Experts Talk Bernanke Testimony, PPI, Labor Slump
Bloomberg BusinessWeek compiles comments from Wall Street economists and strategists on the key economic and market topics of Mar. 17
Michelle Meyer, Barclays Capital
In testimony [on Mar. 17] to the House Financial Services Committee, Fed Chairman [Ben] Bernanke is set to argue that it is important for the Fed to supervise banks of all sizes, according to the prepared text already released. This is in response to Senator [Christopher] Dodd's proposed bill that would limit the Fed's supervision to banks with assets exceeding $50 billion and transfer the regulation of smaller banks to the FDIC. Chairman Bernanke argued that the Fed's "involvement in supervising banks of all sizes improves the Federal Reserve's ability to effectively carry out its central bank responsibilities." He argued that the Fed's expertise in macroeconomic forecasting [would] help to identify risks to institutions and markets. In addition, Fed staff members have extensive knowledge of payment and settlement systems.
Even more noteworthy, Bernanke argued that the Fed's making of monetary policy and management of discount window [would] benefit from the insights provided by supervising a range of banks.
David Resler, Nomura Securities
The U.S. producer price index (PPI) for February fell 0.6% [from the previous month]. That partly reversed an outsize 1.4% jump in January. In both months, wild gyrations in energy prices dominated the headline price changes. The "core" PPI, which omits the effects of changes in food and energy prices, rose a modest 0.1% in February, after a 0.3% gain in January. Both that headline and core PPI changes have been a bit larger than usual in recent months, but when measured against year-earlier levels, the core PPI inflation rate appears to be steadying at about 1%—its 12-month rate in both January and February.
Across the array of producer goods, price changes were a mix of mostly small ups and downs. Such cross-sectional variation is typical, whether the underlying trend is one of rising or falling inflation. As it happens now, the over-arching picture is one of rather volatile commodity prices but essentially stable finished goods prices—a welcome outcome for policymakers, who appear to have contained the threat of a dangerous deflationary spiral.
Joachim Fels, Morgan Stanley
Debt is rising, the global economy is recovering, and inflation risks will play a crucial role in determining when major central banks start their exit from their ultra-expansionary stance. On these points, there is broad agreement all round. However, the timing of fiscal and monetary policy tightening to deal with these developments is a bit more contentious, and it is here that our view differs from that of markets and many of our clients.
First, while most clients seem to be gearing up for a significant fiscal tightening in 2010-11, we see little sign of such restraint, going by the forecasts from our global economics team. Second, we expect central banks to start tightening policy sooner than markets expect, acting as a counterbalance for weaker fiscal restraint.
Finally, we do not see the recovery or the policy tightening process as a linear one. Specifically, we see more downside risks to growth in 2011 than in 2010 and believe that these downside risks will keep central banks from tightening policy aggressively, keeping the door open for inflationary risks to build up.
Robert Mellman, J.P. Morgan
The recent financial crisis and associated economic downturn were extremely painful across many dimensions. The downturn was the longest recession since World War II and one of the deepest. And household wealth destruction resulting from sharply lower house and equity prices was unusually steep. But the defining characteristic of the recession is probably the hit to the labor markets. Payroll employment is now 6.1% below its previous cyclical peak in December 2007. The percentage decline in employment is roughly double that associated with any other recession in the past 60 years. Job reductions have been associated with both an unusually large and rapid rise in the unemployment rate and a sharp drop in the labor participation rate.
Employment in construction and in manufacturing has declined much more than employment in the services-producing industries. Employment in construction has declined 26% since December 2007, while employment in all services-producing industries has declined less than 4%. Similarly, the rise in the unemployment rate has been especially severe for workers in the goods-producing industries. In February the unemployment rate for workers in the construction industries was 22% nsa and the unemployment rate in manufacturing was 12%, while the unemployment rate in financial activity industries, for example, was slightly less than 7%.
For those over 25 years old, the February unemployment rate was over 15% for those without a high school degree and 5% for college graduates.
The unemployment rate has risen much more for men than for women, partly due to the sharp increase in unemployment in the construction industries. In February, the jobless rate was 8% for women and 10% for men.
The share of the labor force that is among the long-term unemployed, those unemployed for 27 weeks or more, is 4.0%. This rate is much higher than at any other time in the history of this series, dating back to 1948.