Meet The LMCI - The Fed’s New Goal-Seeked, 19-Factor Labor Market Regression Rigmarole

Tyler Durden's picture

Submitted by Jeffrey Snider of Alhambra Partners via Contra Corner blog,

In the rush to make QE’s taper and the follow-on “forward guidance” appear more data-related than of due concerns about the structural (and ultimately philosophical) flaws in the economy, the regressionists of the Federal Reserve have come up with more regressions. The problem was always Ben Bernanke’s rather careless benchmarking to the unemployment rate. In fact, based on nothing more than prior regressions the Fed never expected the rate to drop so quickly.

Given that the denominator was the driving force in that forecast error, the Fed had to scramble to explain itself and its almost immediate violation of what looked like an advertised return to a “rules regime.” When even first mentioning taper in May 2013, Bernanke was careful to allude to the crude deconstruction of the official unemployment as anything but definitive about the state of employment and recovery.

So at Jackson Hole last week, Bernanke’s successor introduced the unemployment rate’s successor in the monetary policy framework. Janet Yellen’s speech directly addressed the inconsistency:

As the recovery progresses, assessments of the degree of remaining slack in the labor market need to become more nuanced because of considerable uncertainty about the level of employment consistent with the Federal Reserve’s dual mandate. Indeed, in its 2012 statement on longer-run goals and monetary policy strategy, the FOMC explicitly recognized that factors determining maximum employment “may change over time and may not be directly measurable,” and that assessments of the level of maximum employment “are necessarily uncertain and subject to revision.”

Economists inside the Fed (remember, these are statisticians far more than anything resembling experts on the economy) have developed a factor model to determine what Yellen noted above – supposedly they will derive “nuance” solely from correlations.

A factor model is a statistical tool intended to extract a small number of unobserved factors that summarize the comovement among a larger set of correlated time series.2 In our model, these factors are assumed to summarize overall labor market conditions. What we call the LMCI is the primary source of common variation among 19 labor market indicators. One essential feature of our factor model is that its inference about labor market conditions places greater weight on indicators whose movements are highly correlated with each other. And, when indicators provide disparate signals, the model’s assessment of overall labor market conditions reflects primarily those indicators that are in broad agreement.

Below is their list of the 19 factors included in that statistical conglomeration, the LMCI:

ABOOK Aug 2014 New Wages Metric

Of the nineteen, there are an inordinate number of surveys to go along with the more traditional statistical figurings like the unemployment rate and private payroll employment. What is conspicuously lacking is any measure of income. In fact, of those nineteen only one refers to wages at all and that is the average hourly earnings rather than a more comprehensive measure of earned income. And, as you will note from the far right column, the calculated correlation of the wage figure is the third lowest of the data set.

What does this mathematical reconstruction of the labor market tell us about the labor market? If you believe the figures, this has been one of the best recoveries on record. No, seriously:

ABOOK Aug 2014 New Wages Metric History

From December 1982 until the official economic peak in July 1990, the Fed’s new tool for nuance gained a total of 319 index points, or an average monthly change of 3. That was during what was an unequivocal and inarguable recovery and robust expansion (we can debate how much of it was artificial, particularly later in the decade, but there was no debate, as now, that economic growth was there).

By comparison, the LMCI shows a total gain of 290 points from July 2009 through what are apparently the latest estimates at the end of Q1. On an average monthly basis, the index in this recovery gained 5 per month, besting by a wide margin the 1982-90 expansion.

The reason for that is the unemployment rate. The Fed helpfully breaks down the contributions to changes in the index and, unsurprisingly, the three largest factors driving this epic recovery in jobs nuance are the Establishment Survey, the estimate of jobless claims and, somehow, the unemployment rate. Those statistical oddities, more than any assurance of actual growth and recovery, actually offer up confirmation bias directly within the index creation.

ABOOK Aug 2014 New Wages Contributions

The idea, as Yellen more than suggested last week, was to try to get a handle on labor market slack without “rewarding” the deterioration in labor participation that is inarguably skewing labor perceptions as far, far too positive. So they come up with a new “factor model” where the largest positive contribution still comes from the deterioration in labor participation (the pink portions in the chart above).

If the overall impression of the factor model’s comparison to actual growth in the 1980’s wasn’t enough to disqualify its use, then this surely should be. But rest assured, these kinds of regressions are only going to grow in importance in setting monetary policy under the Yellen regime. The amount of math, which behaved so poorly previously, is set to rise exponentially as actual experience with the actual economy is totally replaced via regression and multi-layered statistics.

This will be called a transition from “discretionary” monetary policy under Bernanke/Greenspan to a “rules based” approach. The latter sounds far more appealing given what has transpired, and even to what the Fed is now willing to admit as largely ineffective. However, it still represents the same old problems as rules or not, when setting those rules in the first place it simply re-arranges discretion from less clearly defined to simply setting the variables. And if the discretion and subjectivity in setting the variables is as poorly constructed as this LMCI, then what does it matter this change in the first place? The answer may be simply PR and “confidence” (the full and various meanings of that word).

Of the models in the Fed’s arsenal, however, this labor “nuance” has to be among the least formidable. It almost seems like it was slapped together haphazardly just to fill the void left by the participation problem cutting into the pre-programmed end to QE. But more than that, it displays exactly the basic kind of ignorance you would expect of a group that places mathematics before understanding (if it isn’t a regression equation, it simply doesn’t exist to them).

Even if the model represented a somewhat realistic assessment, it stills doesn’t tell us much about the actual economic trajectory. By focusing on the beancount raw numbers of these various sub-parts, the FOMC and the orthodox economists using this construction will over-emphasize the most cursory of the labor market aspects – the numerical number of jobs. That, as we well know today, is not much use where the economy is being transformed by “some” structural shift. In other words, the model will count as “good” the replacement of high-value productive jobs with low-value “asset inflation” service jobs (ie, the bartender economy), seeing recovery where only persistent drain exists.

The emphasis on the short run and the persistent appeal to generic activity leaves these mathematicians blind to what a real economy consists of – wealth and the valuable trade of labor for work in productive action. Nowhere does income, the true measure of economic strength, penetrate this moribund monstrosity. That is how this measure can look at the labor market post-2000 and see it as equal or better than what came before.

Back to Yellen:

Second, wage developments reflect not only cyclical but also secular trends that have likely affected the evolution of labor’s share of income in recent years. As I noted, real wages have been rising less rapidly than productivity, implying that real unit labor costs have been declining, a pattern suggesting that there is scope for nominal wages to accelerate from their recent pace without creating meaningful inflationary pressure. However, research suggests that the decline in real unit labor costs may partly reflect secular factors that predate the recession, including changing patterns of production and international trade, as well as measurement issues. If so, productivity growth could continue to outpace real wage gains even when the economy is again operating at its potential.

That is just nonsense – the only way “productivity growth could continue to outpace real wage gains” is under a system of financial repression that substitutes debt for wealth. In other words, nominal redistribution via massive credit production is exchanged for actual economic advance, but since the orthodox practitioner can’t tell the difference (monetary neutrality, after all, must be preserved no matter how much incoherence and convolution is needed to maintain it) it leaves behind all these mysteries in “need” of mathematical solutions, including so many poorly suited to the ideals.

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Bloppy's picture

Economists are good at making their sorcery look like a "science". This is moar baffle with BS, a tried-and-true tactic.

Meanwhile, NFL bans "Slap Ya Mama" hot sauce ads in New Orleans:

Herd Redirection Committee's picture

Who was the genius who thought to include surveys instead of data?

knukles's picture

(my nuts keep shrinking up into my torso)

NidStyles's picture

Anyone notice that everything from the Fed is worker this and work that? Never anything about currency auctions or debt issues.


Sounds like the Marxists made their way into office there...

NOTaREALmerican's picture

Ever notice what they actually do results in the top 1% winning?

Crony-CapitalIST have always been in the offices there. 

walküre's picture

"jobs plentiful vs. hard to get"

something my 12 y/o could have dreamed up for her fantasy career fair

Stoploss's picture

"All Other Indicators"   LOL!!!

It plays with the grey rectangle, to manipulate the blue rectangle...


Danno Anderson's picture

Where's the chart on part time jobs or Obamanomics ?

kevinearick's picture

E-Resonance:  Trolls Seeking Trolls

Obama or Putin, Clinton or Merkel, Buffet or Soros, one automaton , another, or a billion, building toll booths to increase rent relative to busy work income, exploiting natural resources in demographic booms and busts, makes no difference to labor. This too shall pass, as have all accounting ponzis preceding it, all ending in an overcrowded desert of peer pressure stupidity, and death.

The empire is psychological. The herd surrounds you with recurring anxiety for which you are to pay for non-recurring relief, with more and more of your time, over time, with nothing to show for it but cheap toys. Perversely, the automatons are only comfortable in their assigned boxes, with programmed boxes to ferry them between boxes.

The gold standard has failed. Competitive currency has failed. Infinite printing has failed. Round and round the empire goes, increasing the efficiency of closed system derivatives with specialization, always solving yesterday’s problems, incorrectly.

The upper middle class declared war on labor fifty years ago, thinking that its dc computer, which is now replacing the middle class from the bottom up, could replace labor, and the upper middle class is the easiest to replace, because the basis of its economy is arbitrary extortion. Absent labor, empire borders implode. You don’t have to do anything.

Like its proprietary system, the new world order is collapsing faster than the critters can patch it together. You’ll have that, solving the problem with the problem, the intelligencia of peer pressure perpetuation, upon a willfully ignorant herd. Go right into Syria; keep that Iraqi toll booth operational, at all cost.

It really doesn’t matter what theory the bankers come up with next; the positive feedback loop between monetary and fiscal policy is just a ground, and any ground will do, unless you want to go to the future, which the majority in a boom is always bred to fear. Always begin by replacing the return line.

In a closed dc system, everything affects everything because the components are subject to external pressure and temperature, which automatically enter a positive feedback loop around the closed system. You don’t need an EMP. Just adjust your distance.

Regardless of system, the increasingly ignorant empire must seek increasing return on decreasing risk to feed the ponzi, creating a monolithic crystal, the prism from which it sees the universe, as a reflection of itself, gravity. Making money by replicating the past more efficiently can only result in collapse, but that never stops the critters from cornering the market, on themselves.

Of course they fear having children after a demographic boom, applying an implicit force behind the curve, because they tax children and their parents into submission as a means to their own propulsion, civil marriage, arbitrary laws creating arbitrary laws. A point, a circle and a vortex are differentiated only by perspective, time created for the purpose.

The universe is timeless, net, always in the act of creation. Gravity exists only in its past. Labor completed its task long ago, but the empire continues to expend increasing energy on isolation and surveillance, distilling labor out, and itself in, to a bomb, with MAD insurance, growing pomp and circumstance.

The other day, I bought a $1500 bike for $50, which is only worth $20, to get me from point A to point B, in the future, which will be worth more than $50 relative to the healthcare ponzi. The idea that you cannot burn wood, buy land with timber and well water to build a home, or sell apples for less than $5 a bag, because the morons are burning natural resources like there’s no tomorrow and printing money on the back of the activity, is nonsense.

The only toll the critters have is probability, in a closed system, repeating the past, all dressed up in the misdirection of artificial complexity, a contract made to be broken. Sidewalk surveys to confirm compliance changes nothing. Sticks, stones and name-calling, from a tyrant in a glass house, perfect.

The critters are always getting on the train, to leave the worksite, hoping for a better outcome somewhere, anywhere else, and you are supposed to take them there, by law. Build the station, and the train will take care of itself.

The ivory tower types are always trying to out-gravity gravity, assuming that life is gravity. Whatever the critters touch turns to crap, because their objective is to occupy space, to collect rent. They expect you to sell your time cheaply and buy it back dearly, chasing a mortgage, always creating another line for the purpose.

Go ahead. Replace labor with another monetary and fiscal c-clamp, and expect a different result. Who is dumb enough to avoid the future, and who is dumb enough to profit from the process, is irrelevant.

Running an economy into the ground is the easy part, but higher education makes it appear to be rocket science. Building a community is work. The empire only has an exit if you choose to give it one. If it doesn’t get itself by increasing rent, it gets itself by increasing rent.

Public education is all about the politics of civil marriage, and nothing whatsoever about education. Don’t send your kids into that gravity without tools, built in privacy for the purpose. Funny, the cop teaching gang awareness is running the gang. That’s expert systems for you.

Keep shipping natural resources out, to be squandered, and tourists in, to be fleeced, until all the critters are throwing rocks at empty houses, made of glass. Did you notice that the kids took off with their kids for vacation, and never came back?

Don’t mistake patience for nicety for stupidity. The only thing nastier than a German is a German with a dog trained to hunt Germans. Print as much code as you like.


NOTaREALmerican's picture

If it has lots of numbers it must be correct.   But, I'm assuming they pulled an assumption out of their ass first.

IANAE's picture

many moar assumptions than one ...

spastic_colon's picture

"...this has been one of the best recoveries on record. No, seriously:....."


which is why yields have normalized and QE ended 1 year ago....oh wait

i_call_you_my_base's picture

Arguing against the Fed's logic is like arguing with a liar that their lies are wrong. The fed doesn't care about unemployment, it's just a vehicle to distract from their real function, which is to make rich people wealthier.

walküre's picture

Just change the goal posts as it suits you. I do it all the time and don't need any meds or drugs to keep me happy!

enforcer92677's picture

See this is the kind of stuff that is so bloody dangerous.  You have some sort of psudo-scientific looking spreadsheet with all kinds of data on it and it fully supports the press releases and narrative and the media and low informed eat it up. 

Never mind the fact that reality totally clashes with it. I worry that this thing will gain traction as legit.  Will it get blown off becuase it so obviously contradicts reality and the long unemployment lines we see with our own eyes?

FieldingMellish's picture

Because "modelling" works so well in CPI and GDP calculations.

youngman's picture

Yes this model makes the people that came up with it look smart...and look like they are actually doing something productive....they get a weekly paycheck for coming up with this stuff....and we are stupid enough to pay them and believe them....economies grow with manufacturing..not with statisticial models....we are just playing with ourselves where other countries have actual dates...

Atomizer's picture

Obama is already working on fluffing the American Taxpayer for a new stimulus program to build new bridges, create new highways, update green coal infrastructure, affordable high speed railway transportation, expand solar/wind energy programs, the same list goes on. 

Unfortunately, this Uncle Tom is on his knees sucking you off and hopes you'll ejaculate in his mouth to support a second chance. 

Hefty money donations will have a street sign under their name alloted. All contributions to bridge improvements will be honored by a signature brick to show the contribution in spending money to rebuild future generations. 

They pulled this same shit back in the past. 

youngman's picture

To early..that will not be pulled out until before the for us and you get all these goodies...see how easy it is to win now...

IANAE's picture

if the first measurement doesn't comport with expectations, get a new - hypertechnical, obfuscating, hocus pocus dependent - ruler and re-measure.

joebren's picture

It's called 'data masturbation'.

OMG's picture

Where is the goal post? Who moved the fucking goal post?

vote_libertarian_party's picture

interesting that there is no factor for 'jobs from birth\death = 0 real jobs'

seek's picture

Jesus. I know I should know better as I expect the whoe fucking show to collapse, but...

I work with lots of statistical models as part of my job, and when I see this level of statistical revisionism/denial... I'm just stunned.

Shit like this is what results in the dug-in policy ticks at the federal level congratulating themselves on a job well done and recession avertd while people starve. This is the government denying reality. This is how you get riots.

sosoome's picture

After trying to read all this bs, I got so bored I don't care anymore.

blu's picture

19-factor analysis is for slackers. Wake me when they get to 64-way tri-state Wilson multivariates, maybe then I'll have a look.

nostromo17's picture

Please solve a 19 variable equation for me in a meaningful way!?:)


nostromo17's picture

Fucking Retards.