Labor Markets, Interest Rates and Shakespeare
When Shakespeare’s soothsayer warned Julius Caesar to “beware the Ides of March” there were dire events ahead for the Roman emperor (he was stabbed to death in the Roman Senate). Are we in store for a similarly tragic ending to the recent run of better-than-expected economic data? Likely not. The employment data from this past March, though disappointing, does not foretell of the exsanguination of the U.S. economy. Payroll employment for March gained 120,000, well below consensus expectations of about 205,000, and breaking the string of three consecutive +200K months. January and February’s stronger gains were revised up another 22,000 jobs. There may be some weather effects in play boosting job gains earlier in the year. Temporary hiring increased by 36,400 in January and 54,900 in February, but reversed course and fell by 7,500 in March. Retail trade lost 33,800 jobs in March despite solid performance from retailers and improved consumer spending. So if we take a “core jobs” approach excluding temporary and retail jobs, the payroll report remains congruent with ongoing moderate gains in economic activity. Also, the recent trend in data revisions for the payroll survey has been consistently in the positive direction, and this appears likely to continue through March. The good news in the jobs report is that the unemployment rate fell to 8.2 percent, but unfortunately not for good reasons. The labor force declined by 164,000, while the household employment survey fell by 31,000 jobs. All told, it was a disappointing jobs report, but one that feels more quirky than ominous, maybe not as you like it, but likely much ado about nothing.
In his recent address to the National Association of Business Economics, Federal Reserve Chairman Ben Bernanke made the case that the long-term unemployment problem is due primarily to cyclical and not structural factors. This is an important distinction because it serves as the foundation to his view that further improvement to the unemployment rate can be supported by gains to production which, in turn, require accommodative monetary policy. If structural factors (such as demographic patterns or shifts in technology) are dominant, then very accommodative monetary policy would be a less than effective tool in reducing unemployment. If cyclical factors are dominant, then accommodative policy works to reabsorb disenfranchised workers. The current interest rate environment remains heavily influenced by highly accommodative Federal Reserve policies (see discussion on page 2), and also by the expectation (or threat) of additional policy actions. Much depends on the Federal Reserve’s view on unemployment. Structural or cyclical, or perhaps both? That is the question.
Click here for the complete April 2012 U.S. Economic Update: USEconomicUpdate0412.