One of the regular themes of this blog has been uncertainty about the state of the US economy post credit crunch. We have many metrics which record an improvement and yet this recovery somehow seems to be not quite like ones in the past. This is perhaps best highlighted by the data from the labor ( as they spell it) market. If we look at the headline then the situation if we use old style thinking looks rather good.
Total nonfarm payroll employment rose by 255,000 in July, and the unemployment rate was
unchanged at 4.9 percent, the U.S. Bureau of Labor Statistics reported today.
So as we approach concepts of the natural rate of unemployment and what some considered to be full employment we see that the US economy is still creating jobs. However Ivory Tower economic models would have forecast a lot more than this.
Over the year, average hourly earnings have risen by 2.6 percent.
In yet another twist they would not be predicting that real wages would be rising nor that consumer inflation would see a dip.
The all items index rose 0.8 percent for the 12 months ending July, a smaller increase than the 1.0 percent rise for the 12 months ending June.
But perhaps the biggest challenge for those in their Ivory Towers has been this.
Both the labor force participation rate, at 62.8 percent, and the employment-population ratio, at 59.7 percent, changed little in July.
The labor force participation rate was more like 66% to 67% before the credit crunch and this matters as falls in it flatter the unemployment numbers.In round number terms we would expect the US labor force to be around 168 million rather than the current 159 million for the level of population. There are demographic issues like an increased number of retirements as the baby boomer generation age but it is also likely that some have become what is called “discouraged”.
Open Mouth Operations
We have seen plenty of these from the US Federal Reserve in 2016 and the opening salvo came from John Williams of the San Francisco Fed on January 4th. From Reuters.
For 2016, “I think something in that three to five rate hike range makes sense at least at this time,” Williams said in an interview on CNBC.
Since then he has suggested 2-3 and 2 and as I wrote on the 16th of this month now seems to be more of fan of higher inflation targets than higher interest-rates. So a bad 2016 for his credibility, especially as we note the number of interest-rate increase so far which is 0 and the approaching US election.
Yesterday the baton was picked up by Vice-Chair Stanley Fischer.
So we are close to our targets. Not only that, the behavior of employment has been remarkably resilient.
Let us look at the thinking behind it and as ever it focuses on the labor market.
Employment has increased impressively over the past six years since its low point in early 2010, and the unemployment rate has hovered near 5 percent since August of last year, close to most estimates of the full-employment rate of unemployment.
You may note that Stan still seems to think that concepts such as full employment are at play although even he cannot avoid mentioning this.
depending on what happens to labor force participation among other things.
The “missing” 9 million only get a sideways mention.
reflecting demographic factors such as the aging of the baby-boom generation
Actually in Stan’s world all the old Ivory Tower concepts seems to be at play.
the unemployment rate is currently close to most estimates of the natural rate
Indeed he follows John Williams by still apparently believing there is a natural rate of interest as well.
The decline in estimates of r*–the neutral interest rate that neither boosts nor slows the economy–which is related to the fear that we are facing a prolonged period of secular stagnation.
In a rather extraordinary addition footnote 10 adds this to our sum of knowledge.
For the record, I note (a) that looking ahead, I expect GDP growth to pick up in coming quarters, as investment recovers from a surprisingly weak patch and the drag from past dollar appreciation diminishes, and (b) that I am an optimist.
It is hard not to wonder if like the US Federal Reserve back then Stan was an optimist heading into the 2008 recession? But if we look at part a) then it looks for now as if he is getting some support from the data.
The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2016 is 3.6 percent on August 16, up from 3.5 percent on August 12. ( Atlanta Fed )
Accordingly Stan may think job done in terms of Open Mouth Operations as he reads this in the Financial Times.
The Federal Reserve is close to meeting both its targets for the US economy, one of its leading policymakers said, as he delivered an upbeat verdict on the post-crisis recovery.
Even a cursory look at the rhetoric on inflation provided by our Stan poses problems.
Although total PCE inflation was less than 1 percent over the 12 months ending in June,
Like Adam Posen used to do when he was at the Bank of England Stan has to pick and chose amongst sub-indices to claim we are close to target. Rather oddly he does not seem to simply point out that he thinks inflation will pick-up going forwards. After all he is supposed to be looking 18/24 months forwards.
There is a problem here for Stan as his employment cheerleading meets the output or GDP (Gross Domestic Product) numbers.
Output growth has been much less impressive. Over the four quarters ending this spring, real GDP is now estimated to have increased only 1-1/4 percent.
So we are left noting this.
Output per hour increased only 1-1/4 percent per year on average from 2006 to 2015, compared with its long-run average of 2-1/2 percent from 1949 to 2005.
Indeed he goes further.
A 1-1/4 percentage point slowdown in productivity growth is a massive change, one that, if it were to persist, would have wide-ranging consequences for employment, wage growth, and economic policy more broadly. For example, the frustratingly slow pace of real wage gains seen during the recent expansion likely partly reflects the slow growth in productivity
Some might think that a nine-year period is a sign of something persisting as it is only a year short of being another lost decade. For that not to happen now there would have to be quite a change.
Most recently, business-sector productivity is reported to have declined for the past three quarters, its worst performance since 1979.
This week will increasingly focus on US Federal Reserve policy as we approach the annual Jackson Hole symposium where more than a few policy changes have been announced. We will see both sides of the debate jostling for attention but Vice-Chair Fischer has other problems in addition to the ones I have mentioned so far. For example why did our “optimist” not join Esther George in voting for an interest-rate rise at the last meeting? Also why does our “optimist” feel the need to mention this.
that the U.S. economy could find itself having to contend at some point with negative interest rates–something that the Fed has no plans to introduce;
Surely in his world of rising interest-rates this is of no concern at all. Let us leave him singing along with Eminem and Dido.
The morning rain clouds up my window and I can’t see at all
And even if I could it’ll all be gray, but your picture on my wall
It reminds me, that it’s not so bad, it’s not so bad
Bank of England Brainwashing
I was concerned to note that there was clear evidence of this yesterday as West Han United fans sang along with the Bank of England theme song so enthusiastically! 🙂
I am sad to see it end but there are dangers in bringing it into everything as Gideon Rachman of the Financial Times has illustrated today.
Obscure fact: Katarina Johnson-Thompson
@KJT high jump of 5.98 in heptathlon would have won gold medal in individual women’s high jump
Actually she would have won the pole vault as well and would have saved on the pole! Even if we correct to 1.98 we have the problem that Thiam of Belgium also jumped it and is recorded as number one in the heptathlon high jump.