Yellen's Cold Open
12:00 AM, Feb 8, 2014 • By IRWIN M. STELZER
When economic forecasts prove wrong, it is customary to blame the weather. So cold that consumers stayed home, or so hot that consumers, well, stayed home. So cold that outdoor construction was unexpectedly low, unless of course unusually high temperatures made such work impossible lest heat stroke afflict the workers. In short, weather is the straw at which sinking forecasters often grasp.
This time they might, but only might, be right to blame the weather for some unexpectedly unpleasant news. America’s huddled masses in the Midwest and the East find themselves buried in snow. So economists might have reason to use the language of weather forecasters to describe the economy that only a few weeks ago they said was heating up. Severe headwinds. Rapid cooling. But keep in mind that the survey underlying the jobs data was conducted during a rather mild week, when there was no unusual spurt in workers having difficulty getting to work. Which is why, Jason Furman, chairman of the President’s Council of Economic Advisers, says that January weather did not have a significant impact on the jobs creation.
“When sorrows come, they come not single spies, but in battalions,” a notably pessimistic Danish forecaster long ago remarked. So it seems now in America.
· Auto sales fell in January, with the three largest manufacturers (Ford -7 percent, GM -12 percent, Toyota -7.2 percent) complaining that snow and often-impassable roads (no test drives) kept potential buyers at home. The industry will have some catching up to do to reach the 2014 forecast level of 16 million light vehicles, up from a healthy 15.6 million last year.
· Retailers, especially those catering to teenagers, are complaining that a mediocre-at-best holiday season is being followed by a non-too-robust new year, and doubt that a thaw will do much to help them.
· Sales of newly built homes dropped in December, and the estimate for November was revised downward. More ominously, the pace of new-home building has exceeded sales in recent months.
· Prospects for trade-opening deals with Asian Rim countries and with the European Union, deals that most economists believe would stimulate growth and job creation, became considerably bleaker as leading Democrats told their President they would not support his negotiations.
· Several “emerging nations” face a variety of problems ranging from weak banks in China, to slowing sales as China’s import growth slows, to capital flight in response to a further reduction in Federal Reserve Board bond buying, which drove U.S. interest rates up to levels investors find more attractive relative to those on offer in several emerging nations.
· Exports were down in December after solid gains in October and November, due largely to a plunge in auto exports, and imports were up. Result: a wider trade deficit
· Then there is deflation in Europe and inflation in such as Argentina, the spread of the Syrian civil war to neighboring countries, instability in Egypt, and the EU’s decision to allow Iran to drag negotiations about its nuclear ambitions beyond their scheduled conclusion. The list of nervous-making events not made-in-the-USA goes on. The world is indeed too much with us in the view of many investors here.
Such is the inheritance of Janet Yellen as she eases into Ben Bernanke’s former chair at the Fed, and prepares for a grilling by a House committee on Tuesday and its Senate counterpart on Thursday. Since her questioners are eager to remain on camera as long as possible, “questions” usually take the form of speeches rather than testing questions. But some Republican contenders for their party’s presidential nomination are eager to set the stage for reducing the Fed’s independence (they would really like to shut the Fed down, but that is deemed so radical as to frighten voters), which might make this week’s sessions a bit more fraught than those faced by Bernanke, now safely ensconced in the Brookings Institution penning a defense of his role as America’s money-printer-in-chief.
Yellen will be pressed by liberals to defend continued tapering in an economy that added only 113,000 jobs in January, after a paltry 75,000 in December. Coming at her from her right will be conservatives who agree with Richard Fisher, head of the Dallas Fed, a new addition to the Board’s monetary policy committee, and a long-time opponent of QE3, that monetary policy has done all it can to get the economy back on track. Look for Yellen to say that she will continue to monitor the economy and react to data as it comes in, and not accelerate tapering merely because the unemployment rate drops below 6.5 percent, which it will soon do.
More important than these monthly data are long-term structural problems in the labor market. The labor force participation rate did tick up to 63 percent in January from 62.8 percent in December, and the number of workers unemployed for more than 27 weeks did drop by 232,000 in January. But that tiny bit of good news must be weighed against the facts that it would take some eight million workers to leave the couch and return to the job hunt for the participation rate to return to pre-recession levels, and 3.6 million workers remain unemployed long enough to make it difficult for them to retain the skills needed to be re-hired. They are, in the jargon of the trade, “scarred.” Had the number of Americans looking for work not declined, which means they are not counted among the unemployed, the unemployment rate would be over 11 percent. Hence the fierce debate between Democrats who want to raise the minimum wage to give the labor-force drop-outs and the unemployed a greater incentive to seek work, and Republicans who want to create that incentive by not renewing extended unemployment benefits. They might both be right.
The largest decline in the labor force participation rate is among 16-24 year olds – and they are not in school. Participation by 25-54 year old workers is also down. Only workers older than 54 are increasingly at work, as retirement becomes less of a financial option for some, and less attractive to those who are better-off, healthy, and eager to remain active no matter the peril to their golf scores. As the Manhattan Institute’s Diana Furchtgott-Roth points out in RealClearMarkets.com, “One reason for few jobs for younger workers is the increasing labor force participation rate of older workers delaying retirement.” But she adds, “Another reason is the slow GDP growth rate.”
When the Fed’s monetary policy committee reconvenes on March 18 the snows should have melted, consumers will have emerged from hibernation, and we will have had another jobs report among other data to allow a better guess at whether John Felice, Ford’s marketing vice president, is right. He says, “We expect things to return back to trend. All the fundamentals still look really solid.”
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