Monday, January 12, 2015

December 2014 Employment

The unemployment rate came in at 5.56% - almost down to 5.5%.  Hmm.  Going back as far as the beginning of 2014, the Fed was forecasting around 6.2%-6.4%.  Was there anyone with the foresight and courage to forecast something like 5.6% by year end?  'Cause that would be somethin'.  HmmHuh. :-)  (Note for journalists, that's "Erdmann", with two n's.  The second "n" stands for "Nailed it!")

Here is my chart of total unemployment, compared to insured unemployment - plus the zoomed in version.  The black line was my unemployment forecast based on a linear trend in the decline of very long term unemployment.  The red line was my unemployment forecast, assuming that after June 2014, very long term unemployment would stop declining.  December came in between the two.

I will probably revisit these charts less often now, since the trend will be less pronounced as we proceed from here.

Next, a look at unemployment by duration and at my estimate of very long term unemployed workers.  Most of this month's decline came in the shorter durations.  Durations above 26 weeks are still a little persistent, suggesting that further declines in the unemployment rate might be tougher to come by.  My estimate of very long term unemployment is showing a slight downward trend again, but this will probably not be a steep as it has been.

Following the graphs is a table comparing September unemployment with the estimates I had at the time for December and with actual December numbers.  Here again, we can see that the declines even over that time frame have been due to unexpected declines at the short end, and that long term unemployment is near my pessimistic projections.

There could be some bounce back from here.  I wouldn't be surprised if, several months from now, there is at least one month that still prints at 5.5% or 5.6%.

Looking at employment flows paints a more positive picture.  Flows between unemployment and employment were an aberration in November, I think.  This month flows into employment bounced back, and I don't see any reason to expect this net flow (from UtoE) to suddenly tighten up.  We should expect about 0.2% of the labor force to continue to move from UtoE in a typical month.  At this point in the recovery, we might expect there to be flows back into the labor force.  But, this month, there was a tick up in flows directly from Employment to Not in the Labor Force.  And, there were no net flows from Not in Labor Force to Unemployed.  Of those two flows, it is NtoU that would affect the unemployment rate, and as with UtoE, there is no reason to expect a sudden change in behavior.  Outside of the most intense parts of labor corrections, like in 2008-9, the net flow NtoU hasn't typically been more than about 0.1% of the labor force since the 1990's.  Looking at flows suggests that inertia in these flows should continue to pull unemployment down at a nice pace.  Maybe each of these flows will converge a little bit, causing unemployment to level off without any sharp changes in trends.  But, as the last graph suggests, UtoE flows dropping below about 0.14% has been a recessionary signal, and I just don't see that happening soon unless the Fed knocks the wind out of us very quickly.

Looking at flows data makes sub-5% by the end of 2015 seem very possible.  And, looking at flows data, it's hard to imagine that we could still be teasing around 5.5% a few months from now.  We'll have to wait and see how the mystery unravels.

Interestingly, interest rates have dropped after the employment rate was published Friday.  I think the market has moved on from unemployment levels to wage growth as the focus of potential Fed policy triggers.

I think I'll have a post up tomorrow on that topic.


  1. Kevin, this article is an excellent illustration of why we need the Fed to drive OMO's by targeting a prediction market. People like you, who are one in a million with an actual ability to forecast, could then be informing Fed policy, if you could be induced to trade in the NGDP prediction market. (Could you?)


    Kenneth Duda
    Menlo Park, CA

    1. I'm bragging with my tongue a bit in my cheek. But, I agree with your sentiment. I think it's great that you and the others are helping to get those markets started. People keep telling me that the CME/CBOT doesn't have any natural support for the market. I don't understand that. It seems like something that could hedge against any number of assets.
      I don't currently have a target for NGDP, so I haven't looked into trading on them. I usually only trade securities that are extremely mispriced. But, I could see taking a position as we get more information on mortgage credit and Fed policy, and my NGDP expectations move to an extreme. I should get an account. If I develop a strong opinion on the forecast, I would definitely want to help add liquidity to the markets that have been started.