Labor market blues

The employment report for August came out…and it´s a bummer! Employment gains of 142K were far below expectations (225K) and previous months were revised down. With Kocherlakota a notable exception, many at the Fed were quite ‘optimistic’ about rates having to increase sooner rather than later. Maybe some will find reasons to keep insisting on that.

In fact, despite being peddled as “the best single indicator of labor market conditions”, the unemployment rate can be very misleading, especially when the labor participation rate falls so drastically and is kept low.

As the chart below shows, what the economy and the labor market needs is a “shot of spending”. Structural (demographic) factors may play a role, but only a very minor one. The coincidence is too strong to leave any doubt about the reason for the strong drop in the labor force!

LM Blues_1

The next set of charts buttresses the view that many people stay out of the labor force unwillingly! The opposite occurred in the “roaring 90s.

LM Blues_2

So what´s needed is to “fire up the economic engine” and that´s not going to happen if spending doesn´t pick up. Otherwise, the Fed will end up postponing ad infinitum the date interest rates will start to go up!

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