Bernanke on the Unemployment Rate and Labor Weakness
Sitka Pacific Capital Management
By Mike "Mish" Shedlock
February 8, 2012
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I nearly always disagree with Bernanke on monetary and fiscal policy. Specifically, the Fed ought not have a monetary policy for the simple reason the Fed should not exist.
Indeed, the Bernanke Fed and the Greenspan Fed have both proven beyond a shadow of a doubt they do not know what they are doing, where the economy is headed, or anything else of relevance in setting monetary policy.
However, on rare occasions, Bernanke can say a few snippets that seem to make complete sense. For example, Bernanke Says 8.3% Unemployment Understates Labor Weakness.
|Federal Reserve Chairman Ben S. Bernanke said the 8.3 percent rate of unemployment in January understates weakness in the U.S. labor market.
"It is very important to look not just at the unemployment rate, which reflects only people who are actively seeking work," Bernanke said today in response to questions at a hearing before the Senate Budget Committee in Washington. "There are also a lot of people who are either out of the labor force because they don't think they can find work" or in part- time jobs.
"The 8.3 percent no doubt understates the weakness of the labor market in some broad sense," Bernanke said today, while noting that some job indicators are improving.
Fed officials last month estimated that the world's largest economy will grow 2.2 percent to 2.7 percent this year, according to the central tendency estimate, while the unemployment rate will average 8.2 percent to 8.5 percent in the fourth quarter.
I agree with most of the above analysis, but the more Bernanke or the Fed talks, the quicker a disagreement is bound to arise. The problem above is the Fed's growth projection. The Fed could be right, I just highly doubt it.
Let's put it this way, Bernanke has been seriously wrong so many times on economic projections that perhaps by accident he finally gets one correct.
"8.3% Unemployment Understates Labor Weakness"
Some things are so obvious even Bernanke seems to understand. His labor weakness statement is one of them.
I said similar things on Monday, with far more details and reasons, in Fewer Nonfarm Employees Now Than December 2000; Unemployment Rate: Some Things Still Don't Add Up; Obamanomics?
Please click on link for a series of charts showing just how weak the recovery has been and just how understated the unemployment rate is.
Critique of Bernanke's Pledge to Hold Rates to Zero Through 2014
The strange thing here is that although Bernanke seems to understand the likeliness of further economic weakness, most analysts and writers are tooting the horns of an economic recovery, while chastising Bernanke for promising to hold rates low until 2014, as if the decline in unemployment rate is meaningful.
I disagree with the Fed's rate decision for a different fundamental reason: a bunch of academics chasing their tails cannot effectively set interest rates (only the market can). That simple fact has been proven is spades.
Analysis of Bernanke's "Labor Weakness" Statements
Unfortunately, Bernanke's statements offer surprising little economic insight.
For example, please consider the Fed's estimate that the "unemployment rate will average 8.2 percent to 8.5 percent in the fourth quarter".
Perfectly Useless Projection
Let's assume Bernanke is correct. Is that a meaningful projection?
The short answer is the projection, even if totally accurate, is perfectly useless. Let's analyze "why? in light of Bernanke's estimate that it takes 125,000 jobs a month to keep up with demographics (birthrate plus immigration).
Three Cases In Which Unemployment Rate Stays Flat
- Is the Fed projecting 125,000 per month in line with expected demographics?
- Is the Fed expecting 200,000 jobs a month with a rising participation rate that holds the unemployment rate steady?
- Is the Fed expecting 50,000 jobs a month with a falling participation rate that holds the unemployment rate steady?
It would be more useful (assuming there is any use to Bernanke's statements which is certainly debatable) to know just what he is thinking because those three scenarios are vastly different in terms of economic significance, even though they all project the same 8.2 percent to 8.5 percent unemployment rate prediction.
In other words, the Fed's projection, even if accurate, is totally useless, not that anyone should be paying any attention to what he says in the first place.
Originally posted at Mish's Global Economic Trend Analysis
(c) Mike "Mish" Shedlock
Investment Advisor Representative