Fed Focus

Thinking about the Fed, Wages, Part 3

 Those urging the Federal Reserve to delay include those who believe the economy is too fragile to withstand any increase in rates, and that our more vulnerable workers will take the hit, and those who believe the stock-market will be in for a fall. 

 We’ve argued the weak wage case repeatedly, and will spare you a recap. Some of our most respected analysts argue that wage increases are a late-cycle rear-view mirror phenomenon in an ordinary cycle, and we agree. But our own analysis of the current recovery suggests that the labor market will take a while more to follow historical metrics. We will cite, however, a recent paper by former Bank of England advisor and Dartmouth professor (among other things) David Blanchflower and Andrew Levin, currently at the IMF but moving to Dartmouth in the fall, in which they publish some new results on underemployment and wages drawn from state-level data. In a nutshell, they find that a decrease in broadly measured labor-market slack does not increase wage pressure if the level of slack remains high, and assert that starting the tightening process would be premature, and should be held off until labor market slack decreases significantly and inflation comes closer to the FOMC’s goal of 2 percent.

Considering its recent performance (see below), if the stock market can’t withstand up to a 1% increase in the policy rate, we’d better find that out. 

The environment of super-low rates and high liquidity has encouraged all kinds of financial machinations. The withdrawal of that indulgence, we hope, will encourage economic actors to focus  on more productive long-term activity. We suspect that a move from abnormally low rates to still very low rates won't derail the welcome increase in capital spending we have seen recently. 

We support concern about the effect the first move may have on the improving job market–it still has a way to go. A recent SF Fed piece suggests a few more years to true health.  That makes it a real shame that there's little possibility of a productive fiscal compromise: a focused business and low-inflation friendly infrastructure/retrofitting project that could offset the potential pressure on our workforce as rate increases turn the corner. Not to mention some relief from the ever increasing flat tire rate caused by old degraded roadways.

by Philippa Dunne· · 0 comments · Fed Focus

Bad News from the SF Fed

The last thing we want right now is a study from a regional federal reserve bank with the headline, "Jobless Recovery Redux?" and a subhead, "Reasons for pessimism," but that's what we have from the SF Fed, and it's hard to argue with their logic.

Researchers Mary Daly, Bart Hobjin, and Joyce Kwok consider three labor market indicators–flows in and out of unemployment, involuntary part-time employment, and temporary layoffs–to project how the unemployment rate may behave when the anticipated recovery begins.

They point out that before the 1991 recession, increases in the inflow rate, the speed at which workers move into unemployment, and decreases in the outflow rate, the pace at which they find jobs, were nearly equivalent in relative terms during recessions. The resultant sharp increases in the unemployment rate were followed by rapid recoveries as firms hired back workers in improved conditions.

Increases in the unemployment rate in the 1991 and 2001 recessions, however, were driven by disproportionate declines in the outflow rate, making lack of hiring the primary culprit.  And recoveries diverged from the established pattern as well: outflow rates recovered much more slowly than they had in pre-1990 recoveries.  In fact, the authors cite several studies showing that current business-cycle fluctuations in the unemployment rate are driven primarily by the outflow rate.

The current recession is particularly nasty because the outflow rate is at an historic low and the inflow rate is rising in line with the recessions of the 1970s and 1980s-actually, it's shooting straight up at present-both  contributing to an extremely weak labor market.

The authors evaluate several possibilities for the future. Their benchmark, no change in the outflow/inflow rates, would bring us to 10% unemployment by 2010. The "Blue Chip" consensus included in the paper posits an employment recovery slightly weaker than that of 1983 and a bit stronger than that of 1992, bringing the unemployment rate to 10% in early 2010, from where it would begin to decline.  But if inflow/outflow rates behave as they did in 1992, unemployment would peak around 11% by summer of 2010, and remain above 9% through 2011.

And that's where temporary layoffs and involuntary part-time work come in. In the current recession those working part-time for economic reasons has risen dramatically and to an historical high, from 3.0% in December 2007 to 5.8% in April 2009, with significant reductions in hours across broad sectors. At the same time the share of workers on temporary-as opposed to permanent-layoff is very low. In fact it actually fell from 12.9% in Dec-07 to 11.9% in April-09. (Generally the share of workers on temporary layoffs rises during recessions: it increased from 16.1% to 20.7% between July 1981 and November 1982.)  So with few workers on temporary lay-off waiting in the wings, and a large number working part-time against their wills, it seems logical that employers will expand the hours of partially-idled workers instead of taking on new employees. The authors formulate their forecast for the unemployment rate by adding the linear relationship between part-time employment and the unemployment rate between Dec-07 and April-09 to the Blue Chip consensus. This suggests labor market slack will be higher by the end of the year than at any time since WWII, the outflow rate will be historically low, and the unemployment rate will be sticky. In other words, Jobless Recovery III.

Full report here: 
by Philippa Dunne· · 0 comments · Fed Focus

State unemployment jumps

And other reasons for the Fed to hang fire.

Originally published June 20, 2008

The BLS reported a sharp jump in state unemployment rates this morning, further evidence of a slackening job market. That, plus the performance of capacity utilization, suggests that the Fed is likely to hang fire for months to come – especially since gas prices seem to be doing a lot of their tightening work for them.

The big news in the June 6 BLS release on national employment was the big jump in the unemployment rate.  We’ve been waiting for the last two weeks to see if there were some regional anomalies in the increase, but we need look no further than the first sentence of the summary in this morning’s BLS release on state and local employment trends. "Virtually all regional and state jobless rates increased in May."  It’s an ugly table: Thirty-seven states reported statistically significant  increases in unemployment, and only one state, Louisiana, reported a decline.  The Midwest saw the biggest jump, +0.8 points, and the Northeast, South and West all posted gains of .5 points, right in line with the 0.5 increase reported for the nation as a whole in early June.

The state establishment survey put in a stronger performance. Bucking the national trend, employment rose in 30 states in May, and total state employment rose by 30,000 (vs. a national payroll decline of 49,000). But that follows a decline of 142,000 in total state employment in April (vs. -28,000 nationally). Over the two months, the decline in total employment exceeds the national decline by 35,000. Yearly growth in the sum-of-the-states measure is now 0.3%, slightly ahead of the 0.2% rate for the national establishment survey.

by Philippa Dunne· · 0 comments · Fed Focus

Hawk Talk

Originally published June 10, 2008

One of us heard Dallas Fed president Richard Fisher’s presentation at the Council on Foreign Relations this morning. Fisher was unsurprisingly hawkish on inflation – he said several times and in several different ways that no central bank can "countenance" a rise in inflation. He was worried that when the U.S. economy recovers from this case of "anemia" (he prefers that term to "recession"), it will start expanding with inflation at an uncomfortably high level. When asked if his colleagues shared his concerns – if, as the questioner put it, the Fed had the "character" to raise rates with the economy still sluggish, as it did in the Volcker years, he answered by saying that he had the highest respect for his colleagues. He praised Bernanke and Geithner several times, and professed his admiration for Jean-Claude Trichet as well.

by Philippa Dunne· · 0 comments · Fed Focus

Donald Kohn’s “Less Alarmist” View

Originally published November 28, 2007

Fed vice-chair Donald Kohn spoke at the Council on Foreign Relations in New York this morning, in a session moderated by Laurence Meyer. Kohn’s prepared remarks are on the Fed’s website at:


Unsurprisingly, the text reads mostly like a standard one the one hand/on the other analysis of the sort that caused Harry Truman to demand a one-handed economist. Though Kohn would never win any public speaking awards, there were some subtleties in the delivery that might be meaningful. For example, he drew out the reading of this sentence, as if for emphasis: "Some broader repricing of risk is not surprising or unwelcome in the wake of unusually thin rewards for risk taking in several types of credit over recent years." And he emphasized the starred words in the following passage: "Consequently, we might expect a **moderate** adjustment in the availability of credit to these key spending sectors….  Heightened concerns about larger losses at financial institutions now reflected in various markets have depressed equity prices and **could** induce more intermediaries to adopt a more defensive posture in granting credit, not only for house purchases, but for other uses a well." These emphases suggest that Kohn – who emphasized he was speaking for himself only and not his colleagues – holds a less alarmist view of things than do many market participants.

by Philippa Dunne· · 0 comments · Fed Focus