Claims keep falling

Year to date, the biggest change on the margin in the labor force has not been the modest increase in new jobs, which I think has been overly-hyped, but the huge decline in the number of people receiving unemployment insurance.

On a seasonally-adjusted basis, initial claims for unemployment have dropped by 12% since the end of last year, from 352K to 312K. This series has been declining for over 5 years, and is nearing very low levels relative to the size of the workforce. It (the probability that one is laid off in any given week) doesn't get much better than this.

In addition to there being fewer people filing unemployment insurance claims, the number of those receiving unemployment insurance has plunged, thanks mainly to the expiration of the "emergency" claims program. Since the end of last year, the number of people receiving benefits (actual, not seasonally adjusted) is down by 2.25 million, an unprecedented drop of almost 50% in just over six months. This has undoubtedly changed the dynamics of the labor market for the better, since lots of people have suddenly found a new incentive to find and accept jobs.

These are very healthy developments.

QE3 to end in October, but the world doesn't

With today's release of the June FOMC meeting minutes, we learn that the Fed will almost certainly finish the "tapering" of QE3 in October. As of this writing, interest rates are almost unchanged on the day, so the news was as expected. But as the chart above shows, 10-yr Treasury yields are still substantially higher than they were when QE3 began about 21 months ago, and that is not what were told to expect. The Fed has purchased over $1 trillion of Treasuries and MBS since late 2012, but Treasury and MBS yields have nevertheless risen, not fallen, and by a significant amount. So much for the quaint notion that QE purchases were designed to lower interest rates and thereby stimulate the economy.

As the chart also shows, interest rates have risen during each episode of Quantitative Easing. Even Operation Twist, which was designed specifically to reduce the yield on 10-yr Treasuries, failed to deliver on its promise, since at the end of OT yields were the same as when OT started. Yields briefly dipped, but on balance OT was a fruitless exercise in yield curve manipulation.

What we've learned from all this is that the Fed can't manipulate interest rates. Interest rates rose during each episode of QE because the effect of Quantitative Easing was to supply the world with much-sought-after safe, short-term securities. See my explanation of how this works here. By supplying much-needed, risk-free liquidity to the financial system, the Fed helped avert a liquidity squeeze that could have otherwise hurt the economy. QE restored some financial health to the markets, and that served to bolster the market's confidence in the recovery, and that in turn led to higher interest rates.

When QE1 and QE2 ended, interest rates plunged. That wasn't expected either: wouldn't the end of Fed bond purchases have ushered in an era of rising yields? It didn't work that way, because in retrospect we can see that the Fed should not have discontinued its bond purchases. The Fed exited QE prematurely, twice, at a time when the world still needed extra, risk-free liquidity. Once they resumed QE purchases, yields rose and the outlook for the economy improved.

So it's very encouraging to see that the approaching end of QE3 has not resulted in any significant decline in yields. I think this reinforces my post earlier this week (risk aversion is declining). The world is less risk averse, and so the need for safe, risk-free securities such as bank reserves has declined. Ending QE3 is not going to be a problem for the economy, like it was in 2010 and 2011. The market can handle things on its own this time, without the Fed needing to "transmogrify" bonds into T-bill equivalents. The outlook for the economy is thus a bit healthier, and that's why yields are higher today than they were in mid-2012.

So the end of QE3 is not the end of the world, it's the beginning of the economy's ability to grow on its own; the beginning of the end of risk aversion. It's good news.

Too much excitement about the June jobs report

I'm seeing lots of people waxing enthusiastic about the job gains of recent months. But as I see it—in the chart above—there's nothing unusual afoot. The private sector, which is the only one that really counts, has been growing jobs at about a 2% pace for the past several years, and that's about the same pace we've seen year to date. (The chart tracks the 6-mo. annualized growth rate of private sector jobs.)

As the chart above shows, the public sector now appears to be adding jobs for the first time since the Great Recession ended. This is not cause for cheer in my book. Our public sector is a bloated bureaucratic mess that is suffocating the private sector. See Glenn Reynolds' excellent op-ed in today's USA Today to understand why.

The one thing that does look encouraging in the jobs market is the jump in Job Openings (see chart above, showing data released today) in recent months.