Few thoughts on the jobs report


I have no thoughts on seasonal factors, the length of the survey period, day counts or the like.  They can matter, so maybe check with the street. But I prefer to focus on the implications of the broader trends, rather than the monthly detail. This is a hobby.

  • Jobs growth is slowing, as is probably desirable with the approach of full employment.  But it remains above-trend, if by trend we mean the pace consistent with a stable unemployment rate, determined largely by demographics. There is certainly no recession or recession risk signal here.
  • So are we at full employment? My view on this has evolved over the years from definitely not, to almost, and now to probably. To me, labor market conditions are indistinguishable from those I would associate with full employment. So gun to head, yes. But nobody really knows.  I think the Fed will continue to say we are almost there, and maybe they believe it.  There are still some discouraged & involuntary-part-time workers about, and the labor force participation rate is low by some people’s measures. But I prefer to make the easy calls that others are just being stubborn, political or dickish about. To me, this looks close enough to full employment for government work.
  • The rising trend in wage growth sure looks shallow and took a set back this month. This takes some of the urgency out of the Fed speeding up and I doubt they will signal such a speeding up in December. Sticking with their old call plus the idea they don’t really know should be good enough for now. (Guidance is dumb in the current environment.)   The idea that inflation indicators go non-linear the minute full employment is achieved is not convincing*, so I see no conflict between full employment and these wage figures.  With luck, wage growth will continue to steepen.
  • Away from inflation and the Fed, the lower wage figures this month kept the labor income proxy from rising on the month. But that followed a few stronger gains in early months, so with base effects, the 3- and 12-month changes there look ok. That is consistent with a meh economy not inlined to dip into recession soon.  I say consistent with because that is my call on other grounds too.

I have set out a case against fiscal expansion, so for a while I may dwell on that, even if it is not the main thing in the big picture. With the economy existing liquidity trap and now apparently indistinguishable from at full employment, now is not the right time for fiscal “stimulus.” All that would be stimulated might be the Fed.

* This is pretty analogous with a point I have been making for the past couple years about why the Taylor Rule cannot be used. The idea that inflation “pressure” determines the appropriate funds rate is just wrong, particularly near the lower bound on rates, which is where we still are.


Elaboration on Taylor Rule

The Taylor Rule and policy rules like it generally prescribe that the Fed act as though the appropriate funds rate is some sort of linear function of the unemployment rate and inflation rate.  That premise tends to work well enough in most economic environments because the mistakes generated by it are corrected via stabilizing feedback loops. Accordingly, the Fed was able roughly to follow this approach for a couple decades, which understandably created an impression that the premise was true.

But the premise is not true, and the untruth is actually very relevant when the fed funds rate is near the zero bound, as it has been for the past ten years.   This is why the funds rate has been below the rate prescribed by various policy rules for a very long time now. It is  not that the rules were parameterized too hawkishly, but that the very logic of Taylor breaks down at or near the zero bound. People have not internalized this, to say the least.

Practically speaking, if the economy is near full employment and seemingly inclined to grow at an above-trend rate absent a rise of the funds rate, then we will probably have a rise of the funds rate. That describes now.  But contrary to the widely and wrongly held believe, the logic of Taylor cannot tell you by how much.

Markets at least fully price this insight, which is why I am following a policy of Zip It! on expressing dovish ideas.  But much of the resulting discussion among the talkers seems quite confused.  The consensus among the talkers sees irony everywhere. They could get over this if they would just lose the central (wrong) premise of the Taylor Rule.

We know employment growth has to slow, but we don’t in fact know the path of rates required to get us there. Anybody who uses Taylor-like rules to imply otherwise is mislead or trying to fool you.  I think.

ADL doth protest too much

They can have as their mission fighting anti-semitism and promoting peace across religious and ethnic lines or they can be yet another reflexively blinkered likudnik lobby, unable to distinguish between anti-semitism and a reasonable debate about what America’s position in the Milddle East should be. If everything is anti-semitism, anti-semitism is nothing. I know that construction is overused. But surely it applies.