Monday, July 22, 2013

The Fed & Unemployment (excerpt)

In his Q&A session following his congressional testimony last Wednesday, Fed Chairman ben Bernanke said that “the difference between 7.6 [the current jobless rate] and 5.6 is cyclical and the rest of it is what economists would call frictional or structural." Interestingly, FRB-Minneapolis President Narayana Kocherlakota posted a 6/24 note proposing that the threshold level for even just discussing raising the fed funds rate should be lowered to 5.5% from 6.5%.

In his prepared testimony, Bernanke said that “if a substantial part of the reductions in measured unemployment were judged to reflect cyclical declines in labor force participation rather than gains in employment, the Committee would be unlikely to view a decline in unemployment to 6-1/2 percent as a sufficient reason to raise its target for the federal funds rate.”

Wow, that’s an important statement! It’s not hard to see that all of the drop in the unemployment rate so far can be attributed to the decline in the participation rate. I constructed three hypothetical time series showing the total number of unemployed workers by subtracting actual employment from the civilian working-age population multiplied by labor force participation rates of 63%, 65%, and 67%. This analysis shows that nearly all of the 3.6 million drop in unemployment from the peak at 15.4 million during October 2009 through June of this year can be explained by the drop in the participation rate from 65.0% to 63.5%. The same can be said for the drop in the unemployment rate from its most recent cyclical peak. Currently at 7.6%, it would be at 9.7% if the participation rate were 65%.

Today's Morning Briefing: The Misery Index. (1) The latest version of the Fed’s message. (2) Fed’s “shadow” mandate is to boost stock prices. (3) Financial stability is at the bottom of the Fed’s mandate list. (4) Avoiding bubbles is hard to do, says Fed governor. Bernanke agrees. (5) Misery Index has too much unemployment, not enough inflation. (6) Falling misery is bullish for stocks maybe for another four years. (7) Will Fed lower the jobless threshold to 5.5% from 6.5%? (8) Labor force dropouts account for all of the drop in jobless rate. (9) Lots of part-time jobs. (10) Good news out of Europe. (11) Raging bull sectors within the aging bull market. (12) “The Way, Way Back” (+). (More for subscribers.)

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