Friday, February 28, 2014

Data Yellen Is Watching Closely
In her testimony on Thursday, Yellen blamed the weather for the recent batch of “soft data.” She said, “We have seen quite a bit of soft data over the last month or six weeks. We need to get a firmer handle about how much of the softer data can be explained by the weather.” Nevertheless, she also said that the job market’s recovery is “far from complete.” She said she expects Fed policies to favor low interest rates “for quite some time.”

Then again, she strongly suggested that the recent decline in the unemployment rate may be a more accurate indicator of a tightening labor market than previously thought. Many economists have said that the falling labor force participation rate (LFPR) may be exaggerating the improvement in the unemployment situation. Last Thursday, Yellen said that the drop in the LFPR in recent years may be more structural than cyclical:
A significant part of the decline in labor force participation is structural and not cyclical. Baby boomers are moving into older ages where there is a dramatic drop off in labor force participation and (with) an aging population we should expect to see a decline in labor force participation... There is no doubt in my mind that an important portion of this labor force participation decline is structural. That said, there may also be, and I am inclined to believe myself based on the evidence--that there are also cyclical factors at work. ... There is no sure-fire way to separate that decline into those components.
She might be right, but the data tell a complex story. The LFPR peaked at a record high of 67.3% during January 2000. The big drop occurred since November 2007, which remains the record high for the household measure of employment. Since then, the LFPR has plunged from 66.0% to 63.0% at the start of this year. We’ve been tracking the underlying data in our Labor Force Changes Since November 2007. Here are some of the latest highlights drilling down by age groups:

(1) Working-age population. Since November 2007, the working-age population is up 14.0 million, yet the labor force is up just 1.6 million. The number of people not in the labor force rose 12.4 million.

The aging Baby Boomers are having a big impact on the age distribution of the working-age population. Since November 2007, the fastest-growing group is the 55- to 74-year-olds, up 12.6 million. The 35- to 54-year-olds group is down 3.5 million.

(2) In the labor force. The weak 1.6 million increase in the labor force since November 2007 can be explained mostly by the loss of 4.9 million workers in the 35- to 54-year-old group, offset by a gain of 5.7 million in the 55- to 74-year-olds.

(3) Not in the labor force. That older group tends to have a high labor force dropout rate due to retirements. Indeed, 6.7 million more of them were not in the labor force since November 2007 through January of this year.

On the other hand, that still leaves 5.5 million people younger than 55 who dropped out of the labor force over that same period. (The numbers don’t quite add up because the age group data are not seasonally adjusted as are the aggregate data.)

By the way, the Monetary Policy Report submitted by the Fed to Congress noted that while there might be structural explanations for the falling participation rate related to the aging of the Baby Boomers, the employment-to-population ratio remains very depressed. This suggests that “some of the weakness in participation is also likely due to workers’ perceptions of relatively poor job opportunities.”

What other labor market indicators are Yellen and her colleagues monitoring? According to their report, “For example, the share of the unemployed who have been out of work longer than six months and the percentage of the workforce that is working part time but would like to work full time have declined only modestly over the recovery.” Yellen & Co. are also watching the quit rate--“an indicator of workers’ confidence in the availability of other jobs”--which remains low.
(Based on an excerpt from YRI Morning Briefing)
Fairy Godmother
Fed Chair Janet Yellen presented the Fed’s semiannual Monetary Policy Report to a congressional committee in the House on Tuesday, February 11. She was scheduled to do so again before a Senate committee the next day, but the session was postponed until Thursday, February 27 because of a snowstorm. Previously, on several occasions, I’ve described Yellen as the “Fairy Godmother of the Bull Market.” The stock market has tended to move higher in reaction to her comments on monetary policy ever since she joined the Fed’s Board of Governors during October 2010.

She did it again last month. The S&P 500 is up 3.3% since the day before she spoke on February 11. It rose to a new record high by last Thursday’s close, and still higher on Friday to 1859.45, up 0.6% ytd and 6.7% from the February 3 low. It is only 8.3% below our yearend target of 2014.

In her past comments, Yellen often either signaled a continuation of ultra-easy monetary policy at the next FOMC meeting or confirmed that such decisions were made at the previous meeting. This partly explains why stock prices have tended to rise so often both before and after FOMC meetings since Fed Governor Yellen started sprinkling her fairy dust.

In her identical prepared remarks for both congressional committees last month, Yellen emphasized that the Fed’s monetary policy would remain on the same course as it had been under Ben Bernanke: “Turning to monetary policy, let me emphasize that I expect a great deal of continuity in the FOMC's approach to monetary policy. I served on the Committee as we formulated our current policy strategy and I strongly support that strategy, which is designed to fulfill the Federal Reserve's statutory mandate of maximum employment and price stability.”

Under Yellen, the Fed’s number one priority will continue to be to avoid another Lehman-style meltdown and a depression. The second priority remains to revive the labor market. If so, then the “scary parallel” chart showing an amazing correlation between the DJIA from 2013-2014 and 1928-1929 isn’t likely to be a useful paradigm, as I’ve argued before.

The chart went viral over the Internet in late January and early February, heightening fears of an imminent crash. The relationship has started to diverge in recent days, with the DJIA moving higher rather than crashing thanks in part to Yellen’s comforting testimony. Of course, concerns about the Ukrainian crisis could send stock prices down again over the next few days, though I doubt that it could somehow cause a recession in the US and end the bull market.

By the way, bearishly inclined technicians also saw some correlation between the current bull market since 2009 and the previous one from 2003-2007. That paradigm stopped working last year as the S&P 500 rose into record territory contrary to the bearish script of 2007. A closer fit can be found between the DJIA from 2006-2008 and 1928-1930, though the magnitude of the most recent crash wasn’t as bad as the Great Crash.
(Based on an excerpt from YRI Morning Briefing)