All eyes will be on Jackson Hole, Wyoming, where The Kansas City Federal Reserve will host its annual economic policy symposium. The event kicks off on Thursday, August 21.
The topic of this year’s meeting: “Re-Evaluating Labour Market Dynamics.”
This is a perfect topic given what’s happening in the economy right now.
Among the participants who will be speaking include Janet Yellen and Mario Draghi.
Deutsche Bank’s Carl Riccadonna said in commentary ahead of Jackson Hole that Yellen — who speaks on Friday — is likely to highlight some of the employment data that hasn’t normalized to pre-financial crisis levels.
“There has been an ongoing debate among economists regarding the amount of slack in the economy and labour market,” Riccadonna said. “While the unemployment rate provides a useful metric of excess labour supply, it is an imperfect gauge due to measurement issues relating to marginal labour force participants.”
Below we present the outlines of the labour market puzzle that will get a lot of discussion.
The Labour Market Puzzle
In the last year, the unemployment rate has fallen steadily, and each of the last six months have seen job gains of at least 200,000, the first such stretch since 1997.
As of the July jobs report, the unemployment rate was 6.2%, which clearly has the Fed a bit caught out. In June 2013, the Fed’s Summary of Economic Projections showed the FOMC expecting the unemployment rate to fall somewhere between 6.5%-6.8% at the end of this year.
Risks remain that the unemployment could again fall below the Fed’s expectations, with a year-end unemployment rate of 6%-6.1% expected at the end of this year, according to the Fed’s most recent projections.
But these headline numbers aren’t quite convincing the Fed that things are getting good.
In its latest FOMC statement, the Fed said, “a range of labour market indicators suggests that there remains significant underutilization of labour resources.”
Chris Rupkey at Bank of Tokyo-Mitsubishi said this commentary signaled that the Fed has “further demoted” the unemployment rate as a policy guide. In other words, the dropping unemployment rate alone won’t cause the Fed to conclude the labour market is “tight.”
But in addition to a falling unemployment rate, the number of job openings has also been on the rise, showing that perhaps some “slack” is, in fact, coming out of the labour market.
“Slack” in the labour market is a way to say how many job seekers there are for each available opening. A “loose” or “slack” labour market has excess demand for openings, giving employers leverage; a “tight” labour market has more demand for labour, giving employees leverage.
The latest JOLTS report, or job openings and labour turnover survey, which is one of Yellen’s preferred economic data reports, showed that job openings recently reached a 13-year high.
And so a question the Fed is likely asking itself: how much slack is in the labour market?
Specifically, there should be discussion about whether the surging number of unfilled jobs is a reflection of the weak economy, or whether it’s something more structural (employers can’t find people with the proper skills)
An interesting wrinkle, pointed out by Dean Baker, here is that while you might be tempted to say that surging unfilled job openings reflect workers not having the proper skills, one of the fastest areas of jobs growth is in food service, which is not what we’re told are the skills people are lacking for (usually people say it’s tech skills that are causing the disparity)
Labour Force Participation
The labour force participation rate has been steadily falling over the last two decades.
Some of this decline is due to changing demographics. The population is ageing, and many workers who were at or near retirement age ahead of the financial crisis haven’t made it back into the workforce.
But an ageing population doesn’t answer all the questions, since the labour force participation rate has also dropped for prime-age workers.
Deutsche Bank’s Carl Riccadonna wrote ahead of Jackson Hole that Yellen has, “expressed sympathy with the view that there is a substantial cyclical component to the participation decline in recent years.”
Those who believe the labour market is recovering solidly will say that the labour force participation rate reflects demographic factors, but others aren’t so sure.
The July jobs report on August 1 showed showed non-farm payrolls grew by 209,000 in July, but the number of workers employed part-time for economic reasons — or workers who want full-time work but can’t find it — still remains way above where it was before the financial crisis.
In his preview of Jackson Hole, Michael Gapen at Barclays said, “While it is clear the [FOMC] is focused on labour market conditions, it is not clear exactly on what variables it is focused or how participants will judge progress.”
Wage growth has also been tepid, roughly keeping pace with inflation over the last several years, and not leaving workers feeling as confident as other data might suggest.
And so the labour market appears to have data standing on either side of a stark divide: a labour market coming back to life, and a labour market still mired in dysfunction.
Wall Street Expectations
Wall Street wasn’t invited to this year’s edition of the conference, but they will have their attention turned to Wyoming this week.
Yellen’s comments aren’t expected to give major explicit signals about the direction of Fed policy the way commentary from her predecessor Ben Bernanke did in 2010 and 2012.
In a note to clients ahead of the meeting, Ethan Harris at Bank of American Merrill Lynch wrote that, “With significant policy changes a long way off, and with the intense market focus on Jackson Hole, we expect [Yellen] to try to say nothing interesting about the policy outlook.”
Harris adds that, “if the Chair wants to be a bit more interesting, presumably, she will talk a bit about why she still sees a long recovery ahead in the labour market, pointing to the weakness in wages and broader measures of slack.”
There are a number of speakers at Jackson Hole, and while Yellen is headliner, Harris notes that, “criticism of the Fed is a useful ‘stress test’ for Chair Yellen and her allies.”
And so Yellen will be as much attuned to critiques of Fed policy from other conference participants as she is on spelling out some of her concerns regarding the state of the labour market.
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