Comments & Context

JOLTs update

The Bureau of Labor Statistic's March 11 release of the Job Openings and Labor Turnover Survey (JOLTS) data for January showed a distinct lack of dynamism in the labor market: the level of hires and separations, expressed as a share of employment matched record lows for the series (which goes back to December 2000). 

JOLTS

Net hiring – hires less separations – was just 0.1% of employment. Turnover – hires plus separations – was just 5.5% of employment, a record low for the series. Openings fell to 2.1% of employment (from 2.2%). That's better than the 2009 average of 1.8%, but matches the 2010 average. The numbers for the private sector were similarly tepid. January was not a sizzling month for employment.

Also, the relationship between job openings and unemployment, which had gotten out of whack, has gotten somewhat back into whack. Based on the historical relationship, unemployment in December "should" have been 7.7%, not its actual 9.4%. That gap narrowed substantially in January; the expected unemployment rate was 8.0%, vs. the actual of 9.0%. There were 5.02 unemployed persons per job opening in January, compared with 4.96 in December – and a 2002-2007 average of 2.03.

by Philippa Dunne· · 0 comments · Comments & Context

Flows out of unemployment—and out of the labor force

Many analysts have been scratching their heads over the combination of a sharp drop in unemployment over the last few months alongside rather tepid job growth. The discrepancy is partially caused by the two different surveys from which the numbers are derived, surveys that often march to their own drummer in the short term. The BLS’s data on job flows offers additional clues.

Graphed below are some histories based on the flows numbers. The top graph shows where the formerly employed go from one month to the next. Between December 2010 and January 2011, 1.5% of the employed became unemployed, and 2.6% of the employed dropped out of the labor force. (There was a break in all the household survey numbers, because of the annual adjustments to the population controls, but the effect on these flows numbers looks to be very small.) The three-month moving averages of those two series are 1.7% and 2.7% respectively. The share becoming unemployed has been drifting lower since early 2009, but still remains rather high; the share leaving the labor force is up over the last few months, but isn’t out of line with historical averages.

Job-flows-800wi

The bottom graph is striking, however. The share of the unemployed finding work is very close to the recently set all-time low, and has barely improved over the last year. The share of the unemployed dropping out of the labor force, however, has been rising for more than a year, and now has exceeded those finding work for two years.

When you make a point like this, some skeptics are quick to blame excessively generous unemployment benefits and a labor force unfit for today’s demanding employers rather than a still-sick macroeconomy, suggesting that there’s less slack in the labor market than might appear at first glance.

There’s not much evidence for that. As newly minted San Francisco Fed president John Williams pointed out in a recent speech, the “natural” rate of unemployment—the one below which inflationary pressures rise—has probably risen from 5.0% before the financial crisis to 6.7% now. About half the increase is the result of extended unemployment insurance benefits (which will wane soon enough). The balance is the result of severe shocks that have hit the labor market, notably in the construction sector. Williams and his staff estimate that these increases in the natural rate are temporary, and likely to dissipate over the next few years. In any case, the unemployment rate is still considerably above 6.7%, and likely to stay there for quite a while. (Full text here: http://www.frbsf.org/economics/speeches/2011/john_williams0222.php)

 

by Philippa Dunne· · 2 comments · Comments & Context

Mismatching the facts

In a speech delivered on August 17, Minneapolis Fed president Narayana Kocherlakota claimed that there’s been a major breakdown between the relationship between the unemployment rate and the number of job vacancies reported in the BLS’s Job Openings and Labor Turnover Survey (JOLTS). According to Kocherlakota, the breakdown began in mid-2008 as the unemployment rate rose more rapidly than the JOLTS openings data suggest—a breakdown that intensified in mid-2009, as the unemployment rate continued to rise and then failed to decline significantly as the number of openings rose by nearly 20%. Kocherlakota explains this by asserting that there’s a mismatch between the skills, geography, and demography of available workers and unfilled openings. And that’s not anything that monetary policy can change: “the Fed does not have a means to transform construction workers into manufacturing workers.”

There are many things wrong with Kocherlakota’s argument. While he’s right that a regression that forecasts unemployment based on the JOLTS openings rate says that the jobless rate should have been 7.7% in June, not 9.5%, the number of unemployed fell by over a quarter-million more than the number of openings rose during the first half of 2010.

Despite that, there are still almost 5 unemployed for every opening—down from over 6 at the end of 2009, but still enormously high. Also, as the graphs below show, the major problem with the labor market is that the recession was harsh and the recovery so far has been weak. The gap between GDP growth and employment growth, though wider than it was in the recessions of the early 1990s and early 2000s, isn’t out of line with earlier downturns, like those of the early 1980s, mid-1970s, and the 1950s. Since the JOLTS data that Kocherlakota bases his mismatch thesis on only begins in December 2000, he’s missing a lot of important history.

  GDP-and-E

And, the share of permanent job losers, as opposed to those on temporary layoff, hit a record high in over 40 years of data at the end of 2009, and has come down only slightly since. By contrast, the share on temporary layoff is at a record low. Clearly, that composition makes re-employment a lot harder.

In a paper prepared for a Brookings Institution panel in March, Michael Elsby, Bart Hobijn, and Aysegul Sahin review the grim pathologies of the labor market in the Great Recession. In almost every aspect, the downturn was the worst since the 1930s. Among their specific points:

  • While inflows into unemployment in the early part of the recession were dominated by the weaker demographics—the young, the less educated, the nonwhite—the rate of exit has been broadly similar for all subgroups.
  • Since the workforce is now older than it was in earlier recessions, the rise in the unemployment rate is actually sharper than it appears, since older workers are less likely to be disemployed than younger ones. Adjusting historical unemployment figures for the labor force’s changing age composition shows that this recession’s unemployment rate is a record by a significant margin.
  • Specifically addressing the mismatch argument, Elsby et al. find that instead of finding a divergence in outflows from unemployment between industries in structural decline and those not in decline, the rates of sectoral outflow have converged. (Outflow rates in the financial, durable goods and information sectors were all lagging the total when Elsby et al. published.) As with demographics, then, the problem is largely an aggregate one.
  • The dominance of long-term unemployment among the jobless in this cycle is disturbing, since the longer people are unemployed, the less likely they are to find new employment. Based on historical relations, Elsby & Co. project that the decline in unemployment could be half as rapid as it was in the mid-1980s. (Of course, if GDP growth remains weak, then that recovery would be even slower.)
  • Another factor likely to contribute to a slow decline in the unemployment rate: the high share of the employed working part-time for economic reasons. In July, they were 6.0% of the total employed, well over two standard deviations above the series’ 55-year average, and not far below last December’s record of 6.6%. And it’s likely that they’ll find full-time work before the currently unemployed do.
  • Some analysts have pointed to the extension of unemployment benefits over the last couple of years as keeping the jobless rate higher than it would otherwise be. Based on other studies, Elsby et al. estimate that emergency benefits have contributed between 0.7 and 1.8 points of the 5.5 point rise in unemployment in the recession, with the lower end far more likely than the upper. (One reason: the statistical estimates are largely based on periods when temporary layoffs rather than permanent losses were more common.)
  • Finally, the JOLTS data show that the quit rate was remarkably low during the recent recession. It’s picked up a bit since but remains lower than at any time before late 2008. This suggests that employed workers, who presumably have the qualifications that employers desire, remain remarkably skeptical about the possibility of finding fresh work. If it were easier than it looks for the qualified to find a job—as the mismatch theory suggests—then the quit rate would be higher.
by Philippa Dunne· · 0 comments · Comments & Context

Where we are?

Here’s an updated guide to “where we are”—how the U.S. economy is faring relative to the average of previous financial crises around the world. Though individual details vary, we’re following the script pretty well.

In the graphs of four major indicators that below, the lines marked “average” are the averages of fifteen financial crises in thirteen rich countries since the early 1970s, as identified by the IMF. GDP isn’t shown because the experiences were so varied that the averages were meaningless. But for the indicators shown, the averages do illustrate some tendencies worth taking seriously.

Where-we-are-8-10-2-720
 

Employment
Though the U.S. peaked later and bottomed earlier than the average, and also rose higher and fell harder, the trajectories of the two lines are still remarkably similar. Note that after hitting bottom, employment in the average experience grew very slowly. If we’re in for anything like that average, then we’re likely to see employment growth of only about 35,000 a month over the next year—less than a third what’s necessary just to accommodate population growth. That suggests that we could see an unemployment north of 10% in about a year.

CPI
Given the gyrations in energy prices over the last couple of years, reading the headline CPI has been very difficult. But the gyration does seem to be around the average line. And core CPI—for which we don’t have international data—is tracking the average pretty tightly. If inflation follows the script, it should continue to decline into next year. With core inflation at around 1%, it’s reasonable to expect that we could go into mild deflation sometime over the next few quarters.

Interest Rates
Rates on 10-year Treasury bonds have fallen harder in the U.S. than in other crisis-afflicted countries, but the trend is typically down for almost four years after the onset of crisis. Further declines in U.S. rates seem like a stretch, but the likelihood of an upward spike looks remote.

Stocks
Stocks fell much harder in the U.S. than they did in the wake of the average financial crisis, though they did enjoy five quarters of nice recovery. As with interest rates, further declines seem unlikely; in fact, the average increase from here would be around 7% over the next year.

So, all in all, we’re getting pretty much what we might expect out of our major economic and financial variables: a weak, choppy recovery with a deflationary undertow. 

by Philippa Dunne· · 0 comments · Comments & Context

Impulse Control

Decomposing the deficit: structural, cyclical, and the fiscal impulse

Against a still struggling recovery, and continuing weakness in state revenues, talk in Washington is turning to cutting back. That may sound strange, but hear us out.

With the Obama administration released its proposed 2011 budget last month, a lot of attention has rightly been paid to the ginormous deficit—its possible corrosive economic effects and the possible difficulties in funding it. But what’s lost in those worries is what’s going to happen as the stimulus program expires.

Specifically, after the most fiscally stimulative budgets in modern history, barring major changes, policy is about to turn much tighter. 

Structure of the Deficit

The federal deficit can be thought of as having two major components, structural and cyclical. The structural deficit is what the balance would be were the economy at full employment; the cyclical component is the contribution that comes from departures from full employment, i.e., the state of the business cycle.

The graph below shows changes in the structure of the deficit from 2007 through 2018. Sometimes the cyclical component is positive, lessening the deficit (as was the case in 2007); sometimes it’s negative, as it is most other years:

Composition-of-the-deficit

(These estimates come from the Office of Management and Budget, as part of the President’s budget for 2011. Despite that authorship, the estimates look cautious to us. They define full employment as an unemployment rate of 5.5%, and we don’t see the economy returning to that level until 2017. And even if they’re optimistic on magnitudes and the longer-term trend, they’re probably not wrong about the direction of things over the next couple of years.)

The best way to isolate the policy effects of changes in government spending is to look at the cyclically adjusted balance. If the deficit passively swells because of recession, that’s just the so-called automatic stabilizers switching on. But if policy adds to it, through spending increases or tax cuts, then it becomes actively stimulative. 

The table below shows OMB’s estimate of the total budget deficit through 2018, and we are concentrating on the next few years.  In fiscal 2010, the total budget deficit is 10.5% of GDP, 3.2% of it the result of the recession and 7.3% of it structural, or from policy. That’s up from a deficit of 9.9% of GDP in 2009, 2.4% of it cyclical and 7.6% of it from policy. In other words, while the 2010 deficit is larger than 2009’s, the main reason for that is cyclical, not structural, since there’s less stimulus and bailout spending coming this year than last. Going forward, the structural deficit is projected to continue shrinking—to 5.1% of GDP in 2012, and 3.0% the following year. 

Unadjusted-budget-balance  

The Fiscal Impulse

Changes in the structural budget balance are sometimes called the fiscal impulse, shown in the right column. The decline in the structural deficit from 7.3% of GDP in 2010 to 5.1% in 2011 results in a contractionary fiscal impulse of 2.2% of GDP. Both the OMB and the CBO try to separate the cyclical and policy contributions to the deficit. The CBO’s number start in 1962 and end in 2011, and the OMB’s run from 2007 to 2017. If we splice the OMB and CBO series together, which is only slightly reckless since they’re pretty similar when they overlap, this is one of the starkest episodes of fiscal tightening in the last five decades, exceeded only by the 3.1% shift in 1969. A recession began in December 1969 and continued through November 1970. The second-biggest tightening was in 1987, the year of the stock market crash, which was followed a little later by a long period of sluggishness. 

Fiscal-impulse

Of course, the fiscal impulse can be stimulative. By the CBO’s measure, the 2009 impulse was expansive to the tune of 5.9% of GDP; by the OMB’s, it was 4.5%. These numbers are three or four times earlier maximums, like those of 1983 or 2002. And it’s not unreasonable to conclude that what economic recovery we’ve seen since mid-2009 is the result of this massive stimulus. This is apparent not only at the abstract macro level of budget numbers—it’s visible in specific cases, like the effect of cash-for-clunkers on car sales (which ebbed when the program expired) and the effect of federal support on the housing market (there would simply be no mortgage market without Washington’s support). So what is going to happen as the Fed’s purchase of mortgage securities ends in March? As the stimulus spending declines to a trickle

According to a simple regression, the fiscal impulse has an almost one-for-one influence on GDP growth. (See graph below.) So next year’s drag of 2.3% of GDP implies a brake on growth almost that large. Of course, fiscal policy, while important, is far from the only influence on growth; the regression’s r2 is .10, suggesting that it explains about 10% of the yearly variation in GDP growth (though from eyeballing the graph, we see that the extreme cases seem to matter most). That’s not beanbag, but it still leaves a lot to be explained.

Fiscal-impulse-gdp-growth

A stronger influence on growth is the change in nonfederal credit; as shown in the graph below, it explains about 18% of the yearly variation in GDP growth. Together, the two explain close to 30% of the yearly variation in GDP growth. Putting the two together suggests that we’d need a very strong growth rate of 7-10% in nonfederal credit this year and next to offset the fiscal drag. We’ve only come close to that in two years out of the last 50. So we’re back to a dilemma we’ve identified many times: it looks like GDP growth needs a major revival of private credit expansion—but is that possible or even desirable?

Nonfed-borrowing  

Given that 70% of GDP growth remains unexplained by these two variables, we don’t mean them as literal projections. But it does offer support for fears that since the recovery was driven by fiscal stimulus, once that’s gone, we could be in trouble again.

by Philippa Dunne· · 1 comment · Comments & Context