The Federal Reserve’s Labor Market Conditions Index Sinks Fifth-Straight Month In May; May Signal Recession

A Benjamin Cole post

The U.S. Federal Reserve’s Labor Market Conditions Index, a composite of 19 labor market indicators, posted a 4.8 index point drop in May, the fifth-straight decline, the Fed reported yesterday.

BC CLMCI

This May is the lowest reading for the index since the Great Recession. The index retreating into negative territory is usually a sign on impending recession. The index delivered a false signal around 2002, though that was when the economy was climbing out of a recession (something economies used to do).

The only other false signal was in 1995. Otherwise, the Fed’s Labor Market Conditions Index has reliably foretold recessions.

So we have a picture nearly unimaginable in previous eras: A Federal Reserve shooting below its inflation target for years (all of 2.0% on the PCE, btw) and also rapidly declining labor market conditions. And yet, one Fed Governor or regional bank president after another publicly pontificates about pending rate hikes. It would be comic, except for the consequences.

BTW, the 10-year U.S. Treasury bond is offering 1.73% interest. The markets do not expect inflation.

Conclusion

There is a growing chasm between central bank culture and institutional prerogatives, and the needs of the macro-economy. Central bankers today appear psychologically ill-equipped to develop new policies and tools to negotiate the world as it is.

Whenever a central banker was heard to say, “The target for the next few years is robust real growth, to shake the global economy out of the torpor. We may get moderate inflation getting there, but if we are successful that is a price we are glad to pay”?

Why not?

3 thoughts on “The Federal Reserve’s Labor Market Conditions Index Sinks Fifth-Straight Month In May; May Signal Recession

  1. The Fed says it is data dependent when clearly it is not. If it were, we’d see much less autocorrelation in their rate decisions. It really is a psychological hang up. They want to be forecasting gods, so reversing course would be an embarrassment.

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