Thursday, November 7, 2013

Janet Yellen on Employment

With Janet Yellen slated to take over as Chair of the Federal Reserve at the end of January 2014, I thought that it would be interesting to look back at Ms. Yellen's commentary on the U.S. housing market and other aspects of the economy way back on December 12th, 2006 at a meeting of the FOMC.  This meeting just happened to be the last meeting that Alan "Bubbles" Greenspan was head of the Federal Reserve.  Ms. Yellen is currently the Vice Chair of the Board of Governors of the Federal Reserve, having previously served as President and CEO of the Federal Reserve Bank of San Francisco from 2004 to 2010 when she attended the December 2006 meeting of the Federal Open Market Committee.

I will be posting Ms. Yellen's thoughts in three parts; employment, housing and inflation/productivity.

Let's start with the employment picture.  Here's what Ms. Yellen had to say about employment in the U.S. in late 2006:

"The very latest data show payroll employment growing steadily. The household data are even more alarming. The unemployment rate has declined 1⁄2 percentage point over the past year and now stands at 4 1⁄2 percent, 1⁄2 percentage point below our estimate of the NAIRU. My business contacts tell me the same thing. Labor markets are tight, and jobs are hard to fill, especially for skilled positions. But some other indicators suggest that labor markets may have softened a bit. In particular, the Conference Board index of job market perceptions, based on a survey of households, declined in both October and November. This index is historically very highly correlated with the unemployment rate, but now it’s sending a different signal, suggesting that labor markets are roughly in balance. Similarly, in November fewer firms reported openings that are hard to fill." (my bold)

Here's what happened to the U-3 unemployment rate after this meeting took place:

Jobs may have been "hard to fill" in late 2006 but, every month thereafter until mid-2009, the unemployment rate climbed more-or-less continuously until it hit 10 percent.

Here's what happened to the employment-to-population ratio after this meeting took place:

Note that the employment-to-population ratio dropped immediately after the December 2006 FOMC meeting.  More people with fewer jobs can hardly be termed a "labour market that is roughly in balance".

Since construction of housing formed such a key part in America's booming new millennium economy, let's look at what happened to construction employment levels after this meeting took place:

Within 12 months, construction employment had dropped from 7.725 million at the beginning of 2007 to 7.456 million at the beginning of 2008, a loss of over a quarter of a million construction jobs.  The level of construction employment continued to drop to between 5.4 and 5.5 million, a total loss of between 2.2 and 2.3 million jobs, most of which have not been replaced to the end of the third quarter 2013.

Apparently, America's job market "may have softened a bit" by the end of 2007, less than one year after the December 2006 FOMC meeting.  Perhaps Ms. Yellen's observations about employment in America back in 2006 were the economic understatement of the year!  While job markets may have been "roughly in balance" at the end of 2006, things began to unravel very quickly and, within 12 months, the U-3 unemployment rate had risen to 5 percent (and from there to 10 percent), a rate that now seems like a distant and unattainable dream.

No one expects a central banker to have completely accurate foresight, however, given that their economic skill sets create the policies that drive the economy, one would think that they would have a better grasp of the potential  medium- and long-term outcomes of a particular policy.  As shown in this posting, that would quite clearly not be the case and Ms. Yellen's 2006 observations about the employment situation in the U.S. provide ample proof that central bankers all suffer from cluster think.

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