MacroScope

Why rise in part-time employment does not explain U.S. jobless rate decline

The September unemployment rate was the lowest since December 2008 after surprisingly large back-to-back declines, sending economists back to the drawing board after big forecast misses. Some pointed to the large increase in involuntary part-time employment – erroneously so, according to an analysis from Ray Stone, economist and managing director at Stone & McCarthy.

The jobless rate fell to 7.8 percent last month from 8.1 percent in August.

After a quick, superficial look at the September household data, several commentators embraced the thesis that it was due to a 582,000 increase in Part-Time Employment for Economic Reasons. These are people who prefer full-time employment, but sadly had to settle for a part-time job. These 582,000 part-timers accounted for much of the overall 873,000 increase in September civilian employment.

This Part-Time for Economic Reasons statistic “was a Greenspan favorite, and certainly over longer periods of time such is a measure of labor distress,” Stone said. “But, the month-to-month wiggles in this series usually turn out to be noise. In September this metric rose to 8.613 million.”

Especially interesting is that each of the last three Septembers saw similar surges in the Part Time for Economic Reasons statistic and that the size of the September 2012 increase was similar in size to the previous  three Septembers when nothing particularly noteworthy occurred to the unemployment rate.

In that context, “is it fair to attribute the 0.3 percent decline in September 2012′s unemployment rate to a surge in the Part-Time for Economic Reasons statistic?” Stone asks.

WHY THE SEPTEMBER SURGE?

An increase in part-time work does not explain September's sharp drop in the jobless rate, says Ray Stone of Stone & McCarthy. Join Discussion

Europe’s reactive leadership

Spain doesn’t need financial help. That was the verdict from euro zone ministers on Monday – quickly followed by a selloff in Spanish stocks and bonds on Tuesday. The trouble with that line of thinking is that it again leaves policymakers behind the curve, reacting to events rather than preempting them, write currency strategists at Brown Brothers Harriman in a research note:

For several weeks now Germany Finance Minister Schaeuble has argued against the need for Spain to request aid. France and Italy, in contrast, have been reportedly encouraging Spain to ask for assistance, which they assume would ease financial pressures within the region as whole. The Eurogroup meeting of euro area finance ministers endorsed Schaeuble’s position. Spain is taking necessary measures to overhaul the economy, they said.  Spain is able to successfully fund itself in the capital markets. Aid is simply not needed now.

While there is a compelling logic to the argument, the problem is that it prevents officials from being proactive rather than continue to its reactive function. It means that whenSpaineventually requests assistance, it will be in a crisis and the cost of assistance will be greater. It is penny-wise but dollar foolish. By failing to find a preventative salve, officials are not maximizing the breathing space that the ECB has created (intentionally or otherwise).

By reacting to events rather than shaping them, Europe's leaders are raising the cost of managing the continent's financial crisis, according to analysts at Brown Brothers Harriman. Join Discussion

Greece versus Germany

Angela Merkel’s visit to Greece today was anything but low key.  Greek police fired teargas and stun grenades at protesters in central Athens when they tried to break through a barrier and reach  the German chancellor. There are lots of differences between the two countries. Here’s a look at some of the main ones:

 

 

Angela Merkel's visit to Greece today was anything but low key. Greek police fired teargas and stun grenades at protesters in central Athens when they tried to break through a barrier and reach the German chancellor. There are lots of differences between the two countries. Here's a look at some of the main ones: Join Discussion

The Greek conundrum

Euro zone finance ministers, apart from formally launching the ESM rescue fund, made little headway yesterday evening, holding what they called “robust” talks about Greece’s prospects but not coming up with anything to continue the pretence that the country can get back on track. The report from the troika of EU/IMF/ECB inspectors looks likely not to be complete until next month’s Eurogroup meeting.

There are signs of divisions between the euro zone and IMF, with the latter convinced only dramatic measures such as a big writedown on the Greek bonds held by European governments will make the numbers add up. “More needs to be done,” IMF head Christine Lagarde said pointedly last night.

Angela Merkel, who is visiting Athens today and could stir up public Greek anger by doing so, is apparently set on returning to her increasingly critical Bundestag just once more – with a sweeping package to deal with Greece, Spain, Cyprus and maybe Slovenia. Ergo, the lack of Greek progress means any Spanish move for aid is probably some way off. And given the chaotically mixed messages coming from Madrid, it’s not clear that the government there has fully realized it will have to do so at some point.

Since European Central Bank chief Mario Draghi changed the terms of the game, the bond market has cut Spain some slack. Spanish 10-year are around 5.75 percent. A lurch well above six percent for an extended period of time could force Spanish Prime Minister Mariano Rajoy’s hand. In Luxembourg, Eurogroup head Jean-Claude Juncker said there had been no discussion about Spain needing a sovereign bailout on top of the help being given to its banks. A ratings judgment by Moody’s is now overdue and could come any day. If it cuts Spain to junk, events could accelerate but if it does not, Madrid may have a little more breathing room.

The International Monetary Fund cut its global growth forecasts for the second time since April and, more locally, predicted Spain will miss its deficit targets both this year and next. The IMF forecast the euro zone economy would shrink by 0.4 percent this year, and grow by just 0.2 percent in 2012 – hardly an environment conducive to cutting debt, and a downgrade of its July numbers.

Merkel’s visit to the lion’s den is highly symbolic but is unlikely to move forward the Greek negotiations, given the troika’s ongoing work. But her trip represents a gesture of solidarity with her Greek counterpart, Antonis Samaras.  Police have banned protests in most of central Athens and readied 6,000 officers to provide security. The German Chancellor, having expressed some doubts earlier this year, now seems hell-bent on keeping Greece in the euro zone, at least until German elections in autumn of next year.

The other big setpiece of the day is Draghi’s lengthy testimony to the European Parliament. The ECB is somewhat hamstrung until Spain calls for aid – it cannot implement its bond-buying programme until a country first seeks help from the ESM – but Draghi rarely wastes an opportunity to keep the pot boiling. At the ECB’s monthly policy meeting last week he said the conditions Madrid would have to sign up to need not be painful, suggesting he hopes Rajoy will hope off the fence sooner rather than later. He also said the ECB was ready to go.

Germany's Angela Merkel visits Athens while Greece's lenders wrangle over its bailout terms. Join Discussion

Fed speak galore

The pace of Federal Reserve speeches intensifies next week, with Vice Chair Janet Yellen kicking off the calendar on Tuesday with a speech on financial stability. Yellen will be speaking in Tokyo at an IMF meeting panel. The cacophony picks up on Wednesday, with remarks from Minneapolis Fed president and recent dovish convert Narayana Kocherlakota, the board’s regulation-czar Dan Tarullo and the ever hawkish Richard Fisher from Dallas. On Thursday, Yellen will directly address monetary policy in another speech, while board governors Jeremy Stein and Sarah Raskin offer a rare peak into their macroeconomic views. Philadelphia Fed President Charles Plosser and Jim Bullard of the St.Louis Fed, both of whom have opposed QE3, are also on tap. Jeff Lacker, the lone dissenter on this year’s FOMC, will close the week on Friday.

Next week's calendar contains a long list of Federal Reserve speeches. Join Discussion

Early hints of stronger unemployment numbers – that Wall Street economists missed

As traders and economists hash over the sharp and unexpected drop in the U.S.jobless rate to 7.8 percent, they might do well to review some key data points that offered early hints that at least some households were seeing improvement in the labor market. Wall Street analysts in a Reuters poll had forecast a rise in the unemployment rate to 8.2 percent.

Even as big companies were laying off more workers or at least holding back on hiring, The Conference Board’s consumer confidence data showed workers felt more encouraged about finding jobs. The Thomson Reuters/University of Michigan survey depicted a late summer upturn in consumer mood even as gasoline prices remained high. The latest ADP report, with all its perceived flaws, indicated a consistent, moderate acceleration in hiring among small- and mid-sized companies since late spring even though big firms seemed reluctant to expand their payrolls.

The graph below shows confidence improving as job prospects brighten.

 

 

Economists completely missed the looming drop in the jobless rate to 7.8 percent in September -- but some indicators had already pointed to strength. Join Discussion

Sustainable full employment is within reach: Green Party U.S. presidential candidate Stein

As Americans get ready or tonight’s presidential debate, there’s one candidate they won’t be seeing on television and may not even have heard of: Jill Stein, a Harvard-trained doctor and Green Party candidate. Stein is promising a Green New Deal that she says could create more than 20 million jobs, 16 million through a government-sponsored program for full employment and millions more due to the increase in demand that would come from the new investments. She wants to expand Medicare coverage for all Americans and sharply reduce military spending, and says her policies would reduce the deficit by boosting tax revenues. She spoke to Reuters recently by telephone. What follows is an abbreviated transcript of the interview.

The Green Party does not appear to have realistic chance to win a major election at the moment. What is the goal of your candidacy?

An election is a wonderful time when people get involved and have a much broader conversation than usual. My hope is that we can drive some really critical solutions that already have majority support from the American public, that we can actually drive them into a political system that has been terribly hijacked and disconnected from the interests of everyday people.

I think it is beginning to spread like a little bit of a wildfire. I’m not holding my breath that we are going to turn the White House into a Green House. Someday that will happen, I’m not sure whether it will happen this time or not.  But regardless I think, if we don’t win the office we still can win the day by driving these critical issues forward and into the public dialogue that are otherwise just going to be completely swept off the table. Really creating jobs. Medicare for all. Public higher education for free. A Moratorium on foreclosures. Bringing home our military.

How difficult would it be to accomplish these things politically given the resistance that, say, the Obama administration faces when it attempts anything that even edges close to the word stimulus. Why do you think the political system continues to support leaders that work in a way that’s so different from the vision that you have?

In a way that’s so contrary to the expressed priorities of the public. The public wants jobs, they don’t want tax breaks. The public is concerned about jobs, not about paying down the deficit, in poll after poll. Yet Washington is totally riveted on the deficit. It’s quite clear that our democracy has been hung out to dry. We have the best democracy money can buy and both political parties are competing within a narrow spectrum for their corporate funders’ dollars. That’s essentially what they’re competing for, that’s what their election’s about. And the American public has been entirely lost in the shuffle.

There are statistics from 2011 for example that clarify how incredibly hijacked the whole campaign finance system is, looking at Barack Obama’s funding through the Joint Victory Fund, which is for the Democratic National Committee as well as Barack Obama’s campaign contributions. The numbers are absolutely mind-boggling. It’s something like 99 percent of all donations are coming in chunks of $1,000 or more. Who has that kind of money? These donations for our political system are coming from a tiny tiny fraction – something like a millionth of a percent, something on that order. So it’s no surprise that the political agenda has nothing to do with, and in fact is quite contrary to, the interests of the vast majority of the American public, who are paying dearly, with their homes, with their prospects of education which is no longer affordable, with our climate that is in an all-out meltdown and is only getting worse. Those key issues don’t count and what the establishment is doing is not only not fixing them, both parties have actually been accelerating them in the wrong direction, to the point where people are actually waking up now and that’s very much because everyday people are in the crosshairs.

Green Party presidential candidate Jill Stein says her Green New Deal could put more than 20 million jobless Americans back to work. Join Discussion

Don Rajoy de la Mancha: Spain’s “quixotic” adventures

 

Spain will not seek aid imminently, says Prime Minister Mariano Rajoy. And by imminently, he means, not this weekend. Just the latest twist in a European crisis plot that now sees Spain as its primary actor.

The focus on Spain’s reluctance to see foreign aid, a pre-condition for additional European Central Bank purchases of its bonds, is ironic given the country’s record of goading weaker counterparts into similar rescue packages earlier in the crisis.

To Lena Komileva, chief economist at G+ Economics, the saga is all too reminiscent of the hapless meanderings of Don Quixote. Komileva argues that the country’s latest budget announcement marks only the beginning of a deeper, almost circular plight:

Perhaps this budget and the bank recapitalization efforts that will follow the stress tests will convince the markets that Spain will receive the EU’s political endorsement and with it the financial support that is critical to lowering the cost of capital for the Spanish economy before the year-end. But the government’s reformist drive is hostage to divisive politics in Europe and at home, a deepening recession, and agnostic market attitudes towards any EU crisis-management policies that sacrifice growth. Even with the prospect of EFSF and ECB support for government and bank debt in sight, and the government’s Quixotic crusade for fiscal credibility, the question of Spain’s debt sustainability over time remains wide open.

 

One economist has likened Spain's debt saga to the adventures of Don Quixote. Join Discussion

Why the Fed shouldn’t raise rates to discipline Congress

Federal Reserve Chairman Ben Bernanke has been trying for some time to fend off critics of his bond-buying policies who argue the central bank is making it easier for the federal government to run deficits. In remarks to the Economic Club of Indiana on Monday, he seems to have found a useful way to help illustrate his point.

It follows logically that those who say the Fed is abetting profligate governments might want to see higher interest rates that would discourage excess federal borrowing. Bernanke pursues this line of thinking to its natural conclusions – and is very uncomfortable with the results:

I sometimes hear the complaint that the Federal Reserve is enabling bad fiscal policy by keeping interest rates very low and thereby making it cheaper for the federal government to borrow. I find this argument unpersuasive. The responsibility for fiscal policy lies squarely with the Administration and the Congress. At the Federal Reserve, we implement policy to promote maximum employment and price stability, as the law under which we operate requires. Using monetary policy to try to influence the political debate on the budget would be highly inappropriate.

For what it’s worth, I think the strategy would also likely be ineffective: Suppose, notwithstanding our legal mandate, the Federal Reserve were to raise interest rates for the purpose of making it more expensive for the government to borrow. Such an action would substantially increase the deficit, not only because of higher interest rates, but also because the weaker recovery that would result from premature monetary tightening would further widen the gap between spending and revenues. Would such a step lead to better fiscal outcomes? It seems likely that a significant widening of the deficit – which would make the needed fiscal actions even more difficult and painful – would worsen rather than improve the prospects for a comprehensive fiscal solution.

To illustrate the point that loose Fed policy is not an attempt to let Congress off the hook, central bank Chairman Ben Bernanke thinks through what might happen if the Fed hiked rates to teach lawmakers a lesson. Join Discussion

Attempting to measure what QE3 will and won’t do

Deutsche Bank economists have tried to quantify what effect QE3 is likely to have on the U.S. economy. For an assumed $800 billion of purchases of both agency securities and Treasuries through the end of next year, the economy gets a little over half a percentage point lift over the course of two years and a net 500,000 jobs – or about two months’ worth of job creation in a typical strong recovery from recession.

In a model-driven assessment based on the past impact of QE1 and QE2, Deutsche Bank Securities chief economist Peter Hooper says this is what the Federal Reserve printing another $800 billion — slightly less than the gross domestic product of Australia — will do:

1. Reduce the 10-year Treasury yield by 51 bps

2. Raise the level of real GDP by 0.64%

3. Lower the unemployment rate by 0.32 percentage points

4. Increase house prices by 1.82%

5. Boost the S&P 500 by 3.06%, and

6. Raise inflation expectations by 0.25%

Apart from the fact we are more likely to win a lottery jackpot of epic proportions than see all of those predictions come true to that degree of precision, the pressing question is whether a 0.32 percentage point reduction in the unemployment rate would be significant enough for the Fed to stop printing money. After all, the Fed tied whether or not it would be satisfied by the results of QE3 to a substantial improvement in the labour market.

When the Fed signalled QE2 was coming, in August 2010, the U.S. unemployment rate was 9.6 percent. At the time QE2 was launched in November 2010 it was even higher, at 9.8 percent. It has fallen 1.7 percentage point since then, to 8.1 percent.

Deutsche Bank economists sum up their six-point assessment as follows (emphasis mine):

 Although we would consider this a meaningful impact, we agree with Bernanke’s assessment that it is not a panacea. Most likely, QE3 can, at best, encourage marginal improvement in the stagnating labor market and buffer the U.S. economy against the significant headwinds posed by the continuing uncertainty regarding ongoing euro risk, the fiscal cliff, and the debt ceiling.

... the pressing question is whether a 0.32 percentage point reduction in the unemployment rate would be significant enough for the Fed to stop printing money. Join Discussion