Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

NEW$ & VIEW$ (22 MAY 2014)

SLACK OR NO SLACK?

Minutes of the Fed’s April 29-30 policy meeting showed a lengthy debate on this subject and suggested labor-market slack will become an important battleground in the central bank’s coming discussions about how long to continue its low-interest-rate policies. (…)

“Some participants reported that labor markets were tight in their districts or that contacts indicated some sectors or occupations were experiencing shortages of workers,” the minutes said about the Fed’s discussions, without identifying the participants by name or specifying the number holding certain views.

The officials also discussed research challenging her view, the minutes said. For instance, Ms. Yellen has argued that the 3.5 million people out of work for six months or longer represents slack. But Princeton University professor Alan Krueger, former head of President Barack Obama‘s Council of Economic Advisers, recently co-wrote a paper with Judd Cramer and David Cho in March which argued the opposite. (…)

The view at the Fed on the broader near-term economic outlook was little changed at the meeting. Officials believed the economy was gradually picking up momentum, despite a first-quarter stumble. “Meeting participants generally indicated that their assessment of the economic outlook had not changed materially since the March meeting,” the minutes said.

Alan Krueger has a response for people, including top officials at the Federal Reserve, who doubt his research showing the long-term unemployed have been pushed to the fringes of the job market: More research.

Using a survey of households conducted by the Census Bureau between May 2008 and July 2013, the Princeton University professor finds only 22% of the people who entered long-term joblessness during the 2008 recession had gotten steady, full-time jobs by the first half of 2013. Mr. Krueger finds 35% dropped out of the labor force during that period, 28% had jobs that either weren’t steady or weren’t full-time and 14% were still looking for jobs unsuccessfully. “They are on the margins of the labor market,” Mr. Krueger said of the long-term unemployed. dropped out of the labor force during that period, 28% had jobs that either weren’t steady or weren’t full-time and 14% were still looking for jobs unsuccessfully. (…)

That March study, based on data from the Current Population Survey, found that during the period from 2008 to 2013, only 11% of people who had experienced long spells of unemployment had found steady full time work within 16 months. Of the rest, Mr. Krueger found 34% dropped out of the labor force, 25% had jobs that either weren’t steady or weren’t full-time and 30% were still out of work and looking for jobs.

The Current Population Survey used in Mr. Krueger’s earlier study tracks households for four months at a time, stops tracking them, and then returns to them eight months later. The SIPP survey followed families continuously for five years. Mr. Krueger and his coauthors explored SIPP data for a revision of their March paper.

“SIPP is not just a snapshot. It is a rolling picture of how people were doing,” Mr. Krueger said in an interview. “It reinforces what we know from the CPS. We should be more confident in what we found in the earlier version.”

Both surveys tell a similar story: The vast majority of people who entered long-term joblessness during the recession never got back on their feet. Many struggled with unsuccessful job searches, found unsteady work or dropped out of the labor force altogether.

Mr. Krueger hasn’t yet released the revised paper. In a draft shared with The Wall Street Journal, he and his coauthors also find that the longer an individual is unemployed, the greater the odds that person will drop out of the labor force. They found that 31% of people who were jobless for three months were out of the labor force within 15 months, while more than half of people unemployed for 18 months ended up out of the labor force. The revised paper argues that a stronger economy is associated with a higher job finding rate for the short-term unemployed, but has a much weaker and inconsistent relationship with job finding for the long-term unemployed.

Mr. Dudley argued Tuesday that short-term unemployed workers have done better during the early stages of the recovery, in part because employers are biased against workers who have been out of jobs for long spells. Once the supply of available short-term unemployed workers dries up with a stronger economy, Mr. Dudley said, people out of work for long spells should get more jobs and be drawn back into the labor force.

More on this important debate:

MORE DEBATES:
Confused smile  New French Trains Too Wide for Platforms France’s state railway operator admitted failing to mind the gap as new trains are too wide for many stations.

EUROZONE FLASH PMI POINTS TO GROWTH

imageThe eurozone is enjoying its best calendar quarter for three years, according to the Markit Eurozone PMI. Despite the flash PMI estimate for May falling from 54.0 in April to 53.9, the latest reading was the second-strongest seen over the past three years and leaves the average for the second quarter so far at the highest since the second quarter of 2011.

An increase in the survey‟s measure of new orders to its highest since May 2011 also bodes well for further resilient growth of business activity in June.
The ongoing improvement in business conditions was evident in both manufacturing and services, albeit with the rates of growth moving in different directions. While output and new business in the services sector hit the highest since June 2011, manufacturers reported the smallest increases in output and new orders since last November. The slowdown in manufacturing was in part due to weaker export performance, with new export orders showing the smallest increase since July of last year.

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Companies across both sectors nevertheless expanded capacity to meet rising demand, collectively taking on staff at the fastest rate since September 2011. Manufacturers boosted their employment numbers for a fifth straight month, although to a lesser extent than the recent peak seen in April, while services providers raised their payroll count for a second straight month. However, in both cases, rates of job creation remained only modest.

imageThe cautious approach to hiring in part reflects the fact that, although rising, demand remains weak by the survey‟s historical standards, and that growth of sales was often only achieved by further discounting. Average prices charged continued to fall in May, declining at an identical rate to April (although a marginal increase in manufacturers‟ selling prices was recorded, offset by the steepest decline in rates charged for services since November).

Input costs, on the other hand, rose at the fastest rate for three months. When combined with the drop in selling prices, the increase in costs points to a further squeeze on companies‟ profit margins.

By country, robust growth in Germany again contrasted with a disappointing performance in France. An ongoing robust expansion of output meant the region‟s largest member state continued to enjoy its best spell of growth for three years. Order book growth also accelerated, prompting German firms to take on staff at the fastest rate since December 2011. Price charged also rose at a slightly increased rate. Faster activity growth in Germany‟s service sector contrasted with a slowdown in manufacturing.

While Germany enjoyed strong growth, business activity in France fell back into decline, albeit only marginally, contrasting with the modest return to growth seen in the prior two months. Service sector activity fell for the first time for three months while manufacturers reported the first (marginal) contraction of output since January. Both sectors also saw falling levels of new orders. French firms consequently cut staffing numbers to the greatest extent for three months, and cut average selling prices at the steepest rate for ten months.

Elsewhere across the single currency area, output growth continued to accelerate, reaching the highest since August 2007. New orders meanwhile showed the largest monthly increase since July 2007 and, although rising only modestly, employment increased for a second consecutive month, with the rate of job creation nudging up to the highest since February 2008. Prices charged continued to fall, but at the weakest rate since July 2011.