Atlanta, GA 7/10/12 (StreetBeat) -- Yo!! No, not there, over here! Look at that… wow. Really something, don’t you think? It might be worth paying attention to that, I don’t know, I’m just sayin’.You may not pay any heed to a heads up such as this if it was your slightly off of center uncle who was delivering it. But if you were in the business of trying to figure out the future path of monetary policy for a particular central bank and it was that central bank that was giving a signal that they had increased their focus on a particular segment of the economy to a notably higher level than had been the case even just a matter of weeks previously, then it is probably a heads up that is worth heeding.
The statement released after the April FOMC meeting concluded its penultimate paragraph, the paragraph that discusses the Fed’s extraordinary stimulus measures, with this sentence; “The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.” I think it is fair to say that it is a sentence designed to keep their options open; we are alert to all things and can move in a manner that will be appropriate, no matter the direction.
The next FOMC meeting occurred in June. The sentiment expressed by the last sentence of the penultimate paragraph in the June post meeting statement was more urgent and direct in regards to the Fed’s willingness to strike again. The statement said; “The Committee is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”
The April sentence was passive. In June the sentence was anxious and specific in its reason why. When someone says they are “prepared to take further action” it implies that the organizational details have been completed and all they may lack is the triggering event in order to move forward. The April indication was that the Fed could “adjust” their balance sheet, toggling up or down as need be. But “further action” says they will move a greater distance in the direction already traveled. By the way, additional is one of the definitions of “further”. In April it was the general “economic recovery” that got a mention. In June the Fed pointed out that “a sustained improvement in labor market conditions” was the issue upon which they were focused. They will always say that whatever they do is “in a context of price stability”, but they say it now only out a sense of tradition. Their key inflation measure, the PCE, is at 1.5%; that is below their two percent target and essentially half of what it was last fall. The Fed, read Bernanke, will not feel constrained to act because of a medium term inflation risk.
In March Bernanke gave a speech called “Recent Developments in the Labor Market”. At that time he could crow that “private payroll employment increased by nearly 250,000 jobs per month, on average, in the three months ending in February” and that the jobless rate had fallen sharply in the previous half year, from nine percent down to 8.3%. But even so, despite the progress that seemed apparent in late March, he was concerned; “Notwithstanding these welcome recent signs, the job market remains quite weak relative to historical standards…” The crux of the matter, as he presented his opinion that day, was that the problems with the labor market, in particular the “large number of people who have been unemployed for more than six months”, were still cyclical in nature, but that there was the risk that the longer the problems persisted the more likely the situation would become structural and therefore more difficult to solve and almost certainly longer lasting as well. The way he described it in March the “predominant factor” for labor market woes was “the continued weakness in aggregate demand”. And therefore, “the Federal Reserve’s accommodative monetary policies, by providing support for demand and for the recovery, should help, over time, to reduce long-term unemployment as well.”
So the labor market is weaker now than it was when Bernanke voiced his concerns about it in March. The 250k three-month average for private sector payrolls has fallen to a two year low of +91k. The long-term unemployment is materially unchanged at about 42% of all unemployed; which for perspective’s sake is well above the previous 1983 peak at 26%. The peak for all non-farm payrolls was hit in January 2008. Four and a half years later the payrolls are 5 million shy of that mark. Since 1960 the average time lapse between a peak of payrolls and a new high was less than twenty-eight months. As Bernanke said the labor market is “quite weak relative to historical norms.”
But the point is that the FOMC had pointed out the labor market as a reason why they were “prepared to take further action” in their June post meeting statement, which was even before they had access to the disappointing results delivered by the June jobs data. The additional point is that Bernanke sees weak aggregate demand as the key problem for the lack of new hiring and the recent data should do nothing to dissuade him from that view. The monthly change for the most recent Retail Sales reports is -0.2% and -0.2%. The June same store sales reports from US chain stores, ex-Wal-Mart, was +0.2% year on year, that’s the weakest result in almost three years; the three month average for this measure of sales is +0.83%, the lowest reading since November 2009. The ISM New Orders Index fell 12.4 points in June; it was the biggest one month decline since October 2001 and it brought the index down to its lowest level since April 2009.
The labor market weakens after Bernanke said he thinks it is already weak. The key to labor market trouble is sub-par aggregate demand explains Bernanke in March. Demand apparently weakens in the months following his March address. Accommodative policy is Bernanke’s answer to increasing aggregate demand. The labor market continues to be a cyclical problem and it must be solved with some speed. As he described it in March the labor market is on the clock, “even if the primary cause of high long-term unemployment is insufficient aggregate demand, if progress in reducing unemployment is too slow, the long-term unemployed will see their skills and labor force attachment atrophy further, possibly converting a cyclical problem into a structural one.”
The FOMC told us in June that they were “prepared to take further action” and that “sustained improvement in labor market conditions” was a highlighted goal. The data received since they said that has reinforced that argument. The Fed gave us a heads up, why not pay attention.
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