Fed Worries about “Fewer People Looking for Work”
February 16, 2011
David R. Kotok
“Following the loss of about 8-3/4 million jobs from 2008 through 2009, private-sector employment expanded by a little more than 1 million in 2010. However, this gain was barely sufficient to accommodate the inflow of recent graduates and other new entrants to the labor force and, therefore, not enough to significantly erode the wide margin of slack that remains in our labor market. Notable declines in the unemployment rate in December and January, together with improvement in indicators of job openings and firms’ hiring plans, do provide some grounds for optimism on the employment front. Even so, with output growth likely to be moderate for a while and with employers reportedly still reluctant to add to their payrolls, it will be several years before the unemployment rate has returned to a more normal level. Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established.”
Fed Chairman Bernanke used his Feb. 9 congressional testimony to reiterate the Fed’s view about the sustainability of the economic recovery. Bernanke’s key point is that we need to see the jobs before we change the policy. Will we?
NY Fed president Bill Dudley embellished this concern in his Feb. 14 briefing. Remember Dudley is vice-chair of the FOMC and, as NY Fed president, the only regional bank president with permanent voting status. He was clear in his message.
“On the labor front, the most recent employment report for January 2011 is quite difficult to interpret. Only 36,000 nonfarm payroll jobs were added, well below expectations. Yet, we get a very different perspective from the unemployment rate, which fell by 0.4 percentage points for the second month in a row and now stands at 9.0 percent. Job growth was undoubtedly held down by the severe winter storms that affected many major cities, including our own. The decline in the jobless rate was not an unmitigated positive, as a significant part of this decline was due to fewer people looking for work.”
We agree with Dudley’s perception. In our view, it is way too soon to celebrate job recovery. The unemployment rate has dropped to 9% from a 10.1% high in October, 2009. Normally, that would be cause for celebration. However, that may not be the casein this cycle.
Let’s talk about the “fewer people looking for work.”
The drop of over a point in the unemployment rate occurred, in part, because the labor force participation rate is falling, as it has been for years. The number of folks looking for work keeps declining. It appears that the number of unemployed who have given up can be measured in the millions. The latest estimate of the participation rate is 64.2%, the lowest in a quarter century. For contrast, the labor force participation rate peaked at about 67% nearly 12 years ago.
The implications for labor income and for Fed policy are profound. The Fed has made job recovery one of its key objectives. That said, the Fed forecasts the unemployment rate and not total employment. Their target is a 7% unemployment rate, to be reached by 2013.
Nell Soss and Henry Mo (Credit Suisse) took the Fed’s target and adjusted it for changes in the participation rate. The results are dramatic. Remember, the lower the participation rate, the more it seems that the unemployment rate is declining. Dropouts are not counted as looking for jobs and the official unemployment rate counts only those who are looking for work and have not found it.
Soss and Mo projected economic outcomes using the current participation rate of 64.2% and another scenario using an improved 65.2%. The shift of 1% in the participation rate means 2.4 million jobs at the end of 2013. In other words, the Fed could see their estimated 7% targeted unemployment rate reached in a very tepid recovery if the participation rate remains low. Alternatively, the Fed could point to a successful policy outcome if the participation rate rises. The difference means a lot.
The Fed minutes released today describe the FOMC’s latest forecast as follows:
”Although participants generally expected further declines in the unemployment rate over the subsequent two years—to a central tendency of 6.8 to 7.2 percent at the end of 2013—they anticipated that, at the end of that period, unemployment would remain noticeably higher than their estimates of the longer-run rate. Many participants thought that, with appropriate monetary policy and in the absence of further shocks, the unemployment rate would continue to converge gradually toward its longer-run rate within five to six years, but a number of participants indicated that the convergence process would likely be more extended.”
So what happens if we have fewer people looking for work?
A higher participation rate generates more income for workers. It yields more tax revenues to the federal as well as state and local governments. It stimulates more housing and adds to purchasing power of consumers.
A lower participation rate means the job recovery engines of the US economy remain rusted. It means slow growth in consumer income. It means weaker housing and worsening budgets at all levels of government.
So far, in this recovery, we see the latter. That means inflation pressures from labor are muted. This has big implications for markets that are discounting heavy future inflation pressures. We may not see the inflation everyone fears.
Neil Soss ends his essay with this note: “The Fed should count jobs, not unemployment.” We agree. Furthermore, the shrinkage of the state and local government sector means that the US needs nearly 200,000 net new jobs a month to keep the true unemployment rate constant. More are needed to lower it and that only works well when more people are looking for work and not fewer.
We are not sanguine about the jobs outlook. We expect a low labor force participation rate; perhaps, it will keep falling. That will encourage the Fed to keep the policy interest rates near zero for the rest of this year and well into next year.
David R. Kotok, Chairman and Chief Investment Officer
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Source of the Iraqi WMD Claims Comes Clean … And Shows that the American and British Governments Willfully Manipulated the Evidence
As I’ve repeatedly pointed out, everyone knew that Iraq didn’t have WMDs.
The Guardian just interviewed the the infamous “Curveball” who provided false evidence about Iraq’s weapons of mass destruction. Curveball admitted that he knowingly lied about WMDs, in order to topple Saddam Hussein. The Guardian has a series notes in a series of articles out today on the issue which reinforce the conclusion that the American and British governments deliberately manipulated the evidence to justify the Iraqi invasion.
In one article, the Guardian notes :
The former head of the CIA in Europe … Tyler Drumheller, who says he warned the head of the US intelligence agency before the 2003 invasion of Iraq that Curveball might be a liar ….
“My impression was always that his reporting was done in January and February,” said Drumheller, adding that he had been warned well before 2003 by his counterparts in the German secret service (BND) that Curveball might not be reliable. “We didn’t know if it was true. We knew there were real problems with it and there were inconsistencies.”
He passed on this information to the head of the CIA, George Tenet, he said, and yet Curveball’s testimony still made it into Colin Powell’s famous February 2003 speech justifying an invasion. “Right up to the night of Powell’s speech, I said, don’t use that German reporting because there’s a problem with that,” said Drumheller.
He recalled a conversation he had with John McLaughlin, then the CIA’s deputy director. “The week before the speech, I talked to the Deputy McLaughlin, and someone says to him, ‘Tyler’s worried that Curveball might be a fabricator.
“And McLaughlin said, ‘Oh, I hope not, because this is really all we have.’ And I said, and I’ve got to be honest with you, I said: ‘You’ve got to be kidding? his is all we have!’”
In a second article, the Guardian reports:
A senior aide to Colin Powell at the time of his pivotal speech to the United Nations said on Tuesday that Curveball’s admission raised questions about the CIA’s role.
Lawrence Wilkerson, who was chief of staff to the then US secretary of state Powell in the build-up to the invasion, said the lies of Rafid Ahmed Alwan al-Janabi, also known by the codename Curveball, raised questions about how the CIA had briefed Powell ahead of his crucial speech to the UN security council presenting the case for war.
In particular, why did the CIA’s then director George Tenet and his deputy John McLaughlin believe the claim by Curveball, “and convey that to Powell even though the CIA’s own European chief Tyler Drumheller had already raised serious doubts.
“And why did Tenet and McLaughlin portray the presence of mobile biological labs in Iraq to the secretary of state with a degree of conviction bordering on passionate, soul-felt certainty?”
“This is very damning testimony and an indictment of the work the US put into the pre-war intelligence. The decision to go to war, to spend billions on sending hundreds of thousands of soldiers to the region, was in large part taken on the basis of an admitted liar,” said Ashwin Madia, head of an organisation of progressive US military veterans, VoteVets.
Judith Yaphe, a former CIA analyst on Iraq now at the National Defence University in Washington, said … “There were people at the time who doubted what Curveball was saying, but if the administration doesn’t want to believe it, it doesn’t make much difference.”