Global Daily – Updating Yellen’s dashboard

by: Peter de Bruin , Nick Kounis

140409-Global-Daily-Insight.pdf ()
  • JOLT Survey continues to give Chair Yellen ammunition to strike a dovish tone about the recovery,…
  • …though increasingly it is becoming apparent that labour market slack is disappearing
  • IMF sees US-led global recovery, but also concerned about eurozone deflation risk

JOLTS data suggest labour market not completely healthy…

Although yesterday’s JOLT Survey lags the official labour market report by one month, it contains a number of indicators that Fed Chair Yellen frequently looks at. One of the more important indicators is the amount of hirings and separations. Broadly speaking, the former tells something about the amount of persons that find a job, while the latter is informative about how many people are being fired. Despite firms firing fewer people, the hiring rate has remained relatively depressed. Indeed, at 3.3% in February, it is still 0.7 percentage points below the 4% peak seen in the 2002 – 2007 upswing. Another indicator that Yellen frequently looks at is the quit rate which measures the amount of persons that voluntarily give up their job. The higher this rate, the more confidence people have of finding a new job, and, hence, the healthier the labour market. The quit rate has also not returned to levels that we saw during the previous upswing. Indeed, while trending gradually higher during this upswing, at 1.7% in February, it is still 0.6 percentage points below the peak that we saw during the previous upswing. The upshot is that the JOLT Survey should give Chair Yellen plenty of ammunition to continue to strike a dovish tone about the labour market recovery.


…though slack continues to disappear

While we agree with Ms Yellen that firms need to start hiring more aggressively to underpin a stronger labour market recovery, we continue to think that the Fed will need to tighten policy a bit quicker than it is currently communicating. This is because we think there is less slack in the labour market than the Fed believes. Indeed, the amount of unemployed per job opening fell to 2.5 in February, down from 2.6 the month before, a new post-recession low. Also, yesterday’s NFIB Small Business Optimism Index showed that a net 23% of firms raised their compensation during the last three months in March, up from 19% in February, a new high in this recovery, while 41% of the firms struggled to find qualified applicants for job openings.

IMF sees US-led global recovery, eurozone deflation risk

The IMF presented its latest World Economic Outlook report yesterday. It was generally positive about the economic outlook, but also highlighted a number of risks to the global economy. Global economic growth is expected to accelerate to 3.6% this year and 3.9% next year, from 3% in 2013. This forecast is roughly in line with our own. The recovery was ‘not only stronger, but also broader’. A major impulse to global economic growth would come from the US, which would benefit from more moderate fiscal consolidation, accommodative monetary conditions, a stronger housing market and rising household wealth. The eurozone is also seen embarking on an economic recovery helped by a reduction in the pace of fiscal tightening, and turnaround in exports in the periphery. Meanwhile, China’s growth is seen roughly stable at 7.5%, reflecting efforts of the authorities to achieve a more balanced growth path. Emerging markets as a whole see a gradual upswing helped by exports to the advanced economies. However, momentum will be less than in the advanced economies, reflecting the effects of the less favourable external financial environment and domestic structural constraints. The IMF points to a number of risks to the outlook, including the risk of low inflation in advanced economies, with the eurozone signalled out. The risk of deflation in the eurozone was put at 20% and the IMF signals that the ECB should act sooner rather than later to ease policy. We agree that the risks of a long period of too low inflation/deflation are higher than the ECB is currently judging and that the central bank should act proactively to reduce these risks. Finally, the IMF also pointed at risks to emerging markets from tighter financial conditions and to geopolitical risks.