Ben Bernanke and the Puzzle of Employment

Written by Steven Hansen

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.]  Most economic projections have uncertainty.

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 beginning in 2010.

Using jobs growth as the metric, the economy should be expanding more rapidly.  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.

Yet despite Okun’s Law, the jobs grow in 2012 is accelerating 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.

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.

I choose not to look a gift horse in the mouth.

Other Economic News this Week:

The Econintersect economic forecast for April 2012 shows a less good growth.  There has been a degradation in our government and finished goods pulse points.

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 improvement. This index is now 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.  Consider 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 so in reality this is an increase of 10,000).

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.  Depending on the color of your glasses, one could draw several conclusions – my take is that all is still good but I am at a higher alert level looking for economic outliers as the data is mixed.

Weekly Economic Release Scorecard:

February 2012 PCE: Consumers Returned to the Trough
March 2012 Final Michigan Sentiment: Highest level in more than a year
GDP Number Remains Good, Components Shaky
America: What Did Thomas Jefferson Mean?
Oil: Something Has Got to Give
4Q2011 GDP Unchanged, Has Headwinds Going Forward
Do Bankers Dream?
Goldman Sachs: Rewarded for Greek Debt Scheme
Ben Bernanke’s Words Are Gold
Durable Goods Strong in February 2012, Pundits Are Wrong
Structural Shifts: Comparing the Last Two Recessions
Use Caution Looking for Dividends
EU Periphery: Devolving to Developing Country Status?
March 2012 Conference Board Consumer Confidence Weakens a Bit
Case-Shiller Home Prices Continue their Decline in January 2012
10-Year US Treasury: Heading For 6%
Ben Bernanke: Hero or Antihero?
February 2012 Pending Home Index Fortells Good March Home Sales
February 2012 CFNAI Down, But Index Up – Economy Still Good
Biggest Hurdle for the Housing Market
Thirty-Year History of Deregulation
Abba Lerner: Functional Finance
Ten New Anti-Commandments to Enable Increased Financial Fraud
Is the Gold Market Dead?
The Week Ahead: Time to Worry About “Experts” on China
ECRI: Warns Against a Buy-and-Hold Mentality
Investments Gone Bad, 21st Century Cargo Cults
Trefis: Week in Review 24 March 2012
China: More Evidence of a Hard Landing
Interest Rate Swaps: A Wall Street Con Job

Bankruptcies this Week: DRI, Thomas Group

Failed Banks this Week: