Jobs Day on Friday!

April 2nd, 2014 at 6:29 pm

I’ve run my forecast and have come in a bit below consensus, at 170,000 for payrolls.  Consensus, as you see below from the Bloomberg expectations, is for slightly over 200,000.

There’s still maybe some weather dampening the data, though less so than in previous months.  GDP grew less than 3% in 2013Q4, and forecasts for Q1 I’ve seen range from 1.5% to the low 2’s–nothing too inspiring.  There’s been a touch more wage growth but hard to see a ton of confidence from consumers’ perspective.  In fact, both the expectations and the present conditions indices of consumer confidence are still below where they stood before the recession.

The 10-year bond yield is up 15 basis points over the month and just under 100 bps over the year.  That’s not a bad thing at all and it’s what you’d expect in an improving economy.  But it’s shown up in higher mortgage rates which have slowed housing down a bit.  Case-Shiller home prices have flattened considerably over the past few quarters—again, not unexpected given their prior tear.

So I remain a touch bearish, but as always, there’s a lot of uncertainty around these numbers.  The main questions re the job market, at least in my mind, are:

–what’s the underlying trend in payrolls: is it closer to 150K/month, as in pretty sloggy, or 200K, i.e., a better clip?

–if things really start to improve, will we pull more sideliners back into the job market?  That’s a critical question with big macro impacts.

Friday’s data will contribute another piece to solving those puzzles, but they’re big puzzles and one month’s data yields a small piece.

I should be on CNBC when the numbers come out (8:30 on Friday), mixing it up with an interesting cast of characters, so see you there.


Source: Bloomberg

Ryan and the Chained CPI

April 1st, 2014 at 9:09 pm

My Politico oped on the new Ryan budget is up and my wife just read it, liked it, but said, reasonably, that she didn’t get this part:

Ryan also dings President Barack Obama for abandoning the “one significant reform he’s embraced,” changing the way Social Security payments rise with inflation, but he once again offers neither that nor any other policy change to Social Security, instead proposing a process for somebody else to figure out what to do about long-term solvency of the program.

So, as she does a lot for me, the least I can do is explain this as it’s really quite irksome.

For numerous years, President Obama’s budgets included a policy that applied the chained-CPI to the increase in Social Security benefits.   Since this inflation measure grows more slowly than the one currently used, its use represents a reduction in benefits relative to current policy.

This change was and is anathema to many supporters of the program but the President included it in his budget as a symbol of good faith negotiations with Republicans who were constantly at him to do something “serious” on entitlements.

As it turned out, these R’s never showed any interest in actual negotiations.  Rep. Ryan never included the chained-CPI or any other Social Security reforms in any of his budgets.  And yet, when the President decided he’d had enough of this nonsense and left the chained-CPI offer out of his most recent budget, Ryan dinged him for it.  And still, he–Ryan–leaves it out of his own budget.

What I personally think of all the chained-CPI stuff is a different, though related, matter.  I do think chained indexes are more accurate, but if I were going to make the change, I’d be sure to do it with a chained index of prices faced by the elderly, which probably would grow more quickly than the overall chained-CPI.

But that’s not the point.

OK, that wonkish, weedish paragraph has been unpacked.  Next question?

Paul Ryan’s New Budget: Orwell Would Blush

April 1st, 2014 at 4:06 pm

It’s a lot like his old ones, as you’d expect, with a few new wrinkles which I’ll explain in an oped coming out later in Politico.

Just a few points here.  I could, and will and do, go deep in the weeds on this sort of thing.  But here’s pretty much all you need to know: his cuts to Pell grants–college tuition assistance for students from low-income families–comes under the section called “Expanding Opportunity.”

Strengthening the safety net is actually block granting SNAP (food stamps) and Medicaid.  “Ending cronyism” is repealing Dodd-Frank.  Orwell would blush.

Here’s my colleague Edwin Park on the Medicaid cuts, and here’s CBPP President Bob Greenstein’s statement on the budget.  And I’ll link to my oped and other CBPP goodies when they’re out.


Yellen Wisely Continues to Target Broader Measures of Labor Market Slack

March 31st, 2014 at 5:36 pm

Not a surprise, but Janet Yellen appears to have solid intuition when it comes to the labor market slack vs. tautness.  Let me explain.

There’s this debate going on that says “given all the slack in the job market, we should have seen inflation (price growth) fall a lot faster than it has.  Thus, maybe there’s not so much slack in the labor market.”

This position got a bit of a boost from a recent paper by Krueger at al, which argues that if you just look at the total unemployment rate, you will mistakenly conclude that there’s more slack than there really is.  The short-term rate (there’s no set definition, but people generally use unemployed for less than 27 weeks), which has fallen back to its historical average (a bit above 4%), fits the inflation data better than the overall rate and suggests the job market is actually tightening up, meaning the Fed may need to act sooner than later.

When asked about this the other day, Chairwoman Yellen called this line of argument “tremendously premature.”  That’s actually a strong response—one could imagine the Fed chair doing the usual “well, certainly something worth looking at but let’s be cautious…yada, yada.”  Her strong response reflects her intuition that the job market is still quite slack and the extent of long-term unemployment remains an important input into their policy calibrations.

Well, over the weekend I read an interesting piece by Goldman Sachs economists Hatzius and Stehn (H&S, no link) that tackled this question by digging a bit deeper in the current dynamics between unemployment and wages/prices.  Their key findings are:

–Starting around the 1990s, inflation fell and has stayed pretty low and well-anchored (meaning less responsive to temporary shocks);

–Thus, the Phillips curve—the reaction function between inflation and labor market slack flattened considerably, as I show here.

–If you fail to account for this regime shift in the rate and responsiveness of inflation, you’ll overestimate its expected reaction to any given amount of slack.

Why the shift?  H&S say that “a likely explanation is that downward nominal rigidities are much more important at lower levels of inflation than at higher levels, and a given amount of slack is likely to have a smaller impact on inflation when the starting point for inflation is low than when it is high.”  That’s a bit gnarly but what they’re saying is that when there’s a lot of inflation—when it’s 4 or 5% instead of 1 or 2%, like it’s been lately—and slack in the job market, employers can more easily cut real wages by just holding nominal wages pretty constant and letting inflation erode them.  But when inflation is very low, your nominal wage isn’t that different from your real wage, and so it’s tougher to implement real cuts.

To test the proposition that broader measures of slack, including the total rate and the so-called U6 rate—BLS’s most inclusive measure of labor market under-utilization—are better at predicting wage and price movements than the short-term unemployment rate (once they account for the critical regime shift) they produce the following figure.


It shows actual nominal wage growth (the black line) along with various predictions based on different measures of slack.  Actually, all the slack measures over-predict recent wage growth, which has been awfully stagnant (while profits have soared), but the short-term rate does notably worse (it over-predicts the most).  They get a similar result for inflation.

This may seem arcane but I assure you, it’s not.  Were the Fed to buy the short-term-rate-is-the-one-to-watch line, they’d conclude that instead of being biased down (as I and others have been stressing for months) the unemployment rate is biased up.  Thus, they’d be more likely to tighten prematurely.

Second, and Yellen was great on this point in a talk she gave today, to buy the short-term story implies some degree of writing off the long-termers, basically assuming that they’re permanently out of the picture/labor market.  As Ylan Mui reported, Yellen rejected that notion:

Yellen said there have not been “clear indications” that the short-term unemployed are finding jobs more readily than the long-term unemployed. This debate has gained traction among economists lately. The short-term unemployment rate is near its pre-recession level, raising fears that the Fed may be pushing the economy too far. Yellen clearly comes down on the other side of the argument: “This fact gives me hope that a significant share of the long-term unemployed will ultimately benefit from a stronger labor market.”

That view is one I tried to amplify here, and it’s a view that underscores both the long-term costs of such persistent slack in the job market, as well as the potential benefits of pursuing a path back to full employment.

Hey, What’d I Miss? OTE Summary 3/23 – 3/29

March 31st, 2014 at 3:02 pm
  • Over at NYT Economix blog: analyzing the non-relationship between profitability and jobs.
  • Highlighting objective evidence from researchers at Goldman Sachs on the impact of raising the minimum wage.
  • Describing my testimony on fiscal policy in what has to be one of the stranger places on earth right now: the US House of Representatives.
  • Explaining how too much of the austerity line has led many to have a skewed understanding of the dynamics of economics.
  • Underscoring the National Labor Board’s decision to classify footballers at Northwestern as employees of the university, thus paving the way to unionization.
  • Pointing to data from the Bureau of Labor Statistics showing a deceleration of productivity growth.
  • Reflecting on more than a decade worth of non-disagreeable disagreement with my good friend Larry Kudlow on his last show.