Dear Job Market, Take This Indicator And Shove It! by Danielle DiMartino Booth
Some songs are just destined to be belted out while speeding down an open highway with the all the windows down, your hair whipping in the wind and the dust flying. Donald Eugene Lytle, aka, Johnny Paycheck, delivered one in spades with his catchy, purposely grammatically incorrect rendition of David Allan Coe’s working man’s anthem. The song, Take this Job and Shove It, which has earned cult status in the Honky Tonk hall of fame proved to be the only number one hit of Paycheck’s career.
Ironically, Paycheck didn’t change his name to fit the song; that happened 13 years earlier when he borrowed it from a top-ranked Chicago boxer whose claim to fame was his 1940 fight against Joe Lewis for the heavyweight title.
Very few of us have escaped those lyrics invading our mind from time to time. You might have been slopping sauce on one more pizza, bagging yet another bag of leaves on someone else’s lawn or plugging away at a spreadsheet for which you’d never get credit – all for meagre pay. Whatever the thankless task, you sure would have relished unleashing those words to your boss’ face. Just take this job and shove it!
The 1977 hit was so popular it went on to inspire a not so popular 1981 movie. Alas the movie of the of the same name, billed as “The comedy for everyone who’s had it up to here…” fell flat at the box office. It was the timing that was all wrong. A movie with a “job shoving” theme was unseemly considering the economy was veering headlong into a double-dip recession. The worker bees of the economy were understandably unamused by the idea of brazenly quitting their jobs.
Today, in 2016, it’s looking more and more like Janet Yellen is less than amused with her own greatest hit, The Labor Market Conditions Index. She conceived this alternative measure of the job market and debuted it to much fanfare in an August 22, 2014 speech at the Shangri La of economic confabs in Jackson Hole, Wyoming.
With that, a whole new cottage industry was born. Two gauges measuring the state of the job market, nonfarm payrolls and the official unemployment rate, ballooned into 19. Joy for the economist community in the form of 17 new raison d’etres!
How have things worked out since then?
Appreciating the historic context is an essential first step to answering that question. At its December 2012 meeting, with unemployment at 7.8 percent, the Federal Open Market Committee announced its first ever unemployment rate target of 6.5 percent. Fed economists projected that this bogey would not be reached until the end of 2015. At that point, they anticipated the rate would be inside a 6.0-6.6-percent range.
One voter in the FOMC room begged to differ. Richmond President Jeffrey Lacker dissented, recognizing the folly of the quantitative commitment. The Fed was effectively boxing itself in as financial markets would price in a rate hike the minute the threshold was visible on the horizon.
As if wearing blinders, then-Chairman Ben Bernanke predicted that the target would act, “as an automatic stabilizer,” with the added qualifier that the new policy, “by no means puts monetary policy on autopilot.”
Of course, that’s just not the way financial markets work. They are forward-looking beasts precisely because they set prices based on the inputs provided.
Hence the Fed’s panicked emergency videoconference meeting on March 4, 2014 on the heels of that year’s April jobs report, which revealed a steady unemployment rate of 6.7 percent. The markets’ conclusion: A June rate hike was imminent, a full year and a half before Bernanke had any intention of tightening policy.
Though still the subject of furious debate, the missing link from Fed economists’ models was the permanence of the decline in the labor force participation rate fed by the 2009 introduction of 99 weeks of unemployment insurance. Needless to say, politicians clamoring for easy votes extended these extraordinary benefits time and again.
By the end of 2013, 99 weeks had become all too ordinary. Millions of workers had simply dropped out, disincentivized by design. Because the unemployment rate is calculated against the number of people in the labor force, it declined much more rapidly than historic precedent suggested it would.
And so, with mis-measured inflation still too low for comfort (another full blown story for another day), policymakers backtracked on their commitment. The March 2014 FOMC meeting minutes attempted to explain: “The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”
The schizophrenic behavior did nothing to bolster the Fed’s credibility. To counter perceptions, the Fed, under the new leadership of labor economist Yellen, came up with yet another model. As she illustrated in great detail at that year’s Jackson Hole gathering, the LMCI would better measure the slack in the labor market without unduly “rewarding” the decline in the labor force participation rate which cast the low unemployment in too positive a light.
“Assessments of the degree of remaining slack in the labor market need to become more nuanced because of considerable uncertainty,” Yellen said, reminding the audience that in 2012 the Fed had caveated that, “factors determining maximum employment ‘may change over time and may not be directly measurable.’”
More variables, more math, more clarity? Not hardly. OK – that was a pretty extensive history lesson. But sometimes the setup is key to understanding the outcome.
Once again, the markets are heavily anticipating Yellen’s 2016 Jackson Hole speech. Will she posit that the LMCI was flawed at inception to now justify a rate hike? Her baby, so to speak, has been wailing for six straight months, the longest slide since the end of the 2009 recession.
At this year’s June 15th press conference, Yellen once again highlighted the importance of the context of the current backdrop, which has apparently rendered the LMCI, “a kind of experimental research product.” Is it any wonder the media characterized her remarks as “bipolar”?
The question is, what went wrong, if anything?
The nature of the LMCI’s components is a good starting point. As a recent Goldman Sachs report detailed, “The LMCI inputs are detrended, and the estimated trends likely ‘soak up’ some of the growth in labor market activity (such that only growth in excess of the trend contributes positively).” Yours truly added the emphasis as this ‘detrending’ is key to explaining away the alarm emanating from the LMCI.
The Goldman report goes on to say that labor market indicators tend to level off in the middle of an economic cycle even as trends continue on their established pathways, driven by momentum: “The LMCI in effect reflects a combination of the rate of change in labor market conditions – the first difference – as well as recent acceleration or deceleration – the second difference.”
Did someone mention ‘Nuanced” with a capital ‘N’?
And then there are the actual inputs. The index’s 19 indicators endeavor to capture movements not just in job creation, but underemployment, wages, worker flows and both consumer and business surveys. A few examples help to illustrate.