MacroScope

While Federal Reserve Chairman Ben Bernanke was noting the recent strengthening of the U.S. job market is “out of sync” with an otherwise slow recovery on Monday, economists at the New York Fed drew attention to the jobless rate itself by saying that some big changes lie ahead for U.S. labor.

The jobless rate may fall faster than expected to less than 5 percent in five years’ time, the economists said in the first in a series of posts but that seems likely to be due more to the fact that fewer people will be in the labor market than to future job creation.

The post notes how, between 2008 and 2012, the employment to-population ratio had a different pattern than in previous economic cycles, with the unemployment rate falling “because the participation rates declined substantially”. Given the U.S. aging population, with 10,000 baby boomers turning 65 each day, this rate is likely to decline even more. The argument has interesting implications, including a potential decline in the usefulness of the jobless rate as a gauge of well-being.

If the employment-to-population ratio continues to be sluggish as the unemployment rate declines (suggesting that flows to nonparticipation are important in driving the unemployment rate decline), then the unemployment rate will emerge as an increasingly less reliable measure of the health of the labor market.

If so, what will Fed officials look at when defining its future policies?

The concept that the government should serve as an employer of last resort in times of economic stress was first floated by the late economist Hyman Minsky. Its modern-day proponents remain largely marginalized, despite the nation’s persistently high unemployment and the extreme damage to the job market that was done by the deepest recession in generations. 

But Ali Kadri, senior research fellow at the National University of Singapore, argues the policy, which works as an automatic stabilizer when economies are struggling, is all the more appropriate for an Arab world that has been plagued by extremely high joblessness and a general lack of infrastructure and development. He says the Arab spring creates an opportunity for a drastic shift in the region’s approach to social and economic policy.

The retention of resources and their redeployment within the national economy are indispensable conditions for development and job creation. Employment policies are best set subject to social efficiency criteria distinct from the salient neoclassical productivity ones. It is highly unlikely, in view of the sheer smallness to which industry and the productive economy have shrunk under neoliberalism, that it would be possible to reemploy the massive redundant labour force on the basis of expanding private sector expansion and productivity gains. A criterion valuing and remunerating social work may be costly in the short term, but the social returns will reimburse initial expenses over the long term.

Ed Krudy contributed to this post

The Philadelphia Fed’s Mid-Atlantic manufacturing survey covers a pretty small chunk of an already shrunken U.S. factory sector. Still, analysts at Harris Bank have found that the survey’s employment component has been a pretty solid leading indicator of the monthly payrolls figures.

If the trend persists, then February’s report could be a bit of a letdown following a surprisingly robust gain of 243,000 jobs last month. The Philly Fed’s employment index dropped sharply in February to its lowest level since August.

According to Jack Ablin, Harris Bank’s chief investment officer:

For the last several months, the Business Outlook survey has been a keen predictor of the monthly change in the Bureau of Labor Statistics’ non-farm payroll. The survey came close to nailing last month’s 243,000 gain, even though economists expected a 140,000 pickup on average. Should the survey’s predictive power continue, investors could be disappointed with February’s BLS report. The Philly Fed survey implies roughly 50,000 net new non-farm payroll jobs added in February. Positive yes, but it would be a big momentum killer. Stay tuned. The payroll report is not due out until March 9th.

After the initial jubilance that followed last week’s employment report, Wall Street economists are having a second look at the data. Their conclusions are not quite as rosy.

The rapid decline in the U.S. jobless rate in recent months – from 9.1 percent last summer to 8.3  percent in January – has caught forecasters by surprise given the rather soft pace of underlying economic growth. Steve Ricchiuto, chief economist at Mizuho, says a shrinking U.S. labor force helps explain the apparent discrepancy.

The fact that the employment-to-population ratio has not moved since September even as the jobless rate has fallen by 0.7% suggests that this improvement is a statistical mirage. The fact that the labor force participation rate has also declined by 0.4% during this four month period is another warning that the jobless rate is improving for the wrong reasons. This more realistic look at the data suggests that over-thinking the jobs data will lead to investor disappointment in the months ahead.

Not that the battered U.S. labor market needs anymore bad news, but here it is: A new report that derives employment growth from tax data suggests recent strides have been even meeker than the official Labor Department data suggests.

The January jobs report is due out on Friday, and analysts in a Reuters poll are forecasting the jobless rate remained stuck at 8.5 percent while a median of 150,000 net new positions were created last month, down from 200,000 in December.

Not so fast, say analysts at investment research firm TrimTabs. They cull figures on tax withholding to generate what they say is a more accurate real-time reading of job market conditions. Their findings are grim:

It has become a common refrain in both politics and finance: intrusive regulations, an overreaction to Wall Street’s 2008 crisis, are generating uncertainty and preventing employment from bouncing back. Some top Federal Reserve officials have joined the chorus. Dallas Fed President Richard Fisher made the argument to business executives in Austin, Texas last month to justify his lack of support for additional monetary stimulus.

I maintain that no matter how much cash you have on your balance sheet, or how compliant your banker might be, or how cheap the cost of money, you will not commit substantial capital to expanding your payroll or investing significant amounts to expand plant and equipment until you know what it will cost you to run your business; until you know how much you will be taxed; until you know how federal spending will impact your customer base; until you know the cost of employee health insurance; until you are reassured that regulations that affect your business will be structured so as to incentivize rather than discourage expansion; until you have concrete assurance that the fiscal “fix” the nation so desperately needs will be crafted to stimulate the economy rather than depress it and incentivize job creation rather than discourage it.

Jeffrey Lacker, head of the Richmond Fed, also gives credence to the view that regulations are a burden on hiring:

The St. Louis Fed had a public forum this week to talk about their research into the ailing U.S. jobs market. Not a feel-good scenario.

The bottom line was something the regional Fed bank’s research director Christopher Waller told Reuters in a recent interview: the last three recessions have brought jobless recoveries and this one is no exception. No one can clearly explain why, except that employers are less likely to hire back workers they’ve fired than in the past, and that with so much of the recent downturn due to the collapse of housing, it’s evident that unemployed construction workers can’t easily find new work in, say, nursing or IT.

At this week’s gathering, Waller and his staff fleshed out their research with a number of interesting take-aways. In no particular order:

The Federal Reserve’s long-quiet doves are becoming increasingly louder about championing more aggressive forms of monetary easing, including possibly setting employment and inflation targets and/or engaging in another round of bond purchases. Most prominent among these have been Charles Evans, the Chicago Fed president who openly favors more transparent policy guidance and Eric Rosengren, who told CNBC on Wednesday a third round of monetary easing could be in store:

If the economy were to be weaker than most people are forecasting, that would certainly be cause for doing additional monetary policy.

Rosengren also said he favors more explicit policy targets, which could take a rather controversial form known as price-level targeting. Under this arrangement, the Fed would temporarily shoot for higher inflation to make up for the almost deflationary readings seen late last year, in an effort to boost investment, spending and hiring.

The number of jobs waiting to be filled fell in August for the first time in four months, underscoring the pain in the labor market where millions of unemployed workers have been shut out of the economic recovery. There were only 3.06 million available jobs at the end of August, down from July’s downwardly revised 3.21 million, according to the Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) released on Wednesday. Economists at Credit Suisse explain with stark clarity what this really means:

Labor demand is simply not strong enough to support a complete job recovery. Even if all job vacancies were filled overnight, almost 11 million workers would still be left unemployed.

Monthly job openings — unfilled, posted vacancies that employers plan to fill within 30 days — help describe demand for labor. The number has consistently hovered well below the 4.4 million openings registered in December 2007, before the 2007-2009 recession. Some 8 million Americans lost their jobs in the recession and only 1.4 million of those jobs have come back during the recovery.

Looking at the commentary from bank economists on this morning’s “stronger-than-expected” employment report, you would think the country is on a clear path to recovery. Jack Ablin, chief investment officer at Harris Private Bank, was downright euphoric:

This is critical, this is the most important data that we have seen this cycle. This is going to get people’s attention. This confirms that most of the negativity we have seen in the market is derived from the market itself and not the data.

Never mind that nearly half of the 103,000 new jobs “created” in September were accounted for by the return of thousands of striking Verizon workers to their jobs. Brian Dolan, chief strategist at Forex.com, didn’t let that caveat tamp his enthusiasm: