Naples, FL 2/29/2012 (StreetBeat) – Fed Chairman Bernanke thinks the various extraordinary policy strategies that he has shepherded into action in the last couple of years have helped the economy. If he thinks more of the same, or a variation of the previous programs, would be useful he will act again. When he appears on Capitol Hill this week for his semi-annual “Humphrey/Hawkins” testimony, he can be counted on to leave the door wide open for some form of additional stimulus; not a call to action, but just a reiteration that he’s got more of where that came from and he’s not afraid to use it if he has to. That seems clear enough.Bernanke acknowledges that the economy has been gradually recovering from the great recession, but he’s still not happy. Sure, you can almost see a grin form when the stock market rally gets mentioned and there’s a twinkle in his eye when he talks about the business sector. But he is just not satisfied with the overall economy.
“While conditions have certainly improved over this period,” he told committees in both the House and Senate recently, “the pace of the recovery has been frustratingly slow, particularly from the perspective of the millions of workers who remain unemployed or underemployed.” The slow growth rate is a problem unto itself for the Chairman; he’s noted that it leaves the economy vulnerable to shocks. In addition consumer spending concerns him and housing remains a mere shadow of its former self. But it is the labor market that appears to be the crux of the problem for Bernanke, it is the dot to which the other dots can be connected, and he continues to think that it is in pretty sorry shape.
If the Fed is going to reach into its monetary policy tool box one more time, it is probably going to be the labor market to which Bernanke will point as the reason why it was necessary. However, Bernanke’s persistently downbeat view of the labor market has some market participants scratching their heads. The Unemployment Rate is at a three year low, private sector payrolls have a twenty-three month winning streak and the weekly report on new claims for unemployment benefits hasn’t been so low since early 2008. Why the long face Ben?
The implication is that the Fed Chairman is missing something; the data is good, it’s his analysis of the situation that’s bad. But since it can be said that the future path of monetary policy depends greatly upon the opinions and outlook of Ben Bernanke, more so than it does on market participants who are not named Ben Bernanke, then it might be worthwhile to investigate some of the possible reasons why he continues to harbor great concern for the labor market.
I will attempt to parse out some of indications he laid out in his recent testimony that I quoted above. “Overall, the jobs situation does appear to have improved modestly over the past year,” he said in his early February appearances on the Hill. He noted that “private payroll employment increased by about 160,000 jobs per month in 2011, the unemployment rate fell by about 1 percentage point, and new claims for unemployment insurance declined somewhat.” That’s a good short list of positive bullet points for the labor market enthusiasts; but it is apparently not enough for the Chairman. “Nevertheless, as shown by indicators like the rate of unemployment and the ratio of employment to population, we still have a long way to go before the labor market can be said to be operating normally. Particularly troubling is the unusually high level of long term unemployment: More than 40 percent of the unemployed have been jobless for more than six months, roughly double the fraction during the economic expansion of the previous decade.”
The rate of unemployment is 8.3%. While that has fallen by about one percent in the last year it is still well above the level that Bernanke would consider being the “longer run normal” rate. At the January FOMC meeting the Committee estimated that normal falls somewhere in the range of 5.2% to 6.0%. The direction is promising, but the actual level is a problem. Not only that but Bernanke thinks the rate is misleading, as he told the Senate Committee, “The 8.3 percent no doubt underestimates the weakness of the labor market in a broad sense.”
The other side of the jobs situation coin is the ratio of employment to population, or the employment rate. Whereas the unemployment rate is the percentage of those classified as unemployed in the Civilian Labor Force (CLF), the employment rate is the percent of employed in the Civilian Non-Institutional Population (CNIP).
To be counted as part of the CLF one has to be currently employed or jobless and looking for work during the previous four weeks. To be counted as part of the CNIP you have to be 16 years of age or older, residing in the US and not institutionalized or on active duty in the Armed Forces. One key difference between these measures of the labor market is that the employment rate continues to count those jobless people who are not looking for work, no matter the reason, while the unemployment rate does not.
The employment rate is currently at 58.5%, just three tenths of a percent off the low of the cycle; it has not been as low as this in almost three decades. Since job growth resumed in 2010 the rate of unemployment has declined considerably, but the rate of employment has barely budged. One thing that Bernanke may be adding into his labor market misery calculation is the lack of employment improvement in regards to population gains. Here’s one way to look at it. In January 2012 there were 141.6 million people employed, according to the Household Survey conducted by the Bureau of Labor Statistics.
Aside from the depths seen during the Great Recession and in its aftermath that is the lowest number of employed since May 2005. Then consider, as Bernanke might be, that the CNIP rose by 16.5 million between then and now; that is a lot of people, but no net gain in employment and could be one of the reasons the Fed boss thinks the labor market is a long way from normal.
Fewer workers are getting laid off; it is a well established trend. The four week moving average of the weekly report on Initial Jobless Claims is, at 359k, the lowest it has been since March 2008. This is good news, but a look behind the headlines reveals why Bernanke frets about the unusually high level of long term unemployment.
Back in March 2008 there were about three million people receiving jobless benefits. That amounted to 2.2% of the total number of workers whose employment was covered by the state unemployment insurance programs; covered employment totaled 133 million. The benefits lasted for six months.
There are currently about 3.5 million people receiving the state unemployment benefits. Covered employment currently totals 126 million. So those receiving these benefits amounts to 2.8% of those who are eligible. The problem with this comparison is that in the last few years other jobless benefits programs have been created, some that cover the jobless worker for up to 99 weeks, or almost two years. Back in March 2008 the number of people receiving the regular state benefits was the vast majority of the overall total that were in these programs.
Today the total receiving some form of unemployment insurance is in excess of 7.6 million; or about six percent of the covered employment total. The rate at which new claims are being made is way down from its high, but the overall level remains uncomfortably high. Another point of contrast that relates to the claims data is the duration of unemployment. In January 2012 this was 40.1 weeks, just a fraction off the record high set at the end of last year. In March 2008, when the rate of weekly jobless claims was last as low as it is now, the duration of unemployment was 16.5 weeks.
I can’t say for sure that I have hit upon the key reasons why Bernanke remains troubled by the labor market. But the important point is that he gives every indication that he does not think the labor market is healthy and that he is unlikely to change his opinion any time soon. And this is an important thing to remember when considering the future path of monetary policy that the Fed is likely to pursue. Bernanke has said as much.
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