MacroScope

Don’t call it a target: The thing about nominal GDP

Ask top Federal Reserve officials about adopting a target for non-inflation adjusted growth, or nominal GDP, and they will generally wince. Proponents of the awkwardly-named NGDP-targeting approach say it would be a more powerful weapon than the central bank’s current approach in getting the U.S.economy out of a prolonged rut.

This is what Fed Chairman Ben Bernanke had to say when asked about it at a press conference in November 2011:

So the Fed’s mandate is, of course, a dual mandate. We have a mandate for both employment and for price stability, and we have a framework in place that allows us to communicate and to think about the two sides of that mandate. We talked today – or yesterday, actually – about nominal GDP as an indicator, as an information variable, as something to add to the list of variables that we think about, and it was a very interesting discussion. However, we think that within the existing framework that we have, which looks at both sides of the mandate, not just some combination of the two, we can communicate whatever we need to communicate about future monetary policy. So we are not contemplating at this date, at this time, any radical change in framework. We are going to stay within the dual mandate approach that we’ve been using until this point.

But Mike Dueker, chief economist at Russell Investments and a former St. Louis Fed staffer, said the Fed already targets nominal GDP, even if it won’t admit to it. The way he sees it, by setting an inflation target of 2 percent and forecasting long-run growth between 2.3 percent and 2.5 percent, policymakers are effectively aiming for an NGDP target in the vicinity of 4.5 percent.

The basic idea behind aiming for NGDP is to allow for some short-term wiggle room on inflation to help boost economic momentum and induce businesses to invest in new production, and hire more workers. Once momentum gets going, policymakers can dial back stimulus.

Texas-sized jobs growth turns puny? Don’t y’all believe it, Dallas Fed says

Is the pickup in U.S. jobs growth over before it even started? That’s the conclusion you might reach if you checked out the latest Texas employment update from the Dallas Fed , which shows the Lone Star state added only 4,000 jobs in January.Texas, as boosters like Dallas Fed President Richard Fisher never tire of pointing out, has been an enormous engine of job growth for the United States since the end of the Great Recession.

The state added 335,000 jobs last year. For it to generate a paltry 4,000 jobs in January – well, that sounds like bad news.

Dallas Fed chief regional economist Pia Orrenius isn’t a bit worried. Last year’s data also came in too low initially – what turned out to be 3.1 percent growth was originally estimated at 2.5 percent growth. “Nothing happened to suggest we suddenly slowed in January,” she said in a phone interview. The regional Fed’s manufacturing survey was strong, and the oil rig count was up, she said. Both November and December’s initial jobs figures were revised up sharply, she said. As for January, “We expect this will be revised up as well.” Stay tuned for those revisions then. The state’s run as a driver of U.S. employment growth  may not be over yet.

If not for shrinking labor force, U.S. unemployment would be over 11 percent: UniCredit

The U.S. workforce has been shrinking rapidly in recent years, but a new report from UniCredit highlights just how massive the effect of this trend really is. Economist Harm Bandholz says it amounts to a gaping 3.6 percentage points of U.S. unemployment.

That means the U.S. jobless rate, which dropped to 7.7 percent in February, would actually be around 11.3 percent without the decline in labor force participation. This would put American unemployment a lot closer to the euro zone’s recently reported record high rate of 11.9 percent.

The labor force participation fell further in February to 63.5, matching an August reading that was the lowest since 1981.

Fading productivity could hurt U.S. job growth

RBC economist Tom Porcelli is such a curmudgeon these days. Still, given that he was one of the few economists that accurately predicted the possibility of a negative reading on fourth quarter GDP, maybe it’s not a bad idea to listen to what he has to say.

This week, he expressed concern about a rapid decline in U.S. productivity – and that was before data showing U.S. nonfarm productivity fell in the fourth quarter by the most in nearly two years.

Productivity declined at a 2 percent annual rate, the sharpest drop since the first quarter of 2011 and a larger fall than the 1.3 percent forecast in a Reuters poll.

Japan finally takes Bernanke-san’s advice – 10 years later

This post was based on reporting by Leika Kihara in Tokyo

Japan has crossed the monetary rubicon: the government is actively intervening in the affairs of the central bank, pressuring it to more aggressively tackle a prolonged bout of deflation and economic stagnation. The Bank of Japan is expected to discuss raising its inflation target from the current 1 percent level during its next rate decision on January 21-22.

Overnight, a Japanese newspaper reported the finance ministry and the central bank were considering signing a policy accord that would set as a common goal not just achieving 2 percent inflation but also steady job growth.

Key Japanese policymakers played down the prospect of making the BOJ responsible for stable employment like the U.S. Federal Reserve, but said a 2 percent inflation target will be at the heart of a new policy accord with the central bank.

Does the Fed need a new mandate?

Are the world’s top central bankers too paranoid about inflation? As the United States struggles to sustain a weak recovery while the euro zone and Japan face outright contractions in output, a number of economists have called for the monetary authorities to be less dogmatic about adhering tightly to low inflation targets.

Most prominently, IMF chief economist Olivier Blanchard has argued the Federal Reserve’s 2 percent inflation target is too low given the severity of the loss of employment and growth that followed the Great Recession of 2008-2009. Kenneth Rogoff, co-author of an oft-cited study of economic downturns following financial crises called “This Time is Different,” has also championed greater inflation tolerance.

Fed officials, including Chairman Ben Bernanke, have flatly declined to entertain the notion, arguing that the potential cost – a loss of hard-won inflation-fighting credentials – is too high. “We are not seeking higher inflation, we do not want higher inflation and we’re not tolerating higher inflation,” he told a February hearing in Congress.

Economists boosts U.S. December jobs forecasts after strong ADP data

After a “significantly better than expected” ADP employment report, Goldman Sachs has raised its estimate to 200,000 for the U.S. Labor Department’s December nonfarm payroll report due Friday, the firm’s team of economists said. Separately, initial jobless claims were higher than expected for the most recent week, but the Labor Department reported some holiday distortions, the economists noted. “Overall, the data since our preliminary estimate last Friday have been strong enough to prompt us to revise up our forecast for nonfarm payrolls to 200,000,” the economists concluded.

Goldman wasn’t the only firm to revise its estimates. Jeoff Hall, Thomson Reuters’ resident economist, counted as many as five, though not all of the forecast changes hinged solely on ADP.

The ADP report showed private payrolls expanded by 215,000 jobs in December, easily topping a median forecast of 140,000. Initial jobless claims totaled 372,000 in the week ended December 29, slightly more than expected.

Jobs, triggers and the Fed

As Federal Reserve officials debate whether to use thresholds for inflation and joblessness to guide monetary policy, Friday’s jobs report may be a cautionary tale.  The idea of thresholds is to pick markers for potential policy change – an unemployment rate of 6.5 percent, for instance, as a guidepost for when the central bank might begin to raise rates – so that the market has a better idea of where Fed policy is headed. As the unemployment rate nears that level, the theory goes, investors will gradually start to price in tightening; if the unemployment rate rises again, they’ll price it out.

But some Fed officials, notably the hawkish heads of the Richmond, Philadelphia and Dallas regional Fed banks, oppose the idea. One reason: the unemployment rate alone cannot capture the state of the labor market. Friday’s report show why.

Unemployment in November fell to 7.7 percent, the lowest in nearly four years. But the decline was not a sign of labor market strength – far from it. People were giving up looking for jobs, signaling hopelessness, not hope.

Subconscience of a liberal: Krugman’s curious support of sweatshops

Who hasn’t heard of Paul Krugman these days? The Nobel-winning Princeton economist and New York Times columnist has emerged as a key voice in American liberalism, and is berated by the right for his support of heavy fiscal stimulus, higher inflation and a strong social safety net.

Which makes the views espoused in a 1997 missive entitled “In Praise of Cheap Labor” rather surprising. In the article, the economist attacks opponents of globalization for their soft-hearted distaste for inhumane labor conditions in developing countries.

Such moral outrage is common among the opponents of globalization – of the transfer of technology and capital from high-wage to low-wage countries and the resulting growth of labor-intensive Third World exports. These critics take it as a given that anyone with a good word for this process is naive or corrupt and, in either case, a de facto agent of global capital in its oppression of workers here and abroad.

Fiscal cliff could help U.S. avoid road to Japan – but probably won’t

The “fiscal cliff” is widely seen as a massive threat looming over a fragile U.S. recovery. But with a little imagination, it is not difficult to see how the combination of expiring tax cuts and spending reductions actually presents an opportunity for tilting the budget backdrop in a pro-growth direction, even if political paralysis makes this scenario rather unlikely.

For Steve Blitz, chief economist at ITG in New York, the cliff presents a unique chance for the United States to avoid sinking deeper in the direction of Japan’s growth-challenged economy by shifting incentives away from consumption and towards investment:

If current negotiations end up simply turning the “cliff” into a 10-year slide an opportunity to help the economy regain a dynamic growth path and close the gap with pre-recession trend GDP would, in our view, be lost and raise the odds that, in the coming years, U.S. economic performance looks more like Japan’s. […]