US labour market recovery stalling – QE3 should return to markets’ radar screen
Today’s employment report put the 3-month moving average gain of payroll employment at a soft 96k, down from 252k in the prior 3-month period, and solidify, in my view, at least one of the pre-conditions for more monetary policy easing. (More information about the headline numbers follows below).
I therefore stick to my call for more easing at the 19-20 June FOMC meeting, humbly awaiting chairman Bernanke’s congressional testimony on the economy on 7 June.
While most analysts will tend to focus on the weak headline numbers I believe that one of the most troubling aspects of today’s employment report is the persistent exceptionally large number of long-term unemployed: 5.4 million Americans (3.5% of the labour force) have currently been out of work for at least six months, and the average length of unemployment is 39.7 weeks. The longer potential workers remain either unemployed or on the sidelines outside the labour force, the less likely they are to ever get back into employment.
As I recently noted, the exceptionally large number of long-term unemployed is likely to result in a continued reduction of slack in the labour market, consequently raising the risk of higher wage pressures even if economic growth remains as sluggish as most seem to expect (see Signs of a higher NAIRU ignored by the Fed, 11 May 2012).
Against this background I forecast that full employment, defined as an unemployment rate of 7%, should be achieved already in 2014. This would be three years earlier than the Fed currently seems to expect given its assessment that NAIRU is 5½% and not 7% as I assume (see this week’s updated macroeconomic outlook).
In other words, in my view there is a considerable risk that the Fed is currently overestimating the amount of spare capacity in the economy and hence underestimating the risk of inflation.
For now, however, QE3 should be even higher up the FOMC agenda because the majority of policy makers believe the persistently high unemployment rate is primarily cyclical rather than structural.
Nonfarm payrolls rose only 69k in May, the smallest gain in 12 months, and in addition revisions subtracted a total of 49k jobs in March and April. This was a far worse outcome than the consensus forecast of a 150k increase in May (Nordea: 125k). The weak May headline number was partly influenced by a 28k drop in construction, which suggests that at least some of the softness is due to payback from the unusually warm winter.
The unemployment rate, obtained by a separate survey of households, increased 0.1% point to 8.2%, the first increase in nearly a year. It should be noted, however, that the uptick in the unemployment rate was due to a strong 642k increase in the labour force, while employment according to the household survey rose 422k.
Average weekly hours dropped to 34.4 from 34.5, and wages remained very soft with a 0.1% increase in May, up 1.7% from May last year.