More than two-thirds of the gauges on Janet Yellen’s labor-market dashboard are still showing worse readings than before the recession, reinforcing her belief that the economy will need “extraordinary support” from the Federal Reserve for “some time to come.”
Only two of the nine indicators flagged by the new Fed chair -- payroll growth and layoffs -- are back to where they were in the four years leading up to the last economic downturn. The seven others, including joblessness, underemployment and labor-force participation, have yet to return to their 2004-to-2007 averages.
“The unemployment rate and a lot of these other series aren’t where the Fed thinks they need to be,” said Joe LaVorgna, chief U.S. economist at Deutsche Bank Securities in New York and the top forecaster of unemployment over the past two years, according to data compiled by Bloomberg. Policy makers are “going to need a general sense that the labor market has entered a more sustainable path before they start to consider the possibility of raising interest rates.”
Yellen is using what she calls her “dashboard” of jobs data to justify the Fed’s easy-money policies and to argue that there’s still considerable slack in the labor market almost five years after the recession’s end. While the job market has strengthened considerably from the depths of the downturn, it is “not back to normal health,” the Fed chief said in a March 31 speech in Chicago.
The biggest laggards have been long-term unemployment and participation. More than a third of the jobless have been out of work for more than 26 weeks, while the share of the working-age population in the labor force is at an almost 36-year low.
“The indicators are mixed,” said Roberto Perli, a partner at Cornerstone Macro LP in Washington and a former central bank economist. “That allows the Fed to stay the course” and keep interest rates low.
Yellen’s console of statistics has pluses and minuses. While it provides a broader picture of the labor market than focusing on the unemployment rate alone, it can confuse investors about the Fed’s intentions because it introduces additional variables without making clear how much weight the central bank is giving to each statistic.
“The market is more vulnerable to surprise in some of these other labor-market data,” LaVorgna said.
Some economists, including Michelle Girard of RBS Securities in Stamford, Connecticut, also worry that the instrument panel overestimates the amount of slack in the labor market and includes gauges that aren’t susceptible to changes in Fed policy.
The Fed is projected to begin raising interest rates in the third quarter of next year, according to the median estimate of 65 economists in a Bloomberg survey conducted March 7-12.
Yellen, 67, will get an update on five of the indicators -- joblessness, payrolls, underemployment, long-term unemployment and labor-force participation -- on April 4 when the government releases employment data for March. The other four gauges -- measuring the rate of hiring, layoffs, quits and job openings -- are included in the monthly labor turnover summary, next out on April 8.
Chris Collins doesn’t need a basketful of statistics to tell him the labor market isn’t working. The 37-year-old operating engineer in Henderson, Nevada, has been unemployed since April 2013, when his last construction project ended.
“I try to stay upbeat, because sometimes that’s all you have to hold onto is the hope that there’s going to be a big project that breaks loose and you’re going to get back to work and get back on your feet,” said Collins, who specializes in heavy-machinery operation, including work with cranes and paving. “In the meantime, I’m looking outside the industry, just trying to find something to put a little change in the pocket and help my family.”
Fed policy makers put the focus on a broad range of economic and labor-market data last month after junking their strategy for guiding financial markets based on an unemployment threshold. Under its previous plan, the Fed pledged not to consider raising its benchmark interest rate, now zero to 0.25 percent, at least until the jobless rate fell to 6.5 percent.
In place of that quantitative guidance, the central bank adopted a more qualitative approach, saying on March 19 it “will take account of a wide range of information” in deciding when to raise rates.
Policy makers abandoned their jobless marker after unemployment fell faster than they had projected, hitting 6.7 percent in February. Much of the decline was due to Americans dropping out of the labor force, rather than more hiring. Yellen and most Fed policy makers reckon that the long-run sustainable jobless rate is between 5.2 percent and 5.6 percent.
At a press conference after the March 18-19 policy meeting, Yellen said most of the labor-market statistics she looks at are getting better. “If you ask about my dashboard, the dial on virtually all of those things is moving in the direction of improvement,” she said.
Economists are expecting further gains with the release of jobs data on April 4. Payrolls are projected to have risen 200,000 in March, according to the median prediction of economists surveyed by Bloomberg. That compares with a monthly average of 194,250 last year and 161,800 between 2004 and 2007. Still, total payrolls remain 666,000 below the pre-recession peak.
March unemployment is forecast to come in at 6.6 percent, down from 6.7 percent in February and a 26-year high of 10 percent in October 2009. It averaged 5 percent from 2004 to 2007.
Long-term joblessness hasn’t shown nearly as much improvement. At 37 percent, the share of unemployed who have been out of work for 27 weeks or longer still is almost twice its pre-recession average. It reached 45.3 percent in April 2010, its highest level in government records dating to 1948.
This gauge is “probably the most controversial” on Yellen’s dashboard, said Dean Maki, chief U.S. economist for Barclays Plc. in New York. That’s because it may exaggerate the amount of excess manpower in the labor market.
When people are out of work for so long, they tend to become less active in seeking a job, and employers consider them less suitable for hiring, according to studies by economists at Princeton University, Columbia University and the Boston Fed.
That suggests that wages could pick up as the labor market improves, even if the share of long-term unemployment stays high, Maki said.
The participation rate also may be giving the Fed an inflated view of the number of potential workers available, said Girard, chief U.S. economist for RBS in Stamford, Connecticut. At 63 percent in February, it’s near an almost 36-year low of 62.8 percent in December and down from a 66.1 percent average in the four years ending in December 2007.
While some of the drop in participation comes from the retirement of Baby Boomers, a “significant amount” is due to labor market slack, Yellen said on March 31. “Some of these workers may rejoin the labor force in a stronger economy,” she said.
Girard disagreed. “In 2012 and 2013, the bulk of the labor force exits were retirements,” she said. “We’re highly skeptical that these individuals will be pulled back into the labor market even if economic conditions improve.”
“I’m not saying there is no slack” in the labor market, Girard added. “My concern is that some of these measures may not reflect the amount of slack the Fed thinks they do.”