Wednesday, April 7, 2010

April US interest rate outlook

The Fed minutes were released yesterday (see and showed that (apart from one member) the FOMC was not worried about inflation quite yet, but it obviously doesn't stop the hawks ruminating on when the current "super-easy" monetary policy will be reversed.  Clearly this is now on the market's mind, and with impeccable timing a  friend recently pointed me to a site which has an interesting graph of 30-year bond yields breaking out from a 17-year declining trend.  Several comments are in order from a macro perspective.

First, a declining trend cannot continue forever - a break was inevitable, it is the timing that is interesting - we are at a point where clearly the balance of risk is beginning to shift from deflationary pressures to inflationary pressures.  This has clear implications for investors - while the US bond market was a great place to be during the downturn, it will not be such a great place to be anymore!!

Second, the inflation hawks really need to relax - there are so many uncertainties as to how and when the US economy will really pick up steam that it really doesn't make a whole lot of sense to worry about inflation quite yet.  An orderly withdrawal by the Fed and a falling US budget deficit will help to ease pressures as well, so the pressures are likely to be moderate at best.

Third, if this were a short, sharp recession (like the early 1980s recession), then I would say that indeed there is a risk of a strong bounce back which could put the authorities off balance, but given the depth of the recession and the mixed economic signs that we continue to see coming out of it, this looks like it is going to be a slow recovery, which will allow policymakers to make adjustments in a timely fashion which will put the lid on runaway inflation.

Friday, April 2, 2010

US Unemployment Figures for March

Even though the US financial markets are closed today for the Good Friday Easter public holiday, the US unemployment figures were released by the US Department of Labor for March using the Current Population Survey and the Establishment survey (see The figures have caused some economists to say these are optimistic for US economic recovery (see Brian Wesbury's (First Trust Bank in Chicago) comments on NPR this morning at and of course the administration is going to put a glean on the figures as Christina Romer did this morning as well.  But read behind the figures and things are still not good in the US labor market.  As the FT said this am (see even though private sector payrolls increased by a very encouraging 123,000 new jobs which has caused all the "turning the corner" comments in the media and in markets (see Planet Money's comments at 

One of the things that was largely overlooked by the media on the positive front is that the January and February figures were revised to positive figures, which means that in fact employment has been growing now for the past 5 months. 

But there are still some really worrying aspects to the figures here - first, the U6 "alternative" unemployment rate which I reported on a few posts back continued to head upwards, to 16.9 percent (nsa), not quite the highest it's been bit still not encouraging about what's going on in the wider US labor market.  Second, it is a mystery to me as to where all these new jobs are coming from - the employment report says the medical services sector added 27,000 new jobs, some in ambulatory services and others in residential healthcare.  My real question is whether these new jobs are transitory, and relate to the new healthcare legislation or whether it could be because of demographics as the baby boomers need more care.  Certainly the addition of new manufacturing jobs is good news, but does depend on the exchange rate, which has been on it's way up recently, so that might not hold out either.  Third, despite the fact that productivity zoomed up last year, average hourly earnings fell 2 cents last month - not a whole lot, I grant you, but still it reflects that employers are really squeezing labor right now, despite the productivity gains.  Fourth, there was an increase in the numbers of unemployed crossing the "artificial threshold" time of 27 months on the dole from 40.9 to 44.1 percent of the unemployed.  This is not good news, however you try and sugarcoat it.

I think the real worry here (as I told my intermediate macroeconomics class last week), is whether we are seeing either just a very slow recovery to a "natural rate of unemployment" (the average level of unemployment over the business cycle) or whether this is a sign that the US labor market is going through a permanent change such that we'll never get down the low levels of unemployment that we've enjoyed in booms over the past 2 decades.  This is not just "pie-in-the-sky" fanciful thinking - in Europe they went through a definite shift in their "natural rate of unemployment", and economist are still arguing as to why this happened.

So if I had to sum up the report I certainly wouldn't call it a "turning point" - I would call it "treading water" - some good news and some bad news -  but there is no definite sign of recovery in the US labor market in the figures, and although things are not getting worse, for most in the US labor market they are certainly not getting palpably better on a permanent basis - and that's what matters.  15 million workers unemployed and no drop in the unemployment rate is hardly something to cheer about!!

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