Unemployment Falling for Wrong Reason Creates Fed Predicament – Bloomberg 09-08-13

Salient to Investors:

Roberto Perli at Cornerstone Macro said the reduced workforce poses a problem for the Fed as the unemployment rate declines faster than the Fed thought, but not for the right reason.

If the drop is mainly driven by aging baby boomers retiring then the lower unemployment rate gives a true picture of the slack in the labor market, but if the drop is caused by discouraged job-seekers, then the jobless rate doesn’t reflect the true state of the market.

John Herrmann at Mitsubishi UFJ Securities USA forecasts the yield on 10-yr Treasuries will rise to 3.25% by year-end as the jobs market strengthens.

Michelle Barnes, Fabia Gumbau-Brisa and Giovanni Olivei at FRB of Boston say two-thirds of the drop since the start of the last recession results from demographic and other secular forces that probably will persist. Olivei says the participation rate is 0.75% below where it otherwise would be because of temporary forces stemming from the 2007-09 recession and the muted recovery, but says it is very hard to say what is cycle and what is trend.

Julie Hotchkiss at FRB of Atlanta and Fernando Rios-Avila at Georgia State University argue that cyclical influences are all-important in explaining the shrinkage in the labor force. They said if the labor market recovers to pre-recession levels, the participation rate over the years 2015 to 2017 will average 0.33% more than from 2010 through 2012 – payrolls would then have to rise to 425,000 per month for the Fed to achieve its forecast of 7% unemployment by the middle of 2014. If participation held steady at its current level, payrolls would have to increase 142,000 a month, versus the 2013 average of 180,250.

Michael Feroli at JPMorgan Chase said the consensus at the Fed seems to be shifting toward seeing the drop in the number of workers as more long-lasting and structural than cyclical.

Mary Daly at FRB of San Francisco says 60% of the fall in participation since 2008 is because of structural forces, including the aging population: more people are leaving the workforce because they have become permanently disabled, while fewer spouses of working Americans are rejoining. Daly says that participation is anywhere from 0.75% to 1.25% below where it would be if not for the cyclical forces at work, and expects many Americans will resume looking for work provided the jobs market becomes much stronger.

Read the full article at  http://www.bloomberg.com/news/2013-09-09/unemployment-falling-for-wrong-reason-creates-fed-predicament.html

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Roberto Perli at at Cornerstone Macro said the reduced workforce poses a problem for the Fed as the unemployment rate declines faster than the Fed thought, but not for the right reason.

If the drop is mainly driven by aging baby boomers retiring then the lower unemployment rate gives a true picture of the slack in the labor market, but if the drop is caused by discouraged job-seekers, then the jobless rate doesn’t reflect the true state of the market.

John Herrmann at Mitsubishi UFJ Securities USA forecasts the yield on 10-yr Treasuries will rise to 3.25 percent by year-end as the jobs market strengthens.

Michelle Barnes, Fabia Gumbau-Brisa and Giovanni Olivei at FRB of Boston say two-thirds of the drop since the start of the last recession results from demographic and other secular forces that probably will persist. Olivei says the participation rate is 0.75% below where it otherwise would be because of temporary forces stemming from the 2007-09 recession and the muted recovery, but says it is very hard to say what is cycle and what is trend.

Julie Hotchkiss at FRB of Atlanta and Fernando Rios-Avila at Georgia State University argue that cyclical influences are all-important in explaining the shrinkage in the labor force. They said if the labor market recovers to pre-recession levels, the participation rate over the years 2015 to 2017 will average 0.33% more than from 2010 through 2012 – payrolls would then have to rise to 425,000 per month for the Fed to achieve its forecast of 7 percent unemployment by the middle of 2014. If participation held steady at its current level, payrolls would have to increase 142,000 a month, versus the 2013 average of 180,250.

Michael Feroli at JPMorgan Chase said the consensus at the Fed seems to be shifting toward seeing the drop in the number of workers as more long-lasting and structural than cyclical.

Mary Daly at FRB of San Francisco says 60 percent of the fall in participation since 2008 is because of structural forces, including the aging population: more people are leaving the workforce because they have become permanently disabled, while fewer spouses of working Americans are rejoining. Daly expects many Americans will resume looking for work provided the jobs market becomes much stronger. Daly says that participation is anywhere from 0.75% to 1.25% below where it would be if not for the cyclical forces at work.