Friday, October 2, 2015

The Fed is powerless to boost jobs growth

September jobs growth was disappointingly slow, but there's a decent chance that all we're seeing is the typical month-to-month volatility that this series has displayed for many years. This is most likely a temporary statistical slump that will reverse in coming months. 

As the chart above shows, ADP's estimates of private sector jobs growth have been much less volatile than the BLS's establishment survey. Since the recovery began in mid-2009 through last month, the two surveys have registered almost identical total jobs growth: BLS 11.974 million, ADP 11.989 million. That's a difference of only 15K jobs, or a mere 12-13 bps. BLS numbers typically overshoot or undershoot the ADP numbers. If this pattern repeats, we should see stronger jobs numbers next month.

In any event, the chart above shows how the monthly swings in jobs growth have at times been significant. The September number was no outlier. 

But what we can't ignore is the significant shortfall in the labor force participation rate and the growth of the labor force. If past trends were still in place, we would have at least 10 million more people in the labor force today and many millions more jobs. For a variety of reasons, there are huge numbers of people who have simply "dropped out." Some reasons come quickly to mind: high marginal tax rates, huge regulatory burdens, ongoing growth in transfer payments, and generous welfare benefits. The retirement of the baby boomers is also a factor, but I have trouble believing that it was a coincidence that this kicked in right around the time that federal spending surged in early 2009. 

On a year over year basis, jobs growth today is about the same as it has been for the past five years. Earlier this year I thought that there was a chance things might be improving, but I've given up on that hope. We've been stuck in a disappointingly slow-growth economy for the past five years or so, and nothing much has changed of late.

Nevertheless, the fact that the equity market ended up on a positive note today suggests that the market has been priced to rather pessimistic growth assumptions, as I've long argued. Fears, doubts, and uncertainties have weighed heavily on investor sentiment. This is not a bubble market that is vulnerable to popping, this is a market characterized by caution. PE ratios, for example, are only about average, despite the fact that corporate profits are very close to all-time highs relative to GDP. What that tells me is that the market is priced to the expectation that economic growth and corporate profits will be very disappointing. From that perspective, today's jobs report was not a negative surprise.

I don't think it makes any difference whether the Fed postpones liftoff as a result of these numbers or not. (But I would love to see them adopt a more positive attitude and raise rates 25 bps, as that might make the rest of the country a little more optimistic as well.) Whether they launch another round of Quantitative Easing or not wouldn't make much difference either. It should be obvious by now that monetary policy is powerless to stimulate growth. How would another injection of, say, $500 billion in bank reserves (in an exchange for an equal amount of notes and bonds) make a difference to the private sector's willingness to take risk, start up a new company, hire more people, or invest in new productivity-enhancing plant and equipment, when banks are already loaded with $2.5 trillion of excess reserves? The Fed can't print money, only the banks can. And even if the Fed could print money, extra money doesn't necessarily translate into more jobs. More likely, it would just translate into higher prices.

No, the focus needs to shift away from the Fed. They've done all they needed to and all they can do. If we want a healthier economy and more jobs growth, the solution has to come from Washington. We need more growth-friendly polices that make it easier for people to create new businesses and hire more workers. We need lower marginal tax rates (especially on businesses) in order to enhance the after-tax rewards to taking risk and working harder. And we need to slash regulatory burdens to reduce the cost of doing business.

It's my hope that this will be the focus of next year's elections, and that the electorate will respond to the sensible solution—not the populist solution—to our economic woes.

UPDATE: Here's today's version of the "Wall of Worry" chart:


Lawyer in NJ said...

The oldest Boomers were born in 1946; they turned 63 in 2009. As Doug Short points out:

"The employment-population ratio and participation rate will be interesting to watch going forward. The first wave of Boomers will continue to be a downward force on this ratio. The oldest of them were eligible for early retirement when the Great Recession began, and the transition of the Boomer cohort to full retirement age won't end until 2030."

So I don't think the result is unexpected.

Again, other than having a different view on tax and spending policy, great work.

Lawyer in NJ said...

Oh, and I am completely supportive of lowering the corporate tax rate significantly, but our infrastructure is a joke and needs a massive infusion of spending. We should refinance our debt longer-term at these low rates.

Effective public policy is the product of compromise. That won't happen with the current makeup of the House.

Scott Grannis said...

Re baby boomers. I fully acknowledge that baby boomers requiring has had an impact in the participation rate. But I don't think it is the major impact.

Benjamin Cole said...

Well, as usual, I think this is an excellent post but I disagree with Scott Grannis on the results of quantitative easing.

Suppose Scott G. has a $100,000 Treasury note. Scott decides to sell the note and Morgan Stanely securities buys it from him. Scott gets $100,000. Scott says I will spend $20,000 of this and have a great vacation, and put $40,000 into a REIT and $40,000 into Apple stock. (The Fed calls that portfolio rebalancing.)

Meanwhile, Morgan Stanley, which is a Fed-recognized primary dealer, re-sells the $100,000 Treasury note to the Fed and has $100,000 deposited into their commercial bank account.

So the Morgan Stanley swap of bonds for reserves is only the second half of the transaction. The valuable part of QE is Scott G. taking his $20,000 vacation and making a smart play in REITs and Apple stock.

If the Fed wants to send a signal by a normalizing rates perhaps they should end interest on excess reserves. Before 2008 the Fed never paid interest on reserves.

However reluctantly, and perhaps with a different name, the Fed will soon find itself forced back into doing cutie. The question is how much the economy will have to suffer before the Fed takes the proper course.

And remember, if you want less regulations and taxes, and a voting population that likes free enterprise, then the Fed should shoot for robust economic growth. Give to Americans "labor shortages" and they will love free enterprise.

Benjamin Cole said...

Ahem. "cutie" above means "QE."

Although maybe a discussion about cuties, rather than QE, is warranted every once in a while....

And be careful when you post from your smartphone....

Dave said...

Scott again thanks for your great information. When you have a chance can you update your charts on M2 and velocity of money. I have heard that both have recently increased. Thanks.

William said...

Velocity of M2 Money Stock by St Louis Federal Reserve is here:

Data is only through Q2, 2015

marcusbalbus said...

the CAPE is near 27. please take some fluff off of this

Scott Grannis said...

I've written about CAPE several times. I think it has problems, not least of which is its reliance on earnings from 10 years ago to determine valuations today. I have greater confidence in the standard PE method which uses trailing 12-month earnings, but I especially like to compare current prices to the most recent NIPA measure of after-tax corporate profits. Both of these show PE ratios to be close to their long-term average.

Benjamin Cole said...

Copper is down about 50% from five years ago.

marcusbalbus said...

tobin's q? warren's rule? at least admit there's strong reason to doubt.

Scott Grannis said...

Anyone is welcome to lay out and defend opposing viewpoints here. There is always good reason to doubt what anyone has to say, especially if it runs counter to the consensus.

Galactic said...

I wonder if the President has it in him during his last year in office to advance a set of progressive policies like a cut in corporate taxes? If the FED can't boost employment, then fiscal policy seems like the next step..?

(This maneuver would prove unpopular with much of his Democratic party-base for sure. But it would be a significant catalyst to boost across-aisle legislation in other areas)

Separately-- most employment gains lately are for bartenders and wait-staff at restaurants and that is good news-- those can be lucrative jobs if you work hard (but to a point) It seems consumption in the years ahead remains a question here and abroad if consumers aren't willing to spend (to use credit to finance) on their lifestyles like before 2008.

If demand isn't there because wages are stagnant, and if consumers aren't paying with cash or credit, isn't this a classic demand story that insists upon fiscal measures if FED policy isn't working to boost employment and boost demand therefore?

Thanks for excellent blog materials here on this site.

Hans said...

Ben Jamin, another thoughtful post! You are a big (large) asset to
this website..

I have a mountain of articles on QE..I do not have an axe to grind, as to
whether it has gone into the money stream or not..

I want the facts and the truth..

Since nobody or anybody has answered my questions (Why would anyone trade a
higher interest bearing note or bond for a meager 1/4% is beyond me)..

I guess now I will have to George Google this and perhaps find an answer..

Part of the answer are the underwater MBS that the FRB purchased from financial
institutions...Drive down mortgage costs and shore up a banking and financial
system, which was teetering with all too many consequences..

Scott Grannis said...

Hans: Trading a 10-yr Treasury (yielding 2%) for cash equivalents (yielding 0.25%) makes sense if you worry that interest rates are going to rise. The yield you give up in this transaction (1.75%) is equivalent to a 20 bps rise in 10-yr yields. If 10-yr yields were to rise by 100 bps, the price of 10-yr Treasuries would fall by about 875 bps. In other words, even modest increases in yields would wipe out the extra yield of 10-yr Treasuries.

Bob said...

Lawyer said: Effective public policy is the product of compromise. That won't happen with the current makeup of the House.

Since the Republicans took the majority in the House they have done almost nothing except compromise with this administration. That's why Boehner is leaving, and, what has this administration done to stimulate the economy? The real reason we are in this dilemma is because Keynesian demand side, central control monetarism just doesn't work. The real reason we are in this pickle is because government wrongly thought that Americans were entitled to housing and created a scenario ripe for corruption and false promise. IMO this doesn't get stated enough. QE is proving to have been the wrong thing to do as we see the fed painting themselves into a corner. We need pro growth politicians that understand that a strong economy makes room for and allows social programs (effective ones, if that isn't in itself a contradiction in terms) that can help the most disadvantaged in our society. The idea of 'to big to fail' and corporate bailouts flies in the face of true free markets and is a precursor to socialism, which we are quickly moving towards.

As to the Baby Boomers comments. Yes, they are and will have an effect on employment because there are a lot of them (me) and the immediate generation behind them are relatively small in comparison. But as of now the boomers that are of retirement age (62-65 generally speaking) represent a fairly small percentage of all boomers. Those born in 1953/554 and beyond have not reached real retirement age yet. Many boomers (I don't have a statistic) are working, if they can, well past this age of retirement because they don't have the assets to retire on. Pensions were eliminated and 401k's were supposed to be the retirement financial vehicle. But many boomers failed to utilize their 401k's as they should have. So the argument that boomers are a major cause of the employment participation rate being so low is false, IMO. The labor participation rate is low because of to many subsidies to the population. Again, another move toward socialism.

Benjamin Cole said...

Hans---thanks for cooments and I enjoy you outlook too. Scott Grannis is The Boss but the little guys occasionally see things in the bushes....

marmico said...

Male prime age EPOP has been in secular decline for 65 years, declining at ~1% per decade. Female prime age EPOP peaked in 2000. The prime age POP peaked in 2007. 2015 EPOP is 77.25%. Holding the 2007 cycle peak prime age EPOP constant at 80% means that there are at most 2.75% x 125 million POP or 3.4 million "missing " jobs in the prime age cohort.

Also see Williamson and the Atlanta Fed ZPOP.

Hans said...

Valid points, Mr Grannis. Having held Vanguard's Long Term and Short Term corporate
bonds, I did experience yearly gains and losses as high as 18%.

On the over hand, they could be held to maturity or sold via a stop loss..In any case,
the financial institution would have loan capital available that it would not have

If siting on the board of directors, the argument could also be make, that
shifting the bonds to the FRB, would represent a loss of liquidity and earning

I would further suggest, that unknown to the public the FRB has ask for the
corroboration of the lending institutions..It is known that varies governmental
agencies have applied this tactic to earn the compliance of uncooperative

A just completed search (ikquick) found no answers.

Scott Grannis said...

marmico: Thank you. I think that supports my view that while demographics are playing a role in the decline of the labor force participation rate, it is not a dominant role.