Watch Live: Hawkish Yellen Says Fed May Have Misjudged Inflation, Labor Market

Update: In her prepared remarks, Yellen crucially said,

“A more important issue from a policy standpoint is that some key assumptions underlying the baseline outlook could be wrong in ways that imply that inflation will remain low for longer than currently projected.”

As Bloomberg explains, she is stating a bit more clearly than before that the FOMC doesn’t have a handle on why inflation is low and acknowledging that it may last longer than they predict.

*  *  *

As we detailed earlier, on the heels of Bostic ("we didn"t blow any bubbles") Brainard ("some barriers to growth are structural") this morning and Kashkari ("no inflation"), Evans ("need more data"), and Dudley ("inflation"s coming soon") yesterday; it is Fed Chair Janet Yellen"s turn to speak this afternoon on "Inflation, Uncertainty and Monetary Policy" as the dollar extends its post-FOMC gains (to 1-month highs).

Since The FOMC, Fed Speakers have been active...

Raphael Bostic, Atlanta Fed president: "I actually don’t think that our policies are too easy in the sense of really facilitating some sort of asset bubble."

Lael Brainard, Fed governor: Benefits of a lengthy U.S. recovery “can only go so far” and some barriers appear to be structural, sees "widening gulf" between large, small cities.

Neel Kashkari, president Minneapolis, FOMC voter in 2017: “I don’t see inflation taking off so I see no need to tap the brakes.”

Charles Evans, president Chicago Fed, voting member: “I think we need to see clear signs of building wage and price pressures before taking the next step in removing accommodation.”

William Dudley, president New York Fed, permanent voter (and most notably considered to be closely aligned with Yellen"s way of thinking): “With a firmer import price trend and the fading of effects from a number of temporary, idiosyncratic factors, I expect inflation will rise and stabilize around the FOMC’s 2 percent objective over the medium term.”

As a reminder, the Fed Chair said that "we don"t fully understand inflation" and added that the "shortfall of inflation this year is more of a mystery," but, while Yellen speaking would normally be must-watch, with only a few days having passed since her post-statement press conference, we wonder just how much flip-flopping is possible. At that appearance, the Fed chief also downplayed the significance of the weak core inflation data as the central bank set the start date for the reduction of its balance sheet and signaled that an additional rate hike this year remained appropriate.

Additionally, though we doubt she will comment on it, Republican Senator Richard Shelby said he doesn’t think President Donald Trump will nominate Yellen for a second term at the helm of the U.S. central bank. Shelby said Tuesday in an interview with Bloomberg Television’s Vonnie Quinnthat he had spoken with the president about the Fed.

“I believe he will appoint somebody else to take her place,” the No. 2 Republican on the Senate Banking Committee said. “But ultimately, that is up to the president.”

Live Feed (from The National Association of Business Economics)

click image for link to Bloomberg"s Live Coverage

Headlines include (via Reuters)

• YELLEN SEES "CONSIDERABLE" ODDS THAT INFLATION WON"T STABILIZE AT 2-PCT OVER NEXT FEW YEARS


• FED"S YELLEN SAYS UNCERTAINTIES STRENGTHEN CASE FOR GRADUAL RATE HIKES


• YELLEN SAYS GRADUAL APPROACH TO RATE HIKES PARTICULARLY APPROPRIATE IN LIGHT OF SUBDUED INFLATION, LOW NEUTRAL RATE


• YELLEN SAYS THERE IS A RISK INFLATION EXPECTATIONS ARE NOT AS WELL-ANCHORED AS THEY APPEAR


• YELLEN SAYS DATA SUGGESTS LABOR MARKET IS HEALTHY, WITHOUT SUBSTANTIAL SLACK AND NOT OVERHEATED


• YELLEN SAYS EVIDENCE ON LABOR MARKET NOT DEFINITIVE, MUST BE "OPEN-MINDED"


• YELLEN SAYS WOULD BE IMPRUDENT TO LEAVE RATES ON HOLD UNTIL INFLATION REACHES 2 PCT


• YELLEN SAYS FED CAN STILL ACHIEVE 2-PCT INFLATION GOAL EVEN IF IT IS UNDERESTIMATING SLACK OR OVERESTIMATING INFLATION EXPECTATIONS


• FED"S YELLEN SAYS LOW INFLATION LIKELY DUE TO TRANSITORY FACTORS, SEES MANY UNCERTAINTIES


• YELLEN SAYS DOWNWARD PRESSURE ON INFLATION COULD PROVE UNEXPECTEDLY PERSISTENT


• YELLEN SAYS FED SHOULD BE `WARY OF MOVING TOO GRADUALLY"


• YELLEN SAYS WOULD BE IMPRUDENT TO LEAVE RATES ON HOLD UNTIL INFLATION REACHES 2 PCT

Via Bloomberg:

Fed Chair Janet Yellen said FOMC may have misjudged fundamental forces driving inflation and strength of labor market, and policy makers “stand ready to modify our views based on what we learn.”

• “We will need to stay alert” and adjust monetary policy as information comes in, Yellen said in text of speech Tuesday in Cleveland during annual meeting of National Association for Business Economics 


• “My colleagues and I must be ready to adjust our assessments of economic conditions and the outlook when new data warrant it”

Downward pressures on inflation “could prove to be unexpectedly persistent”

• Economic outlook is subject to “considerable uncertainty”

FOMC’s understanding of the forces driving inflation is “imperfect,” policy makers recognize “something more persistent” may be responsible for current undershooting of long-run objective

• While inflation will most likely stabilize around 2% over the next few years, “odds that it could turn out to be noticeably different are considerable”


• There’s also risk that inflation expectations “may not be as well anchored as they appear and perhaps are not consistent with our 2 percent goal”

Stabilizing inflation at around 2% “could prove to be more difficult than expected” 

Key assumptions underlying baseline outlook “could be wrong” in ways that imply inflation will remain low for longer than currently projected; for example, labor market conditions may not be as tight as they appear

Under certain conditions, “continuing to revise our assessments in response to incoming data would naturally result in a policy path that is somewhat easier than that now anticipated”

Significant uncertainties strengthen the case for gradual pace of tightening; however, Fed must also be wary of moving too gradually; “it would be imprudent to keep monetary policy on hold until inflation is back to 2 percent”

Actual value of long-run sustainable unemployment rate “could well be noticeably lower” than FOMC currently projects; can’t rule out possibility that some slack still remains in labor market

• Unemployment rate is probably “correct” in signaling that labor-market conditions have returned to pre-crisis levels; however, that doesn’t necessarily mean that economy is now at full employment


• Data suggest a generally healthy labor market, although can’t make “any definitive assessment”; policy makers “must remain open minded on this question” and its implications for reaching inflation goal 

Paul Craig Roberts' Brief Reflection On The Vanishing American Dream

Authored by Paul Craig Roberts,

Today is Labor Day, a difficult day to celebrate now that American labor has been cast aside and US jobs offshored and given to foreigners.

The remainder of the jobs is slated to be replaced by robotics.

Friday’s payroll jobs report was full of bad news. Full-time jobs declined by 166,000. The meager 156,000 new jobs claimed are really only 115,000 net of the prior month’s revision, and this 115,000 jobs estimate is within the range of statistical insignificance. In other words, there is no confidence that the jobs are actually there.

The US work force continues to develop a Third Word complexion of lowly paid part-time domestic service employment.

The American Dream continues its closedown.

Meanwhile the government tells us that we are at full employment with an unemployment rate of 4.4%.

"The Lost Generation": Goldman Unemployment Charts Explain Just How Spoiled Millennials Are

This morning, Goldman"s Econ team, led by Jan Hatzius, set out to identify why wage growth has been elusive despite the fact that unemployment rates and other labor utilization measures signal an economy at full employment.  For evidence of labor market "slack" they decided to take a look at how recessionary college graduates handled the post-recession labor market as their lack of skills often make them the most vulnerable to a weak job market.

While the unemployment rate and other labor utilization measures signal an economy at full employment, wage growth has been weaker than expected recently, raising questions about the true degree of slack. To the extent that some pockets of excess slack remain, the cohort that came of age during the Great Recession would seem a natural place to ?nd it, given the pronounced and long-lasting effects of recessions on young workers.

In today’s daily, we review the labor market experience of the cohort graduating college or beginning careers during or immediately after the recession. Unsurprisingly, unemployment rose sharply in this segment from 2007 and 2010. However, since then, jobless rates have improved dramatically on both an absolute and relative basis – particularly over the last year – and the unemployment rate in this cohort is now under the national average. Relative wages have also partially recovered, and broader measures of utilization suggest that minimal excess slack remains in this cohort.

While not terribly surprising, they found that the young folks who graduated in the immediate aftermath of the "Great Recession" suffered relatively steep wage degradation relative to the overall population. 

Average earnings trends in the household survey show a similar pattern of underperformance and subsequent recovery. As shown in Exhibit 3, usual weekly earnings in this cohort declined by 6% relative to the population during and after the recession (on an age-adjusted basis). However, despite a partial recovery, the earnings gap remains: relative wages on this basis have only retraced a third of the post-recession decline (qualitatively consistent with the predictions of the academic literature).

But what is surprising is why those wages haven"t recovered meaningfully despite the fact that unemployment rates among the same cohort have fallen precipitously.  

And while Goldman didn"t point this out, perhaps there are some interesting, if overlooked, clues in the following two charts that lend some insight into the behaviors and attitudes of the current millennial generation as compared to previous generations that came of age during previous recessionary periods.

The chart on the left is particularly telling if you just compare the 1981 recession to 2008.  In the immediate aftermath of the recession, the unemployment gap for young people declined in both instances for the first 4 quarters of the recession. 

That said, the experience beyond Q4 is quite different as the 1981 cohort experienced a massive surge in employment while millennials in 2008 simply continued to decline and only bounced slightly off the lows.  Now, one could say this is an unfair comparison because the 2008 recession was deeper and more protracted than the 1981 recession. But, what we find most intriguing is that the 1981 cohort saw a massive surge in employment despite suffering the greatest wage decline of any of the recessionary periods for the past 35 years, and nearly double the experience of the 2008 recession.

Translation, when recession struck in 1981, Baby Boomers and Generation X got off their asses and took any job at any wage they could find to make ends meet.  But, when recession struck in 2008, millennials simply moved in with mom as opposed to taking a job that didn"t fully reward their extensive skillset garnered from 4 years of rigorous anthropology studies at a preppy New England liberal arts college.

Mapping Europe's Temp Worker Epidemic

As we’ve reported time and time again, once one looks past the headlines extolling the labor market "recovery" in the US, the details of these reports paint a much more discouraging picture. One need only look to the establishment survey – one of two measures used to calculate the Labor Department"s monthly jobs figures – which shows that full-time jobs with benefits are increasingly being supplanted by low-paying part-time jobs. In the employment data, many of these jobs are misleadingly double- and triple-counted as the data fail to reflect that many workers are being forced to work two or three part-time jobs, instead of one full-time job.

Unsurprisingly, a recent report from Stratfor reveals that many European countries are struggling with the same problem – except the situation is even more dire. As Stratfor explains, jobs offered under part-time and temporary contracts are accounting for an increasingly large share of total employment, while full-time jobs are disappearing at an alarming clip.

In 2003, well before Europe"s economic crisis, 15 percent of workers in the European Union were employed under part-time contracts. By 2015, that had risen to 19 percent. Meanwhile, in the US, about 18% of workers are part-time, according to the most recent data available from the Bureau of Labor Statistics.

But what"s even more discouraging is the rise in temporary-contract based employment, which rose from 9 percent of the total to 11 percent between 2003 and 2015. The share of employees working on temporary contracts is as high as 20% in Poland and Spain. As Stratfor explains, relying on temporary work can have a profoundly negative impact on an employees’ long-term marketability.

“Temporary jobs offer less security than even part-time permanent ones. They often come with lower salaries and fewer training and career advancement opportunities, making it harder for workers to access credit, plan their consumption decisions or qualify for unemployment benefits.”

Already, a sizable chunk of Europe’s labor force has been permanently relegated to the ranks of the working poor.

“Since the start of the 2008 crisis, many Europeans have been forced to accept temporary contracts or permanent part-time jobs when they would rather work on a full-time, permanent basis. In many cases, the part-time or temporary contracts do not offer a path to full-time work. In some countries, low salaries also put the working poor at risk of falling into poverty."

Unsurprisingly, the problem is particularly severe along the European periphery, where the recovery from the 2008 financial crash has been haltingly uneven.

“Jobs that do not offer much security can be found almost everywhere in the European Union, but they are particularly prevalent in the south, such as Greece, Spain and Portugal, where the unemployment crisis was more severe and the economic recovery more fragile. In addition, the structure of the economy in Southern Europe is more conducive to the creation of such precarious jobs.”

Countries in central and eastern Europe are also struggling, though Southern Europe bore the brunt of the crisis’s impact.

“Countries in Central and Eastern Europe like Poland and Bulgaria also have high rates of temporary employment or jobs with low salaries. But unemployment rates rose faster in Southern Europe, where the crisis hit harder. High unemployment and insufficient economic growth in that region exposed the fragility of the banking sectors in several countries, raised questions about the sustainability of their public and private debts, and created a fertile ground for the emergence of anti-system political parties that could threaten the survival of the eurozone.”

While a surge in temporary-job creation is normal during the early stages of an economic recovery, the fact that temporary jobs continue to edge out quality full-time work could ripple out through the broader economy as consumers see their spending power curtailed by low wages and a lack of a benefits.

“The creation of temporary and precarious forms of employment is a normal phenomenon during the early stages of an economic recovery.

Over time, however, they could drag down an economy by limiting the room for growth in domestic demand, for example. In addition, rising income inequality feeds growing social and political tensions.

While unemployment rates are dropping across the board, issues such as job insecurity, low pay, long-term unemployment, and few opportunities for training or career advancement could weigh down Southern Europe"s incipient economic recovery.”

Pundits have touted Emmanuel Macron’s victory over Marine Le Pen as evidence that the populist wave in European politics has crested for now; but the economic conditions that enabled the rise of populism haven’t changed.

Indeed, nearly half of the French population voted for one of the two anti-globalization candidates. Expect these policies to continue to resonate as more and more workers are robbed of the dignity and security that accompanies reliable full-time work.

An Open Letter To The Fed's William Dudley

Authored by MN Gordon via EconomicPrism.com,

Dear Mr. Dudley,

Your recent remarks in the wake of last week’s FOMC statement were notably unhelpful.

In particular, your excuses for further rate hikes to prevent crashing unemployment and rising inflation stunk of rotten eggs.

Crashing Unemployment

Quite frankly, crashing unemployment is a construct that’s new to popular economic discourse, and a suspect one at that.

Years ago, prior to the nirvana of globalization, the potential for wage inflation stemming from full employment was the going concern.  Now that the official unemployment rate’s just 4.3 percent, and wages are still down in the dumps, it appears the Fed has fabricated a new bugaboo to rally around.  What to make of it?

For starters, the Fed’s unconventional monetary policy has successfully pushed the financial order completely out of the economy’s orbit.  The once impossible is now commonplace.

For example, the absurdity of negative interest rates was unfathomable until very recently. But that was before years of central bank asset purchases made this a reality.

Perhaps, the imminent danger of crashing unemployment will give way to the impossibility of negative unemployment.  Crazy things can happen, you know, especially considering the design limitations of the Bureau of Labor Statistics’ birth-death model.

Secondly, muddying up the Fed’s message with inane nonsense like crashing unemployment severely diminishes the Fed’s goal of providing transparent communication.  In short, Fed communication has regressed from backassward to assbackward.

During the halcyon days of Alan Greenspan’s Goldilocks economy, for instance, the Fed regularly used jawboning as a tactic to manage inflation expectations.  Through smiling teeth Greenspan would talk out of the side of his neck.  He’d jawbone down inflation expectations while cutting rates.

Certainly, a lot has changed over the years.  So, too, the Fed seems to have reversed its jawboning tactic.  By all accounts, including your Monday remarks, the Fed is now jawboning up inflation expectations while raising rates.

Congratulations and Thank You!

History will prove this policy tactic to be a complete fiasco.  But at least the Fed is consistent in one respect.  The Fed has a consistent record of getting everything dead wrong.

If you recall, on January 10, 2008, a full month after the onset of the Great Recession, Fed Chair Ben Bernanke stated that “The Federal Reserve is not currently forecasting a recession.”  Granted, a recession is generally identified by two successive quarters of declining GDP; so, you don’t technically know you’re in a recession until after it is underway.  But, come on, what good is a forecast if it can’t discern a recession when you’re in the midst of one?

Bernanke’s quote ranks up there in sheer idiocy with Irving Fisher’s public declaration in October 1929, on the eve of the 1929 stock market crash and onset of the Great Depression, that “Stock prices have reached what looks like a permanently high plateau.”  By the month’s end the stock market had crashed and crashed again, never to return to its prior highs in Fisher’s lifetime.

To be fair, Fisher wasn’t a Fed man.  However, he was a dyed-in-the-wool central planner cut from the same cloth.  Moreover, it is bloopers like these from the supposed experts like Bernanke and Fisher that make life so amiably pleasurable.  Do you agree?

Hence, Mr. Dudley, words of congratulations are in order!  Because on Monday you added what’ll most definitely be a sidesplitting quote to the annals of economic banter:

“I’m actually very confident that even though the expansion is relatively long in the tooth, we still have quite a long way to go.  This is actually a pretty good place to be.” – William Dudley, June 19, 2017

Thank you, sir, for your shrewd insights.  They’ll offer up countless laughs through the many dreary years ahead.

Too Little, Too Late

When it comes down to it, your excuses for raising rates are not about some unfounded fear of a crashing unemployment rate.  Nor are they about controlling price inflation.  These are mere cover for past mistakes.

The esteemed James Rickards, in an article titled The Fed’s Road Ahead, recently boiled present Fed policy down to its very core:

“Now we’re at a very delicate point, because the Fed missed the opportunity to raise rates five years ago.  They’re trying to play catch-up, and yesterday’s [June 14] was the third rate hike in six months.

“Economic research shows that in a recession, they [the Fed] have to cut interest rates 300 basis points or more, or 3 percent, to lift the economy out of recession.  I’m not saying we are in a recession now, although we’re probably close.

“But if a recession arrives a few months or even a year from now, how is the Fed going to cut rates 3 percent if they’re only at 1.25 percent?

“The answer is, they can’t.

“So the Fed’s desperately trying to raise interest rates up to 300 basis points, or 3 percent, before the next recession, so they have room to start cutting again.  In other words, they are raising rates so they can cut them.”

Unfortunately, Mr. Dudley, the Fed miscalculated.  Efforts to now raise rates will be too little, too late.  To be clear, there ain’t a snowball’s chance in hell the Fed will get the federal funds rate up to 3 percent before the next recession.  You likely won’t even get it up to 2 percent.

Nonetheless, you should stay the course.  If you’re gonna raise rates, then raise rates.  Don’t cut them.  Raise them.  Then raise them some more.

Crash stocks.  Crash bonds.  Crash real estate.  Crush asset prices.  Purge the debt and speculative excesses from financial markets.

Let marginal businesses go broke.  Let too big to fail banks, fail.  You can even consult with Dick “The Gorilla” Fuld, if needed.  Then let nature do its work.

In essence, bring the paper money experiment to a close and shutter the doors of the Federal Reserve.  No doubt, the economy and millions of people will suffer a painful multi-decade restructuring.  But what choice is there, really?

Let’s face it.  The Fed can’t hold the financial order together much longer anyway.  Why pretend you can with utter nonsense like crashing unemployment?  It’s insulting.

Your credibility’s shot.  Better to get on with it now, before it’s forced upon you.

P.S.  What’s up with Neel Kashkari?  The man has gone rogue.

Optimist's Burden Of Proof - Are Bonds "Distracted" Or "Depressed"?

Authored by Jeffrey Snider via Alhambra Investment Partners,

The idea that interest rates have nowhere to go but up is very much like saying the bond market has it all wrong. That is one reason why the rhetoric has been ratcheted that much higher of late, particularly since the Fed “raised rates” for a third time in March. Such “hawkishness” by convention should not go so unnoticed, and yet yields and curves are once more paying little attention to Janet Yellen. When Mohamed El-Erian wrote in what was I guess an oped in the Financial Times on Monday that bond investors were “distracted”, it was his subtle way of attacking them as wrong.

In that way, we are truly back to late 2013 and early 2014 all over again. But back then the Fed’s positivity side, thus bad for bonds, had a whole lot more going for it (even if it was in total still a thin catalog). Recovery at that point was at least plausible under the undetermined guidance of QE3 (and 4), whereas today not even Fed officials talk that way or even bring themselves to mention QE.

This isn’t to say that the bond market or eurodollar futures have everything right, far from it. As I argued earlier this week, these very markets were way off at several points and for several years. Treasuries as well as eurodollar futures were firmly within the camp of higher interest rates and monetary policy support until 2011. In other words, bond investors then were wrong, and even though it took several years to fully appreciate the implications of the con job that was QE, the bond market and eurodollar futures curve have been far more right than wrong since then (the noted exception being late 2013).

On its own, that doesn’t mean bond investors are now infallible and that treasury yields and the eurodollar curve together make up the definitive guide to the universe. Everything is about probabilities and really a spectrum of them, which means in simple terms the bond market deserves the benefit of the doubt where clearly economists and policymakers do not. Therefore, if there is a disagreement all over again between bonds and economists, particularly in similar fashion to 2014 and 2015, it does not make much sense to follow the latter particularly as interpretations on that side continue to rely upon the so far unreliable unemployment rate view of the economy.

For the balance of presumed error to shift back in the favor of this mainstream interpretation will require far more tangible proof than “interest rates have nowhere to go but up.” Having already heard it before several times, and having witnessed that, no, interest rates can actually go lower, there needs to be compelling evidence to that effect.

To this point in 2017, already the second quarter, it remains absent. The payroll report today was but another reminder of that case, especially beyond the headline Establishment Survey number that while disappointing did not describe the full impact of that disappointment. By almost every facet of the BLS data did the unemployment rate fail, which was particularly troubling given that the rate itself fell to a new “cycle” low. In other words, there is no indication that unemployment rate today has any more meaning and significance than it did in 2014 when last “interest rates had nowhere to go but up” because the Fed was tapering.

Instead, economic indications beyond payrolls continue to suggest only sustained weakness. There is improvement in most accounts beyond the labor market, to be sure, but like the labor market data nothing that is close to convincing that a positive inflection is even realistic let alone close at hand. To emphasis that point further, the Atlanta Fed’s GDPNow tracking model was reduced today to project just 0.6% real GDP growth in Q1 – such a low level despite “residual seasonality” already built in even though there hasn’t been found any evidence any such thing as residual seasonality ever existed in the GDP data set.

When it comes to economic interpretation, pointing to the unemployment rate was never enough even if it satisfied everyone in the media. To do so now only further calls into question that position, for if the unemployment rate is all you have to define a “better” economy then you truly have nothing. As I wrote in late January last year, right amidst the then “unexpected” turmoil:

The very basis for this persistent over-optimism has been the BLS figures, both the Establishment Survey and the unemployment rate. Yet, despite robust numbers on either account we are in this mess already. And it was economists and their unemployment rate devotion who told us last year that the “best jobs market in decades” would almost guarantee nothing but the best for the rest of it. It was in many ways the entire basis for the assertions of “transitory.”

More than a year later, not even the Establishment Survey can be included on that sunny side of the ledger. When in the mainstream the bond market’s pessimism is decried as surely wrong, it is done so on the basis of econometric models that are, to put it simply, backward.

It is the backwards priorities of economics; to view all modeled outlooks as if “more real” than observed condition including market prices. Such Aristotelian process raises more questions than confidence, especially surrounding labor statistics. If the labor market is so robust, why are there no wage gains? To the orthodoxy, it’s not a puzzle but an article of faith; there have to be wage gains, just pushed off to some point in the future.

Even after two years of “full employment” the wage acceleration of full employment remains conspicuously missing; to the point that it in all likelihood the Fed’s models have given up on it. The latest payroll report suggests only continued significant slack which can only mean chronic weakness well beyond the unemployment rate’s overly narrow focus (participation problem). If there is any policy debate left it is only about what has caused this depression (or secular stagnation, low/negative R*, or however you wish to characterize what is a no-growth baseline).

Having seen through these statistics for what they really are, the treasury as well as eurodollar market reflects considerable and legitimate economic doubt drawn from realizing what money is (a whole lot more than bank reserves) and what it certainly wasn’t (QE). It is the optimists who share the burden of proof that this time is any different. The longer that evidence remains missing, the greater that burden. This is not a “distraction” as El-Erian would have it, but rather very ugly reality unchanged by time or effort.

US Job Market Not As Strong As Perceived, San Fran Fed Warns

Despite endless streams of Fed Speakers proclaiming, in one form or another, that "we are at, or close to, full employment;" many in America - judging by the election of President Trump - are not feeling as exuberant as the jobs data implies they should be. The SF Fed itself now agrees: "the labor market may not be quite as tight as the headline unemployment rate suggests."

As we detailed previously, between 1948 and 2015, the work rate for U.S. men twenty and older fell from 85.8 percent to 68.2 percent. Thus the proportion of American men twenty and older without paid work more than doubled, from 14 percent to almost 32 percent. Recent data over the last number of years have begun to show that it is not just the American male who is struggling.

The participation rate of female workers is beginning to decline as well. The trend in the workplace has not been our friend.

And The San Franciso"s Fed researchers Regis Barnichon and Geert Mesters question "how tight is the US labor market?"

The current low unemployment rate compared with previous labor market peaks has raised some fears regarding whether the labor market has become too tight. In this Letter, we use a new method to isolate the effects of demographic changes on unemployment, and we find that the demographic-adjusted unemployment rate is still 0.3 to 0.4 percentage point higher than it was at past labor market peaks.

This indicates that the labor market may not be quite as tight as the headline unemployment rate suggests.

The researchers note that there is a major demographic effect in this...

As of February 2017 the shift-share adjusted rate stands at 5.0%—the same level as in the 1979 and 1989 labor market peaks (green line) and only one-tenth higher than the 2006 peak—which appears to confirm the initial impression of a tight labor market.

However, we believe this conclusion is premature. We find that the standard approach to demographic adjustment does not properly capture the full effects of demographic changes. In fact, once we address the shortcomings of the standard approach, the demographic-adjusted unemployment rate appears to be higher than all its previous lows since 1976.

Taking a longer-run perspective, we consider the effects of demographics on unemployment since the mid-1970s and their underlying causes. Figure 2 shows that demographic factors lowered the unemployment rate by about 2 percentage points over this period, according to our adjustment method. This number is substantially larger than that implied by a conventional shift-share analysis, which suggests demographics lowered unemployment by just over 1 percentage point.

So, in other words, if Yellen ever needs an excuse to get dovish, her own SF Fed research department just offered up PhD-style proof that the economy is not as strong as everyone hopes for... due to demographics.

*  *  *

Furthermore, any reasonable analysis suggests that in the future, the rate at which jobs are being lost to new technologies is only going to double and triple. This is one of the central problems facing society today, not just in the US but all across the developed world.

Hedge Fund CIO Amazed At The Absurdity Of It All

The latest weekly recap from One River Asset Management CIO Eric Peters tries to bring some sense to an increasingly absurd global economic, social and political situation, and fails, finding that the "more than absured is no longer absurd."

From Eric Peters" Weekly Notes

“More than absurd!” cried Jens Weidmann, outraged by Pete Navarro. Trump’s trade advisor had deliberately talked-down the dollar to boost US exports by accusing Germany of deliberately weakening the euro to boost European exports.

The argument is quite obviously absurd, because everyone’s trying to engineer a weaker currency. But according to Jens, it’s so absurd as to be more than absurd. Like lifting yourself into the air by grabbing your ass with both hands.

Germany’s current account surplus is over 8% of GDP, 2016 factory orders soared 8.1%. Absurd!

Greek unemployment hit 23%; the IMF forecasts 275% Debt/GDP by 2060. Absurd!

Germany is suffocating Europe. “Absurd!” cry German policy-makers, in more than absurd self-defense, as the Bundesbank repatriated 111 tons of physical gold from the NY Federal Reserve in 2016, and 105 tons from the Bank of France - they’re nearly complete.

“Frexit is a choice of impoverishment that threatens French jobs and savings,” warned the ECB’s Coeure. But if they don’t vote Le Pen, they’ll vote for impoverishment Hamon-style, with his 35 hours of pay for 32-hour work weeks. Or they’ll vote Fillon, with his E830k of government-financed pay for no work at all (you just need to be his wife). Or they’ll vote Macron, who sounds absurdly sensible in a frightened world screaming out for something else, without knowing quite what it is, but willing to take a risk.

“Our leaders chose globalization, which they wanted to be a happy thing. It turned out to be a horrible thing,” Le Pen screeched, to a crowd in Lyon. “It sets the conditions for another form of globalization: Islamist fundamentalism.” An imminent ISIS Paris-bombing was thwarted, the French/German 10yr bond spread widened to 72bps.

“The people are waking - the tide of history has turned,” thundered Marine. As the more than absurd is no longer absurd.

And here is a bonus anecdote from Peters:

 “The UK, US and Italy have rejected the established orthodoxy of the post-1979 period,” said the CIO, in one of those English accents that make American’s feel stupid. “Prior to 1979 it was accepted that the overriding aim of economic policy should be the pursuit of full employment.” Post-1979 the only object of government policy has been the pursuit of a declining inflation rate.

“The former (full employment) bias succeeded so well it dissolved into high inflation and declining real wages. The latter (low inflation) bias succeeded so well it dissolved into deflation and zero net capital investment.”

On the one hand, it’s not clear what capitalism is without a return on capital (1979) and on the other, it’s unclear what capitalism is without capital investment (2016). “The post-Thatcher orthodoxy was designed to reduce inflation. What was not realized (except by the honest few) was that a war on inflation implied a war on developed-economy wages, and that this implied a shift in the distribution of output away from labor toward capital. Even less realized was that by stifling wage growth and reducing wage income as a share of the economy, one would stifle the economy overall.

“Voters rejected the former dispensation with the election of Thatcher and Reagan. Now they have rejected the latter.” Japan went further than any nation in the pursuit of low inflation, driving down real hourly wages for twenty years. An achievement without parallel. “The motor behind the economic outcome to which the electorate appears to object is the obsession with low inflation. In turn this is supported by an obsession with monetary policy and an anathematization of fiscal policy.” Trump says these must change.

“Whether he means it or whether he can change it is open to question. But if he does, a new world awaits as post 1979 orthodoxy is ditched.”

A new world, in which even the Fed"s second in command admits they have no idea what is about to happen next.

Wall Street Responds To Today's Jobs Report

Following today"s jobs report, the market"s reaction to the unexpectedly strong January payrolls visualized in the charts below, is straightforward: the disappointing wage growth is an indication that the Fed may not hike rates for quite a bit longer than expected, and will likely will be forced to reduce its rate hike expectations from 3 to 2 (in line with the market) or fewer if wage growth continue to stagnate.

Sure enough, Wall Street"s strategists agree. As the following compilation of reactions shows, the prevailing reaction to today"s report is that while January job gains beat expectations, slower wage growth and disappointing underemployment figures help temper expectations for a near-term Fed hike.

Some examples, courtesy of Bloomberg:

TD (Mark McCormick)

• Jobs number is sweet spot for risk markets; growth is holding up with little impetus to nudge the Fed into action next month


• A softer read on wages and uncertainty over the economic agenda probably keeps USD sidelined for a bit longer


• This scenario favors continued momentum in some of the growth-sensitive currencies; could see the rallies in AUD, NZD and even NOK persist near-term

BofA (Michelle Meyer)

• Investors were setting up for a higher number given upside surprise in ADP on Wednesday; however, this was offset by increase in unemployment and softness in wages


• Report suggests labor market might not be as tight as previously believed


• Likelihood of the Fed hiking in March is fairly low and jobs report consistent with that


• BofA expects one Fed rate increase this year, in September, with risk of two rate hikes

Bank of Tokyo-Mitsubishi (Chris Rupkey)

• January employment report “strikes a blow” in hopes for a faster pace of rate hikes from “slow and steady” Fed


• “‘Big jobs today, but what about tomorrow’ will be the concern from Fed officials”


• Fed will be unlikely to act before there’s more certainty in Trump policies that could boost growth, make easier monetary conditions from Fed less necessary

Societe Generale (Stephen Gallagher and Omair Sharif)

• Jobs report shows “no additional pressure on the Fed to move beyond its indications of gradual rate hikes”


• “Evidence on labor market tightness abated in January”

Goldman Sachs (led by Jan Hatzius)

• Report “appears consistent with healthy economic growth, but only moderate pressure on labor resources”


• Reduces odds of a rate hike in March to 15% from 35%


• Maintains call for 3 rate increases this year, in June, September and December

CIBC (Avery Shenfeld, note)

• Only sore spot in jobs report was avg hourly earnings


• “Although the annual rate of wage inflation was likely to decelerate a couple of ticks, the fall from the revised 2.8% to 2.5% will be seen as a counterbalance to the stronger headline payroll number”

Janus Capital (Bill Gross)

• “Schizophrenic report” doesn’t alleviate skepticism about 3-4 percent growth promised by Trump administration


• “I think we’re stuck in a 2% real GDP world”


• While slow wage growth may be good for corporate profits, for consumers, “if their money is only growing at 2.5%, that’s a slow-growth economy”

Market Securities (Christophe Barraud)

• January payrolls report “looks somehow disappointing,” will create uncertainty among policy makers that wage pressures are materializing and full employment is close


• Could damp expectations for tighter policy


• Slowing wage growth suggests both personal income and spending were weak in January
  Underemployment results disappointed, while number of people working part-time increased by 242k; numbers don’t confirm that labor slack diminished

Marketfield Asset Management (Michael Shaoul)

• January jobs report “noisy” yet kept prior trends intact


• Weaker avg hourly earnings “greeted with some relief since it reduces the pressure on the FOMC to act in early part of 2017”


• Avg hourly earnings “is a lousy data series, but we accept it is one that the FOMC will follow when setting policy”

BNY Mellon (Marvin Loh)

• Tempered Fed expectations are biggest market takeaway from report, as it signals existence of more slack in labor market than headline unemployment rate would suggest


• “Any trough and subsequent increase in the participation rate would indicate continued jobs growth with limited wage pressure, a possible holy grail for corporate America”


• After report, anyone who thought Fed might raise rates in March will likely move their forecast to June

ING (James Knightley)

• Wages were a ‘big miss’’ but this likely is a “temporary slowdown with strong employment numbers ensuring that the trend is for faster wage growth in the months ahead”


• ING reiterates forecast for March Fed rate hike; expects that to be followed by another increase in 3Q


• “GDP growth on an upward trend”


• “Inflation figures looking consistent with the Fed’s medium term aspirations” so case for March hike “remains strong”

SouthBay (Andrew Zatlin)

• January data did not capture minimum wage hikes, which will show up in February, and that helped suppress wage inflation; expect a bigger jump next month


• If assumption is correct, the current environment of a patient Fed with slower and more gradual rate hikes could flip after next month’s jobs data

Evercore (Krishna Guha)

• January NFP report creates “little need for the Fed to pull forward the next rate hike to March”


• A move by May “is slightly more likely than not,” given strength in hiring


• Combination of strong employment growth with more supply to keep Fed “at bay” for now, “is perfect for U.S. equities”

Prestige Economics (Jason Schenker)

• Continued job creation backs hawkish Fed


• “A March Fed rate hike is a lock” after supportive jobs report and slightly stronger language regarding inflation in the Fed statement this week


• “We have been expecting a March rate hike, and only a shocking turn of policy or major upheaval in financial markets would derail that expectation”


• Sees upside risks for USD before Fed’s March meeting

Source: Bloomberg