Weekly Review: Ben Bernanke and the Puzzle of Employment

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This week Fed Chairman Ben Bernanke critiqued the labor situation in the USA, and concluded:

…..conditions remain far from normal, as shown, for example, by the high level of long-term unemployment and the fact that jobs and hours worked remain well below pre-crisis peaks, even without adjusting for growth in the labor force. Moreover, we cannot yet be sure that the recent pace of improvement in the labor market will be sustained.

It was interesting to me that most pundits and general observers of the employment situation did not have any concerns – and it leads one to wonder why the Chairman would open this Pandora’s box in public.  For those interested in understanding how the Fed looks at the labor market, his speech offered insights.

One of the major points the Chairman made was the unexplained deviation of employment from Okun’s law.

That rule of thumb describes the observed relationship between changes in the unemployment rate and the growth rate of real gross domestic product (GDP).  Okun noted that, because of ongoing increases in the size of the labor force and in the level of productivity, real GDP growth close to the rate of growth of its potential is normally required just to hold the unemployment rate steady.  To reduce the unemployment rate, therefore, the economy must grow at a pace above its potential.

A graphical look at Okun’s law – GDP vs the unemployment rate – showing the divergence since 2010.

Karl Smith posted this week:

Based on both the growth in payrolls and the decline in unemployment  historical patterns would lead us to expect real GDP growth of around 4% and nominal GDP growth of around 6.5 – 7%.

Econintersect uses a non-monetary methodology to forecast jobs growth (a non-monetary approach to Okun’s Law) – yet we are faced with the same puzzle with the deviation since late 2010.  Point blank: the economy is producing more jobs than the economic dynamics since 2000 would have indicated.

Pending next week’s March employment, the labor situation in 2012 is getting better and is finally on a trajectory away from a “less good” growth rate.  A simple chart using the BLS non-adjusted data demonstrates.  When data is analyzed year-over-year it provides a simple seasonal adjustment.

From mid-2010 through December of 2011 – the change in the rate of employment growth remained in a downtrend or a stall pattern.  Traction began with the January data – and continued into February.  Finally, there are positive signs of better growth in the labor market.

Two months of improving data is not a trend – but it is definitely not a negative sign.  However, Chairman Bernanke seems concerned that when there is a disconnect between expectations and reality – there is something not being understood.

Is what we don’t understand good or bad?

Other Economic News this Week:

The Econintersect economic forecast for March 2012 continues to indicate a growing economy. This index essentially uses non-monetary measures (counting things) to determine economic growth or contraction. Several of this index’s components draw on transport industry movements.

ECRI has called a recession. Their data looks ahead at least 6 months and the bottom line for them is that a recession is a certainty. The size and depth is unknown but the recession start has been revised to hit around mid-year 2012.

This week ECRI’s WLI index value is zero -  the best index value since August 2011. This is the tenth week of index value improvement. This index is indicating the economy six months from today will be the same as today.

Initial unemployment claims series (seasonally adjusted) was completely revised from 2007 onwards.  Therefore it is ludicrous to even talk about ups and downs this week.  This week is a baseline week.  Note the Department of Labor press release says the 4 week moving average fell 3,500 to 365,000 (last week the 4 week moving average was 355,000).

Old initial weekly unemployment claims from last week:

The “new” initial weekly unemployment claims:

Data released this week which contained economically intuitive components (forward looking) were rail movements and CFNAI.

Click here to see the Scorecard below with active hyperlinks.

Bankruptcies this Week: DRI, Thomas Group,



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Economy , US Markets

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