Ticking Away the Minutes
by Sinclair Noe
DOW – 105 = 14, 897
SPX – 9 = 1642
NAS – 13 = 3599
10 YR YLD + .04 = 2.85%
OIL + .04 = 105.00
GOLD – 4.20 = 1367,80
SILV – .14 – 22.89
Stocks slid, clawed back to breakeven, then sold aggressively into the close. News of the day in the form of FOMC minutes showing policymakers are talking about pulling away the Quantitative Easing punchbowl. The Dow closed below 15,000 for the first time since July 3; the Dow is now down for six sessions; the S&P ended negative, dragged by utilities and financials; techs held up relatively well. Yields on the benchmark 10-year Treasury hit a fresh session high of 2.88%. The dollar held up against most currencies, and most emerging market currencies continued to take a beating.
So, what did the Fed say in the FOMC minutes? Nothing unexpected. Policy makers were “broadly comfortable” with Bernanke’s plan to start reducing bond buying later this year if the economy improves, with a few saying tapering might be needed soon. But they weren’t saying they had to taper right this moment.
The central bankers did not signal as to whether such a taper of the $85 billion-per-month bond purchase plan would come in September, October or December, the three remaining meeting dates for 2013, but they indicated they would like to have it tapered down by the middle of next year.
“A few members emphasized the importance of being patient and evaluating additional information on the economy before deciding on any changes to the pace of asset purchases,” the minutes show. “Almost all participants confirmed that they were broadly comfortable” with the committee moderating “the pace of its securities purchases later this year.”
Some participants indicated that “overall financial-market conditions had tightened significantly,” the minutes said. “They expressed concern that the higher level of longer-term interest rates could be a significant factor holding back spending and economic growth.”
Several others said the rise in rates “was likely to exert relatively little restraint.” In addition, these participants thought that rising stock prices and easier bank lending standards would offset the impact of higher borrowing costs. Some of the officials welcomed the rise in rates “insofar as those developments were associated with an unwinding of unsustainable speculative positions.”
In other words, there was concern about the stock markets and housing markets, or pick a market… overinflating; possible asset bubbles. One area of concern for the Fed is probably its own balance sheet. The Federal Reserve has set a new record, but it’s not one exactly worth celebrating. For the first time ever, the Fed owns more than $2 trillion in US debt, which is to say, in US Treasuries. On Dec. 31, 2008 that statistic consisted of less than a half-trillion in Treasury securities, but efforts undertaken by the Fed to revive the economy — so called “quantitative easing” — have instead left the bank to bear record amounts of national debt. China, the second place holder with regards to US debt, was owed $1.27 trillion by the US as of late June.
There is another problem for the Fed; if, when, or as the Fed winds down QE and they reduce purchases of mortgage backed securities then interest rates will rise and bond prices will fall. That could raise the federal deficit (because the government would have higher borrowing costs) and slow the housing market (because mortgage rates could rise further). The basic math is that prices fall when interest rates rise, and the longer the maturity the more severe the price drop. This is a big deal with the Fed. As of August 15th, it owned mortgage-backed securities worth $1.264 trillion as well as notes and bonds worth $1.9 trillion. In effect, by tapering the Fed will force down the current value of its own securities portfolio.
The FOMC minutes also revealed the Fed is considering other tools, such as a new overnight reverse repo facility. They also discussed lowering the 6.5% unemployment rate threshold. That’s the target they set for an exit from QE. So, they think the economy is headed for lower unemployment. Maybe, but will that mean better jobs? Maybe not.
Businesses are hiring at a robust rate. The only problem is that three out of four of the nearly 1 million hires this year are part-time and many of the jobs are low-paid. Employers say part-timers offer them flexibility. If the economy picks up, they can quickly offer full-time work. If orders dry up, they know costs are under control. It also helps them to curb costs they might face under the Affordable Care Act, or at least that has become an easy scapegoat. Obamacare is only one factor. The surge in part-time employment also reflects an economy that has struggled to maintain decent growth.
In a paper published last month, the San Francisco Federal Reserve Bank said uncertainty over fiscal and regulatory policy had left the U.S. unemployment rate 1.3 percentage points higher at the end of last year than it otherwise would have been. The jobless rate stood at 7.8 percent in December; it has since fallen to 7.4 percent.
Maybe part-time hiring and the low wages environment will fade away as the economy regains momentum, starting in the second half of this year and through 2014. Maybe not. Businesses have learned how to function with fewer workers. One study found that profit per employee at privately held companies jumped to more than $18,000 in 2012 from about $14,000 in 2009. Private employers are either able to make more money with fewer employees or have been able to make more money without hiring additional employees. The lesson learned for businesses during the downturn was to have lean operations. There are limits to running a lean operation, and the big question is whether we are now at those limits.
Many of these part time, low paying jobs, aren’t really part time, low paying jobs. In the small “d” depression of the past few years, good jobs were transformed into bad jobs, full-time workers with benefits were transformed into freelancers with nothing. From the end of an “average” American recession, it ordinarily takes slightly less than a year to reach or surpass the previous employment peak. As of June 2013, four full years after the official end of the Great Recession, we had recovered only 6.6 million jobs, or just three-quarters of the 8.7 million jobs we lost.
One of the tricks to running “lean operations” was to dump entire departments and reorganize them so that the same work, the same jobs, requiring the same skills, would henceforth, in good times and bad, be done by contingent workers. One sign of that: during the course of the downturn, corporate profits went up by 25%-30%, while wages as a share of national income fell to their lowest point since that number began to be recorded after World War II. This is more than a matter of factories firing and burger joints and Wal-Mart hiring; this was a switcheroo; the good jobs were transformed into bad jobs, and if that wasn’t good enough, the other option was no job.
Eventually the hours will start to creep back up, and at some point labor will gain strength, or maybe even flex muscle, but not today. Until then, be careful you don’t become a part-timer, without even trying.
Still, the FOMC minutes reveal Fed policymakers optimistic about the job market. The June Job Openings and Labor Turnover Survey (JOLTS) data released by the Bureau of Labor Statistics paint a grim picture of job opportunities in the labor market. The “hires rate”—the share of total employment accounted for by new hires—is an important comprehensive measure of the strength of job opportunities because it incorporates two components: 1) net new hires, and 2) new hires that are due to “churn”, i.e., hires that are replacing vacated or lost positions. In June, 3.1 percent of all jobs were hires. This was a substantial drop from May, when the hires rate was 3.3 percent.
The JOLTS data are a regular reminder that there is always a great deal of “churn” in the labor market. In July, the economy added 162,000 jobs, net. Over the last year, an average of 4.3 million workers were hired every month and an average of 4.2 million workers either left their jobs voluntarily or were laid off every month. These hires and separations numbers, however, are currently very low; when the labor market is stronger, there is much more churn. Nowadays, employed workers are less likely to quit the job they have. Back in 2006, about 3 million workers quit their job each month. Last June, 2.2 million workers voluntarily quit their jobs. Because leaving a job for a better opportunity can be an important way for workers to advance, this persistent depressed rate of voluntary quits represents millions of lost opportunities.
Unemployed workers far outnumber job openings in every major sector. This means the main problem in the labor market is a broad-based lack of demand for workers—not, as is often claimed, available workers lacking the skills needed for the sectors with job openings.
The Federal Reserve might be ready to taper, but the reasons for taper are more about the Fed’s balance sheet and asset bubbles than about the strength of the economy, and certainly the labor market. And maybe QE hasn’t and can’t do anything to improve the labor market, but it would have been nice if the FOMC minutes had actually covered the mandate regarding full employment.