Yellen’s Labor Gauges Support Easier-for-Longer Policy
More than half the gauges Janet Yellen uses to track the U.S. labor market are below pre-recession levels, reinforcing the likelihood she will support an easier-for-longer Federal Reserve policy as she prepares to succeed Ben S. Bernanke as chairman.
While payrolls have increased and firings slowed, four measures -- unemployment, labor force participation and rates on hiring and voluntary quits -- are still worse than at the start of the recession in December 2007. Yellen, in a speech earlier this year, named the six gauges as among those she would “consider in judging the strength of the labor market in connection with” the Fed’s asset purchase program.
The share of the working-age population in the labor force is at a 35-year low, and Americans are less inclined to quit their jobs and seek positions elsewhere, highlighting a tenuous labor-market recovery that’s holding back the economy. Fed policy makers are debating the durability of employment gains as they consider when, and by how much, to reduce their $85 billion in monthly asset purchases.
“The progress is so much more grinding and grudging and the underlying dynamics are just not what they want it to be,” said Julia Coronado, chief economist for North America at BNP Paribas in New York and a former member of the Fed’s forecasting staff. “Turnover dynamism and the hiring intentions and willingness to commit to new employees are still very low.”
The unemployment rate has dropped this year, in part because people are leaving the workforce. The participation rate, which indicates the share of the working-age population in the labor force, fell to 62.8 percent in October, the lowest since March 1978.
At 7.3 percent, unemployment remains higher than it was at the end of 2007, when it was 5 percent. Policy makers’ long-term projection for the jobless rate is 5.2 percent to 5.8 percent.
Unemployment is “still too high, reflecting a labor market and economy performing far short of their potential,” Yellen told the Senate Banking Committee during her confirmation hearing on Nov. 14.
Long periods of unemployment “are particularly painful for households, impose great hardship and costs on those without work” and on their families, she said. Yellen added she’s committed to promoting a strong economic recovery and will ensure monetary stimulus isn’t removed too soon.
The Fed said after its October meeting that it will press on with its $85 billion in monthly asset purchases and continue to hold short-term rates near zero at least as long as unemployment is above 6.5 percent and forecast inflation is below 2.5 percent.
“The cyclical rebound that everybody wants to see has not happened by any means,” said Guy Berger, an economist at RBS Securities Inc. in Stamford, Connecticut, whose firm projects the Fed will begin reducing asset purchases in March. “Even if we don’t really see much of a pickup, for example, in flows or rates of hiring and rates of quits or labor force participation, at some point you’ve got to say enough progress has been made simply because of the employment growth to date.”
Payroll growth and reductions in firing have been bright spots. Employment climbed by 204,000 in October, exceeding the highest forecast in a Bloomberg survey of economists. Job growth so far this year has averaged 186,300 a month, compared with 182,750 in 2012.
Discharges as a share of total employment remained at 1.2 percent in August for a third month, near a post-recession low of 1.1 percent and down from a 2 percent peak in early 2009.
At the same time, rates of hiring and quits as measured by the Labor Department’s Job Openings and Labor Turnover report have shown less improvement. The so-called JOLTS report was delayed due to the partial federal shutdown. September data are scheduled for release Nov. 22.
The hiring rate held at 3.3 percent in August, compared with an average 3.8 percent during the previous expansion. The gauge calculates the number of hires during the month divided by the number of employees who worked or received pay during that period.
The quits rate, which shows the willingness of workers to leave their jobs, stayed at 1.7 percent in August, down from a 2.1 percent reading when the recession started almost six years ago.
An increase in the gauge indicates that “workers perceive that their chances to be rehired are good -- in other words, that labor demand has strengthened,” Yellen said in a March speech before the National Association for Business Economics.
There are additional gauges of labor-market health that policy makers follow, according to Bernanke, whose term ends Jan. 31. At his September press conference, he mentioned measures of real wages, jobless claims, aggregate hours of work and household surveys on job expectations.
In addition to labor-market measures, Yellen said she also takes into account the “overall pace of spending and growth in the economy” in order to better gauge the jobs outlook.
The economy expanded at a 2.8 percent annualized rate in the third quarter, boosted by an increase in inventories, after a 2.5 percent gain in the prior three months, Commerce Department figures showed last week. Consumer spending, which accounts for almost 70 percent of the economy, rose at the slowest pace since 2011.
The central bankers meet next Dec. 17-18 to judge whether continued accommodation is needed to propel the economy and improve the labor-market outlook, and whether further expansion of the balance sheet, which stands at a record $3.91 trillion, carries risks that outweigh the benefits.
“Our country has come a long way since the dark days of the financial crisis, but we have farther to go,” Yellen told lawmakers last week. “Likewise, I believe the Federal Reserve has made significant progress toward its goals but has more work to do.”
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