Thursday, July 11, 2013

Fed’s Message: ‘It Depends’ (excerpt)

June’s solid employment report was released last week on July 5. So far, none of the FOMC’s participants have discussed whether it influenced their view on what to do about QE. It should have leaned them toward starting to taper at their next meeting on July 30-31. More likely, they will wait to see if the July and August employment reports are also solid, which would allow them to start tapering at the September 17-18 meeting. Meanwhile, let’s have a closer look at the labor market and how it might influence the FOMC's deliberations:

(1) Fed hawks can stress that payrolls are on a roll with one exception. Payroll employment has increased 201,833 per month, on average, during the first six months of the year. Private payrolls as measured by the Bureau of Labor Statistics (BLS) and ADP are up 205,666 and 162,500 per month over the same period.

Household employment is up 125,000 per month since the start of the year, while the household measure compatible with the BLS payroll measure is up 204,500 per month.

Those are mostly solid gains, across the board. There is only one important discrepancy in this happy story. The Job Openings and Labor Turnover Survey (JOLTS) conducted by the BLS tracks hirings and separations. The difference between them hasn’t diverged much from the monthly payroll change reported by BLS. However, the JOLTS data, which are available through May, show payrolls up 145,200 per month during the first five months of the year, or 58,000 less than the official payrolls data over the same period.

(2) Fed doves can stress that too many people remain out of work. While the employment news is encouraging, there remain plenty of discouraged workers. The number of unemployed workers did fall to 11.8 million during June from a peak of 15.4 million during October 2009. However, that’s still above all previous cyclical peaks since the early 1950s. The number of workers employed part-time for economic reasons was 8.2 million. The average duration of unemployment remains elevated at 35.6 weeks.

Lots of people have simply dropped out of the labor force. The labor force participation rate--i.e., the percentage of the working-age population that is in the labor force--was at 63.5% during June, among the recent lows not seen since the early 1980s. While employment has been increasing as rapidly as the working-age population during most of the current economic expansion, the ratio of the former to the latter is also at the lowest since the early 1980s.

The percentage of the working-age population that has dropped out of the labor force--i.e., the nonparticipation rate--was 36.5% in June, up from a record low of 32.7% during February 2000.

Today's Morning Briefing: Fed’s Message: ‘It Depends’. (1) The difference between FOMC members and participants. (2) Many members not ready to taper. (3) Half of participants ready to terminate QE by yearend! (4) Knickers in a twist. (5) Bernanke says pay no attention to what we said before today. (6) Swapping sideways summer scenario for summer rally. (7) Fed hawks can find plenty of strength in employment. (8) Fed doves (led by Bernanke) can find plenty of soft spots in labor market. (9) Winners and losers in the mini-melt-up since June 24. (More for subscribers.)

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