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.
The National Federation of Independent Businesses queries small businesses on their hiring plans and whether it is hard to fill open positions. So fairly straight forward, forward-looking indicators.
Then you have temporary employment, which once provided a reliable signal on the direction of nonfarm payrolls to come. But temps have lost some of their predictive powers in a world increasingly dominated by firms cutting costs where they can, even if it entails classifying near-permanent employees as temporary to reduce benefit expenses.
The same goes for new help-wanted ads, which have been trending down for a year now. Not to worry, says the Fed itself, whose economists recently debunked fresh postings as unreliable given Craigslist’s near doubling of fees since the end of 2012. The rising costs associated with advertising thus distills the message in the mere four percent rise in postings through yearend 2015 in the help wanted data vs. the 48 percent rise in the job openings data series. We’re supposed to file that one in the “If you say so” file.
Finally, you have the distinct ‘job leavers unemployed for less than five weeks,’ which is buried in the household survey, and the now-beloved ‘quit rate’ from the monthly job openings data. Workers having the hutzpah to tell their employers where they can put their cruddy job is measured by the quit rate. When the rate rises, it tends to coincide with a high degree of confidence that you can storm out one door and waltz into another in a short timeframe. So a rise in unemployed for less than five weeks is thus a good thing reflecting workers’ certainty about the job market’s prospects.
While the unemployed-for-less-than-five-weeks metric has held up of late, the quits rate has fallen. So call this a wash for the moment. In addition, net hiring plans have come off their highs, concomitant with the decline in the number of job openings. These data are released with varying degrees of lag, which can be frustrating for the impatient type who’d prefer to not be sideswiped by a data miss.
That brings us to perhaps the best indicator of what’s to come, which cannot be explained away, though it too comes from help wanted ads. You may recognize the name Jonathan Basile, AIG’s Head of Business Cycle Research. As his pragmatic title suggests, he is duty bound to have a crystal clear crystal ball.
Let’s just say we should all adopt one of his favorite indicators on the labor front, the reposting of job positions. Just about every anecdote we’ve heard in recent years has touched on the dearth of skilled labor. As that slack was absorbed, it became increasingly difficult to source good talent. What to do if you can’t fill a position? Well, you repost it until it does get filled. That way you succeed in achieving your original goal of growing that top line by satisfying the incremental demand that triggered the need for a new hire in the first place.
You see where this is going. If you no longer need to repost that position while the hiring rate is falling…well you get the picture, a picture that’s come into increasing focus since repostings peaked last November.
“When companies stop reposting help wanted ads, it means they’ve given up on adding additional headcount,” Basile said. “It’s a more cautious signal about the outlook. It means their balance sheets can’t handle the additional labor costs. This is what happens when revenue and earnings headwinds bleed into the labor-intensive parts of the economy, like construction and services.”
Revenues? Earnings? Those certainly don’t sound like economic data points. They sound so much more real.
“Labor sits at the intersection of revenues and earnings because it is the biggest cost on corporate balance sheets,” Basile continued. “Many sell-side nonfarm payroll (NFP) models show labor begetting labor – labor data used as inputs to generate NFP as the output. But in business, balance sheets beget labor. You increase or decrease your headcount based on what your revenues and earnings do, the source that pays for labor. How is this left out of the equation?”
Great question. The conclusion: the earnings recession we’ve been told to ignore is, after all, relevant. Get it, got it, good.
You will recall that the bright spot in the awful GDP report was consumption. Hate to go out on any limbs here, but it’s pretty hard to consume if you don’t have a job.
“All it takes is another shock to tip this one-legged pirate of an economy over,” Basile worries. “That’s why I’m on 100% watch.”
We should probably all be watching Yellen’s math as she shoves the jobs data around until it’s contorted enough to fit her agenda’s perfect picture frame. Not so perfect are the prospects for those ungainfully employed who are apparently a figment of our collective imagination. They can only dream of a world where jobs are plentiful enough to not-so-respectfully request their employer take their job and shove it.