Just a small update on some recent developments in the U.S. labour market outlook. The spike in the Gallup daily unemployment rate now seems to be precisely that – a spike. It appears some extremely high values for a few days corrupted the data. That said, the payroll-to-population ratio from the Gallup survey is still not painting a bright picture, which is consistent with the stagnant employment-to-population ratio published by the BLS.
William C. Dudley from the New York Fed pushed back slightly yesterday against the market tightening of recent months, questioning the relevance of the unemployment rate relative to other labour market indicators.
With respect to the first metric, we have seen labor market improvement since the program began last September. Over this time period, the unemployment rate has declined to 7.3 percent from 8.1 percent. However, at the same time, this decline in the unemployment rate overstates the degree of improvement. Other metrics of labor market conditions, such as the hiring, job-openings, job-finding rate, quits rate and the vacancy-to-unemployment ratio, collectively indicate a much more modest improvement in labor market conditions compared to that suggested by the decline in the unemployment rate. In particular, it is still hard for those who are unemployed to find jobs. Currently, there are three unemployed workers per job opening, as opposed to an average of two during the period from 2003 to 2007.
This is contrast to the more hawkish members of the FOMC, who underline that the unemployment rate has been found to be the best measure of labour market slack.
This level of disagreement over the interpretation of the labour market data is another example of how “Forward Guidance” is doomed to fail. If the Fed cannot create a consensus backcast of labour market under-utilisation seen one month ago, it seems unlikely that they can plausibly convince bond market participants to take career risk based on what the committee might do about interest rates two years in the future.
(c) Brian Romanchuk 2013