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Atlanta Fed's Lockhart: Bernanke May Have To Tighten With Considerably Higher Unemployment

Tyler Durden's picture




 

The Atlanta Fed's Dennis Lockhart had prepared remarks before the Atlanta Technical College, in which he said "I continue to support the current
stance of interest rate policy. But the time is approaching when it
will be appropriate to consider recalibrating interest rate policy. I
do not believe that time has yet arrived. The conditions that require a
change of policy are not yet at hand. However, as the economy continues
to improve and financial markets find firmer ground, extraordinarily
low policy rates will not be needed to promote recovery and will become
inconsistent with maintaining price stability. The implication is that the policy rate may have to begin to rise
even while unemployment is considerably higher than before the
recession."
We don't believe it, but does it mean that with tomorrow's whisper 100 million in NFP additions on 200 million in birth/death and census, that someone will finally force the fed to put its fiat money where its corrupt mouth is? In the meantime, El-Erian's New Normal means tens of millions of previously happily employed people will likely never work in the US ever again.

Sources of Employment Uncertainty

Dennis P. Lockhart
President and Chief Executive Officer
Federal Reserve Bank of Atlanta

Atlanta Technical College
Business and Industry Breakfast
Atlanta, Ga.
June 3, 2010

Thank you for the opportunity to speak
at the college's annual business and industry breakfast. I want to
congratulate Atlanta Technical College on being named the best
community college by Washington Monthly. ATC certainly
deserves such praise, but I think community and technical colleges in
general deserve praise for their essential role in so ably preparing
students for America's always fluid and still weak employment market. I
am aware that a high percentage of community and technical college
students are older than 30. In the case of ATC, almost 45 percent are
over 30 and more than 21 percent are over 40. ATC and its sister
institutions do a tremendous service in upgrading the skills and
retooling workers in our economy and smoothing the adjustments—both
macroeconomic and personal—that are necessary in a dynamic, open
economy.

This morning I want to focus on what might be viewed as a puzzling
and frustrating aspect of the economic recovery that is under way. Most
indicators suggest that overall economic activity stopped contracting
and began growing again starting around July 2009. So the economy is
approaching 12 months of sustained recovery, and yet not much has
happened in employment markets to reduce the high level of joblessness.
How can that be? During the last three quarters, gross domestic product
(GDP) has expanded at an average annualized rate of 3.6 percent.
Current estimates point to GDP growth of around 3 percent in the
current quarter. These numbers are not off-the-charts strong, but they
represent solid aggregate economic performance. Why haven't we seen
rehiring accompany this growth? Why hasn't employment recovered at the
same pace as the overall economy? Well, employment always lags recovery
to some extent. Following the previous two recessions, where recovery
has been modest, we've seen weak job growth.

The answer also lies in a surge in labor productivity growth, that is, output per hour of work. This
productivity growth has allowed the economy to expand and firms to
record better sales and profits without yet adding many workers to
payrolls. Historically, productivity has always been strong just after
recessions. So the pattern we're seeing is not abnormal.

Recently my staff and I have been trying to gauge the sustainability
of recent strong productivity growth and its impact on prospects for
reduction of unemployment. In the long run, labor productivity growth
is the friend of all of us. It fuels broad-based improvement of living
standards. Short term, productivity gains may be the nemesis of those
whose prospects depend on job creation.

The Federal Reserve's monetary policy mandate from Congress is to
pursue both maximum employment and low inflation. The possible tension
between productivity and employment is a subtext of the larger story of
economic growth and inflation and the question of whether there is a
short-term tradeoff between the two. So I will try to connect the
employment and productivity outlook to my views on appropriate monetary
policy.

I should emphasize that what you'll hear this morning are my
personal views. They are not necessarily shared by my colleagues on the
Federal Open Market Committee or in the Federal Reserve System.

Economic summary
Let me set the scene with a quick summary of current economic
conditions. As stated earlier, the broad national economy is in
recovery as indicated by GDP growth for almost a year.

In the middle of last year government spending stimulated most of
the economic growth. In the fourth quarter of 2009 and the first
quarter of this year, inventory adjustments drove a lot of economic
activity. Consumer activity over the last few months has exceeded the
expectations of many analysts. This activity has occurred even while
American households continue to deleverage, that is, pay down their
debt. Business investment in equipment and software has been
surprisingly strong considering the consensus forecast of modest growth
ahead. Both consumer spending and business investment in capital goods
may just be evidence of short-term and temporary satisfaction of
pent-up demand following deferral of spending during the recession. The
end game of this evolution is solid and broad-based final demand.

Although, as I have suggested, risks remain to a forecast of
sustained growth, I think confidence is warranted. The mix of sources
of strength underpinning the recovery will evolve. Former contributors
to growth will beget new contributors.

As a consequence of the growth we've seen and the positive outlook,
employment market conditions have begun to improve. Payroll employment
is estimated to have risen by about 560,000 during the first four
months of this year.

We will get another important reading on employment markets
tomorrow. Even if that report shows further gains in employment (some
forecasters expect 500,000, with 400,000 being U.S. Census jobs), it's
fair to say there will remain a large excess of workers looking for
jobs relative to the demand for workers in the economy. Total jobs lost
in the recession and immediate aftermath approach 8 million. This gap
is likely to close only gradually. And, further, the resulting slow
growth of wages and salaries has the potential to limit growth of
consumer spending for a while.

I'll round out this snapshot of the economy with a couple of
comments on inflation. Because of the downward pressure exerted by the
recession and the relatively modest recovery so far, the rate of
consumer price inflation has slowed quite a lot. This recent
disinflation has not yet translated into decline of longer-term
inflation expectations. Most measures of inflation expectations have
remained pretty stable. Overall, for now, the inflation picture is not
a major concern, in my view.

So, to sum up, we've had growth of the economy and improvement in
jobs markets. Among the factors pushing the economy forward—along with
personal consumption, business investment, and inventory effects—is
labor productivity. I'd like to take a deeper look at this element of
economic progress and its relationship to employment.

Role of productivity as an element of economic growth
To simplify a bit, there are two causes of labor productivity growth.
The first is improvements to technology that help people work better.
The second is people working harder. People might be working harder
because the companies they work for have cut employees in response to
tough economic times and are trying to keep production levels,
revenues, and earnings up with fewer people. Technological improvements
tend to be durable, but squeezing more and more out of a diminished
and, in many cases, reorganized workforce may not be sustainable.

In recent months, the U.S. economy has enjoyed especially strong
productivity growth in the business sector (averaging 6 percent per
quarter over the last three quarters versus the long-run average of 2.6
percent). I suspect that much of this productivity growth is of the
second, work-harder type. Many employers reacted to the downturn by
aggressively cutting their workforces, reorganizing remaining workers,
and cutting other costs. They have reacted to the upswing by holding
employment at or near recession levels, seeking efficiencies in supply
chains, investing in labor-saving automation, and generally tweaking
their business models to operate more efficiently than before the
recession. We've heard this story frequently in anecdotal accounts of
our directors and business contacts across the Southeast.

As long as efficiency and productivity gains can be achieved in this
way, employers may remain hesitant to hire. So a key question with
immediate relevance for the recovery and employment is, how long can
firms ride this productivity growth before having to yield to new
hiring to support greater activity?

International comparison
Before venturing a view on that question, let me frame an international
context for better perspective on the ups and downs of labor
productivity in this country. Even though the timing and extent of the
economic downturn were similar in most advanced economies, resulting
labor productivity patterns have varied widely. For instance, in the
United States the level of GDP declined by 3.7 percent, while the
unemployment rate rose 4.5 percentage points during the recession. By
contrast, in Germany the cumulative GDP decline was about 6 percent,
while unemployment rose by only about 1 percentage point. Germany—and
several other advanced economies—experienced a serious recession but a
significantly smaller increase in unemployment in comparison with the
United States.

It's striking that the United States, even in good times, tends to
see much greater flows into and out of unemployment rolls than other
countries. This is an aspect of the vigorous turnover of jobs in our
economy—the regular destruction and creation of jobs in a dynamic
market economy. Other countries tend to experience relatively less such
movement in labor markets over time. Their experience probably reflects
institutional factors such as social laws that make separating
employees more expensive and lower quotients of entrepreneurial
activity.

It can be argued that the comparative absence of labor market
rigidity in the United States results in comparatively large movements
over time of workers between industries and sectors and across
geography. We in the United States simply have more flexible employment
arrangements across the economy, allowing employers to adjust rapidly
and aggressively to downturns and requiring workers to be agile in
response to changing conditions.

There is a point to be made for the benefit of ATC students here:
Beyond the specialized skills you are acquiring in the college's
excellent programs, there will be a high return to work skills that
make you versatile and mobile—for example, computer and IT skills.

Outlook for labor productivity and employment
To return to the question I posed earlier, slightly rephrased: Will
high productivity growth continue and have the effect of impeding
employment growth?

I do not expect the recent outsized productivity growth to continue
indefinitely and become a new, permanently higher trend rate. Some
degree of "wait and see" behavior is at work and is no doubt reflected
in the productivity numbers. With growing economic momentum, deferral
of hiring will become riskier.

Some employment gains should result as labor productivity levels out
and falls back over time to something resembling the historic trend
rate. But the pace of hiring is likely to be gradual. Current data on
the use of part-time workers suggest that businesses have some scope to
increase hours without hiring new full-time employees. And there are
other, more structural obstacles to the rapid reemployment of the
jobless. Some jobs in the construction sector and certain manufacturing
industries are likely permanently lost, requiring some amount of
migration of workers to other sectors. And, for a time, skill and
geographic mismatches may frustrate employers willing to hire.

Also, the weight of uncertainty about the future business
environment makes a gradual pace of employment progress a reasonable
assumption. I hear often from members of the business community that
uncertainty regarding federal, state, and local fiscal fundamentals and
regulatory rules-of-the-game are feeding reticence to pull the trigger
on new ventures, new hires, and new investments. The recent European
sovereign debt and banking pressures have added to uncertainty in
financial markets.

Sizing all this up, I expect recovery in the medium term to be neither jobless nor job rich.

Appropriate monetary policy
As the recovery proceeds—as I believe it will—a central concern of
monetary policy will be when and by how much the Federal Reserve raises
the base level of interest rates.

The Fed has held its interest rate policy at close to zero for about
a year and a half. This has been done to foster conditions that would
end the contraction of the economy and then encourage recovery. Again,
I believe a modest recovery has been under way for almost 12 months.

As I stated earlier, the Fed has a dual mandate from Congress to keep inflation low and promote maximum employment.

I've put forward the view that inflation is not currently a major
concern. So one might ask, do you believe the base interest rate must
remain near zero—at its current level—until unemployment is reduced
substantially and most of the employment lost in the recession has been
restored?

I'm not convinced that will be necessary. I continue to support the
current stance of interest rate policy. But the time is approaching
when it will be appropriate to consider recalibrating interest rate
policy. I do not believe that time has yet arrived. The conditions that
require a change of policy are not yet at hand. However, as the economy
continues to improve and financial markets find firmer ground,
extraordinarily low policy rates will not be needed to promote recovery
and will become inconsistent with maintaining price stability.

The implication is that the policy rate may have to begin to rise
even while unemployment is considerably higher than before the
recession.
I'm very concerned about unemployment, and certainly
employment trends should be a critical consideration in setting policy.
But I accept that good policy, even in circumstances of unacceptable
levels of unemployment, may incorporate higher interest rates.

Again, I want to acknowledge the vital role that Atlanta Technical
College plays in our community in equipping young people, and some
slightly older people, to prosper even in difficult times. You do
important work.

 

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Thu, 06/03/2010 - 08:11 | 391351 awgee
awgee's picture

Someone at the Fed has been threatening to raise interest rates for so long, it seems that they were talking about raising them before they lowered them.

Thu, 06/03/2010 - 08:15 | 391354 Brett in Manhattan
Brett in Manhattan's picture

"But the time is approaching when it will be appropriate to consider recalibrating interest rate policy. I do not believe that time has yet arrived."

My guess is that time will arrive when the market is approaching a low and high interest rates will prod the public out of equities and into cash instruments, leaving stocks at bargain prices for exchange insiders.

Thu, 06/03/2010 - 09:59 | 391552 JoshRoman
JoshRoman's picture

Exactly.   There's only one secret to making money:  accumulate while others are fearful, distribute while others are bold.   The rest is details (or distraction.)

Thu, 06/03/2010 - 08:17 | 391356 plocequ1
plocequ1's picture

Fed, Make up your fucking mind.. One guy says tighten, Another one says not tighten, Then Bernanke comes out and says Rates will remain low for an extended period. You are confusing the hell out of our boss, The United states of China

Thu, 06/03/2010 - 08:33 | 391377 Mitchman
Mitchman's picture

They sure seem to be laying the ground work for a raise don't they?

Thu, 06/03/2010 - 08:51 | 391418 Trichy
Trichy's picture

Yeah right, the fed is going to be proactive! lol

They'll raise rates when the 10y yields Greek rates.

Thu, 06/03/2010 - 08:53 | 391423 Trichy
Trichy's picture

...

Thu, 06/03/2010 - 08:57 | 391431 taraxias
taraxias's picture

It's the same good cop/bad cop routine we all heard before.

In reality, these guys all think the same way and speak with one voice and they all know ZIRP is here to stay for a looooong time.

By the end of the day ZIRP and money printing are the only tools they have.

Thu, 06/03/2010 - 09:05 | 391447 poorold
poorold's picture

it's simply amazing how few understand that the "mold" has been broken.

 

talking about controlling inflation or interest rates or whatever idiot macroeconic levers they want to pull or push and think they can "control" things is way beyond funny. It's sad.

 

They've NEVER gotten it right.

 

When are they going to own up to the fact that there is not enough "wealth" in existance or being created to fund government spending?

 

when are they going to own up to the fact that there is not enough "taxable anything" at the state or local levels to fund state and local governments?

 

If they actually talked about the real problems, people in America would sit up and go "Holy Shit!"

 

Can you imagine the nightly news leading with the following story: "California runs out of money" and continues on to explain that suppliers will paid half, all non-essential contracts are cancelled, 25% across the board pay cuts, and so on and so forth...

Thu, 06/03/2010 - 09:25 | 391481 Lndmvr
Lndmvr's picture

News in Omaha yesterday said ATM are running out of cash. KKTV

Thu, 06/03/2010 - 09:47 | 391500 Trifecta Man
Trifecta Man's picture

"The conditions that require a change of policy are not yet at hand."

The change that is necessary now is to put the Fed out of business.  We need an honest money policy.

"I continue to support the current stance of interest rate policy."

Sure, give trillions of dollars to the banksters who tried to rook the public with crap mortgages, and finally got caught.  Meanwhile deprive millions of senior citizens of being able to live on the interest of their savings.

Thu, 06/03/2010 - 09:56 | 391544 JoshRoman
JoshRoman's picture

 

 

 

Thu, 06/03/2010 - 09:58 | 391549 Cursive
Cursive's picture

Overall, the FRB should be disbanded because it is ineffective and, in the near term, inappropriate distorts market forces by rigging interest rates.  That said, the FRB should raise interest rates at least to match the 10-yr. bond.  But I don't think the FRB will becuase the main obstacle holding back the deflationary damn is ZIRP.

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