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February 7, 2015

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Posted: 07 Feb 2015 12:06 AM PST

Fed Watch: Upbeat Jobs Report

Posted: 06 Feb 2015 10:52 AM PST

Tim Duy:

Upbeat Jobs Report, by Tim Duy: The January jobs report came in above expectations, with nonfarm payrolls growing by 257k and, more importantly, there were large upward revisions to the previous two months. Simply put rumors of the demise of the US economy continue to be premature.
The pace of job gains accelerated further on average:

NFPa020615

Oil and gas extraction jobs declined by 1.9k, but we all know more are coming. But outside of that sector, the economy added 255k jobs. The oil and gas extraction sector itself is only 200k jobs. In short, the fears that this sector is going to topple the US economy are just simply not going to come to pass.
In the context of data Federal Reserve Chair Janet Yellen has previously signaled as important:

NFPc020615

NFPd020615

Ongoing general improvement with measures of underemployment still elevated. There was some excitement about the 12 cent gain in average hourly earnings. I myself am less impressed as to me this largely represents a correction from December's anomalous drop. Wage growth remains fairly anemic year-over-year:

NFPb020615

I would also like to see what happens after the impact of minimum wage hikes dissipates. The Fed, however, my take more comfort in the uptick than me. It goes without saying that a June rate hike remains on the table, although I think it is difficult to justify without faster wage growth. Still four jobs reports till then, so plenty of time to pull that number upward.
Jon Hilsenrath reiterates the view that if the Fed wants to keep the June option open they need to pull the word "patient" in March:
Second, Fed officials will decide at their March meeting whether to change or drop the language in their policy statement pledging to "be patient" in deciding when to raise their benchmark short-term interest rate from zero. That phrase means they won't move for at least two more meetings.
After the March gathering, the Fed has meetings scheduled for April and June. If the policy makers keep the "patient" language in the statement, that would indicate they don't think they'll raise rates at those meetings. If they scrap the phrase, that would give them the option to move as early as June if the economic data hold up.
I doubt this is as black and white as Hilsenrath argues. I don't think Yellen intended to imply that "patient" always means two meetings. Perhaps I just have too many memories about "considerable time" first meaning six months and then not. Plus, the Fed is aware of its past history, and in 2004 "patient" turned to "moderate" just one meeting before the hike. But it was technically the second meeting after "patient" was dropped, so is that two meetings? Also, as we saw with the "considerable" to "patient" transition, the Fed has its own unique way of wordsmithing that can deliver something for everyone. And finally, Yellen has the press conference to redefine her interpretation of "patient." But maybe I am wrong. In any event, I am not taking a fixed stand on what "patient" means until the press conference.
Bottom Line: The US economy has very real momentum on its side at the moment. It is more resilient to shocks than commonly assumed. This isn't 2011. June is still on the table.

'The Rich and the Great Recession'

Posted: 06 Feb 2015 09:40 AM PST

What role did the rich play in causing, propagating, and amplifying the Great Recession?:

The rich and the Great Recession, by Bas Bakker and Joshua Felman Vox EU: Many academic papers about the Great Recession in the US have focused on the boom-bust in housing wealth and how it affected spending of the middle class. But there are reasons to think that a large role was actually played by the rich, as they responded to developments in their overall wealth.

According to the traditional narrative, the rich play a role but as generators of 'excess saving' (Kumhof et al. 2013) and not as part of the spending boom-bust. In the 1980s, incomes of the high-saving rich soared, while those of the middle class stagnated. So the rich lent their 'increased' savings to the middle class, who used the funds to maintain their consumption growth (Rajan 2010) and speculate in real estate. Initially, all was well, as the real estate boom propelled a construction-based expansion. But by 2007, the music had stopped. The middle class became overextended and ceased buying houses, causing prices to collapse so sharply that many homeowners were plunged 'underwater' on their mortgages, owing more than their houses were worth. Some defaulted, while others rapidly increased their saving rates so they could pay down their debts (Mian and Sufi 2014). The result was a deep recession.

In a recent paper (Bakker and Felman 2014) we argue that:

  • It was not just the drop in housing wealth that made the Great Recession so deep, but also the decline in financial wealth. The decline in total wealth was key to explaining the depth of the recession, not the decline in housing wealth only.
  • The rich were not merely passive spectators, generating excess saving to finance the middle class, but active participants in the consumption boom-bust cycle. The saving rate of the rich actually went through a similar cycle as that of the middle class, as rising wealth first spurred their consumption and then falling wealth restrained it. And as the rich accounted for such a large share of aggregate income, this cycle had a profound impact on overall consumption.

...

Conclusion

Our results suggest that the standard narrative of the Great Recession may need to be adjusted. Housing played a role, but so did financial assets, which actually accounted for the bulk of the loss in wealth. The middle class played a role, but so did the rich. In fact, the rich now account for such a large share of the economy, and their wealth has become so large and volatile, that wealth effects on their consumption have started to have a significant impact on the macroeconomy. Indeed, the rich may have accounted for the bulk of the swings in aggregate consumption during the boom-bust.

Paul Krugman: A Game of Chicken

Posted: 06 Feb 2015 09:29 AM PST

Europe is playing a dangerous game:

A Game of Chicken, by Paul Krugman, Commentary, NY Times: On Wednesday, the European Central Bank announced that it would no longer accept Greek government debt as collateral for loans. This move, it turns out, was more symbolic than substantive. Still, the moment of truth is clearly approaching.
And it's a moment of truth not just for Greece, but for the whole of Europe — and, in particular, for the central bank, which may soon have to decide whom it really works for.
Basically, the current situation may be summarized with the following... Germany is demanding that Greece keep trying to pay its debts in full by imposing incredibly harsh austerity. The implied threat if Greece refuses is that the central bank will cut off the support it gives to Greek banks, which is what Wednesday's move sounded like but wasn't. And that would wreak havoc with Greece's already terrible economy.
Yet pulling the plug on Greece would pose enormous risks, not just to Europe's economy, but to the whole European project... What we're looking at here is, in short, a very dangerous confrontation. ..., how much more can Greece take? Clearly, it can't pay the debt in full; that's obvious to anyone who has done the math.
Unfortunately, German politicians have never explained the math to their constituents. Instead, they've taken the lazy path: moralizing about the irresponsibility of borrowers, declaring that debts must and will be paid in full, playing into stereotypes about shiftless southern Europeans. And now that the Greek electorate has finally declared that it can take no more, German officials just keep repeating the same old lines. ...
Furthermore, there's still reason to hope that the European Central Bank will refuse to play along.
On Wednesday, the central bank made an announcement that sounded like severe punishment for Greece, but wasn't, because it left the really important channel of support for Greek banks (Emergency Liquidity Assistance — don't ask) in place. So it was more of a wake-up call than anything else, and arguably it was as much a wake-up call for Germany as it was for Greece.
And what if the Germans don't wake up? In that case we can hope that the central bank takes a stand and declares that its proper role is to do all it can to safeguard Europe's economy and democratic institutions — not to act as Germany's debt collector. As I said, we're rapidly approaching a moment of truth.

'Economy Adds 257,000 Jobs in January'

Posted: 06 Feb 2015 09:02 AM PST

Dean Baker on the employment report:

Economy Adds 257,000 Jobs in January: The Labor Department reported that the economy added 257,000 new jobs in January. With upward revisions to the prior two months' data, this brings the average over the last three months to 336,000 jobs. The unemployment rate was essentially unchanged at 5.7 percent. Adjusting for changes in population controls, the household survey still showed an increase in employment of 435,000 in January.
The job growth in the establishment survey was widely spread across industries, but it is noteworthy that the goods production sector remained strong. Construction added 39,000 jobs, bringing the average over the prior three months to 37,700. Manufacturing added 22,000 jobs bringing the average over the last three months to 31,000. The oil and gas sector is showing the impact of falling prices, with employment down by 1,900 in January. Employment in coal mining also fell by 700. Over the last year, the coal industry has lost 4,800 jobs with employment now standing at 71,300.
Retail added 45,900 jobs in January, while health care added 38,300. The latter figure continues an uptick in job growth in the health care sector that began in the fall. Job growth had averaged under 14,000 a month in 2013 and 19,000 in the first half of 2014. It has averaged 39,000 a month since September. The temp sector showed a loss of 4,100 jobs in January after gaining 55,800 jobs over the prior two months. This more likely represents an erratic movement in the data than a reversal in employment trends in the sector. Restaurant employment rose by 34,600, almost exactly equal to its growth rate over the last year. The government sector lost 10,000 jobs, but most of this was due to the loss of 6,100 jobs in the Postal Service.
There was a 12 cent jump in average hourly pay, but this reflects the erratic movement of this series, not a real development in the economy. Taking the last three months together, compared with the prior three months, wages have grown at just a 2.0 percent annual rate, down from a 2.2 percent increase over the last year. In other words, there is still no real evidence of wage acceleration in the data.
The household survey showed little change in the employment situation for most groups. It is striking that less educated workers continue to be the largest beneficiaries of the recovery. In the last year, the employment rate (EPOP) for workers without high school degrees has risen by 2.1 percentage points, while their unemployment rate has dropped by 1.1 percentage points. High school grads have seen a similar drop in their unemployment rates, although their EPOP has risen by just 0.2 percentage points. By contrast, the unemployment rate for college graduates has fallen by 0.5 percentage points, while their EPOP has dropped by 0.7 percentage points. The unemployment rate for college graduates is still 0.8 percentage points above its average for 2007.
While the unemployment rate edged up, the overall EPOP also rose, hitting 59.3 percent, a new high for the recovery. However this is still 3.7 percentage points below the average for the year before the recession. Contrary to what is frequently claimed, most of this decline is due to prime age workers (ages 25-54) dropping out of the labor force. That reversed the pre-recession trend, in which the percentage of both prime age men and women in the labor force had been rising.
The number of people involuntarily working part-time was little changed from December but was 453,000 below its year-ago level. Voluntary part-time is up by 535,000 from a year ago. Another positive item was that the percentage of unemployment due to people voluntarily quitting their jobs hit a recovery high of 9.5 percent. This is still far below the rates of more than 11 percent before the downturn and more than 14 percent in the 1990s boom.
The January report provides further evidence of a strengthening labor market. However, the weak 4th quarter GDP growth, coupled with a rising trade deficit and continued weakness in investment, should raise concerns about its durability. The labor market is not yet tight enough to produce substantial wage growth, which means that future consumption growth will be limited.

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