MacroScope

Fed doves ‘will not be patient’

Ellen Freilich contributed to this post

The Fed did the twist. Will it shout as well? There has been some debate among economists about whether the U.S. central bank might launch a third round of outright bond buys or QE3 given that it just prolonged Operation Twist.

But a truly grim report on the U.S. manufacturing sector from the Institute for Supply Management, if coupled with further evidence of a deteriorating labor market, could certainly induce policymakers to press their foot to the monetary accelerator.

Not only did the index slip below 50 in June, pointing to a contraction for the first time in three years, but the reading of 49.7 was lower than the lowest forecast in a Reuters poll of economists. Moreover, the subcomponents showed the biggest drop in new orders since the aftermath of the Sept. 11 attacks in 2001.

According to Pierre Ellis, senior economist at Decision Economics:

Fed doves will not be patient in waiting for that issue to be resolved – seeing increasing chances of a demand contraction leading to employment weakness and further demand weakness.

The most alarmed are probably pushing for another easing move now, while others might still be calmed by a  strong-enough services-side employment result Friday. If it does not materialize, the normal hesitation in responding to limited numbers of bad data results will probably be overcome by the breadth of the weakness now evident, and by growing perceptions that the economy is much more vulnerable than normal to downside shocks.

U.S. jobs data marks gloomy hat-trick for economists

By Sarmista Sen and Sumanta Dey

 

Economists predicting jobs growth in the United States, or rather the lack of it, scored an unfortunate hat-trick on Friday – vastly overestimating the rise in payrolls for three consecutive months.

The U.S. economy added 69,000 jobs last month, less than half the Reuters median for a gain of 150,000 jobs and missing even the lowest forecast of 75,000 from nearly 80 economists .

Forecasters last achieved that feat between April and November 2008, when the actual NFP number consistently missed the lowest forecast in the survey, for eight consecutive months.

Asian Americans hit hardest by long-term unemployment

Asian Americans have the highest rate of long-term joblessness of any ethnicity in the United States, according to a report from the Economic Policy Institute, a liberal think tank in Washington.

Last year marked the second year in a row that Asian Americans had the largest share of unemployed workers who were unemployed long term (i.e., for six months or more). In 2011, 50.1 percent of the Asian American unemployed were unemployed long term, up from 48.7 percent in 2010. In both of these years, the Asian American share slightly exceeded the African American share.

Share of unemployed who have been unemployed 27 weeks or more, by race and ethnicity, 2010–2011

Federal Reserve Chairman Ben Bernanke and other central bank officials have argued long-term unemployment is an enormous challenge, but have been reluctant to apply additional monetary stimulus to the problem. In March, Bernanke said:

Jobs or inflation — Is the Fed distracted?

The Federal Reserve doesn’t get much love from Washington these days but it did receive a rare bit of political backing on Wednesday as Democrats defended its role in promoting full employment as well as stable prices.

The U.S. central bank has been the target of criticism from members of both political parties as a result of bank bailouts and hands-off rule-enforcement that let predatory and unsound lending practices go unchecked, among other shortfalls.

But discussing legislation narrowing the Fed’s mandate to a single-minded focus on price stability, Democrats questioned the need to drop the full employment side of the dual mandate.

An upward bias in jobless claims revisions

Weekly data on applications for unemployment benefits have gained renewed importance since a weak March payrolls number left economists wondering whether a tentative labor market recovery was about to cave again. The last two weeks’ readings were just soft enough to leave investors thinking the country’s unemployment crisis may not be healing very quickly.

Daniel Silver at JP Morgan has dug deeper into the claims figures and found a curious trend: a repeated and distinctive tendency toward upward revisions in the numbers.

There has not been a downward revision to the initial claims data reported for the prior week since the start of March 2011, and this recent streak is not a new phenomenon—there have been upward revisions in about 90% of the weekly reports since the start of 2008, as well as going back even further to the start of 2000. These revisions are relatively minor (usually adding only a few thousand claims) and do not change the broader trends in the data, but they can lead to the weekly claims reports showing decreases to the more recent levels, whereas if the prior week had been unrevised, the reports would have shown increases in claims.

What have a trillion euros done for the economic outlook? Not much yet

The trillion euro sugar rush that made Q1 the best start to the year for global stocks in more than a decade has already worn off, but what is most striking is not how quickly it ended. It’s how little the economic outlook has changed.

Cheap central bank money mainly seems to have boosted stocks and the optimism of stock market forecasters, who generally are the most bullish of the lot with or without wads of cheap money.

An analysis of Reuters Polls over the past three months, starting just before the European Central Bank made the first of two gargantuan injections of cheap three-year money into the banking system, reveals what many have fretted might happen.

Hysterical about hysteresis

Economists at times fancy themselves scientists – and they like to borrow from scientific lingo to lend their theories some extra gravitas.

The U.S. unemployment crisis is a case in point. There is a long-running debate among economists as to whether the bulk of joblessness is cyclical, resulting from a lack of demand in a depressed phase of the business cycle, or structural, the product of more fundamental issues such as skills mismatches. The latter problem is more intractable, economists say, and less amenable to treatment via an easy monetary policy.

Nearly three years into the economic recovery, the jobless rate remains at a historically elevated 8.2 percent. Moreover, the economy has only made up about 3.6 million of the nearly 9 million lost during the recession. Against this backdrop, there is widespread concern that the U.S. economy might soon reach a point of what economists call (and here’s where the science comes in) “hysteresis.” In physics, the concept is defined as follows:

A worker is a terrible thing to waste

How bad is the U.S. employment situation? The Labor Department’s tally for March, which showed only 120,000 new jobs were created, raised doubts about the sustainability of a recent pick up in job growth. But to get a broader sense of what things are really like it helps to put things in a longer-term perspective.

Even with the 3.6 million new jobs created during the recovery, some 5 million more are needed just to make up for all of the jobs that were lost during the Great Recession. At March’s pace, it would take nearly four more years to get there – and that’s not accounting for population growth.

If job growth remains at tepid clip of around 150,000 a month, it would take five years for the jobless rate, which registered 8.2 percent in March, to fall to 6 percent, according to Atlanta Federal Reserve Bank economist Julie Hotchkiss.

Bernanke’s jobs pivot

Jason Lange contributed to this post

Fed Chairman Ben Bernanke made no direct references to the outlook for monetary policy in a speech to the National Association for Business Economics on Monday. But the message from his heavy focus on a weak labor market was pretty clear: The Fed is not considering tightening policy in the near future and stands ready to do more if growth doesn’t pick up steam this year. Ironically, Bernanke’s pessimism cheered the markets – by signaling that another round of stimulus is not off the table.

Andrew Wilkinson at Miller Tabak captured Bernanke’s feat for the day:

It ain’t what you say it’s the way that you say it – at least that’s what Chairman Bernanke found out on Monday by not mentioning further quantitative easing.

After its last two meetings, the Fed said it would likely keep rates near zero at least through late 2014. But upbeat economic signs, including solid employment growth, have led investors to bet on a move as early as the middle of next year. Bernanke’s speech appeared aimed at pushing back against those expectations.

Lower future jobless rate may give Fed little comfort

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.