Interest on Reserves in 2008 and now

Interest on Reserves in 2008 - Highly Contractionary

I was reading this paper from Peter Ireland about Interest on Reserves (IOR).  Reading that paper, and thinking through the effects we should expect from IOR, I am thinking that the Fed Funds Rate (FFR) is still the overwhelming factor with regard to monetary policy.  If I have his argument correct, given the current level of reserves, a rising FFR along with a rising IOR rate should basically have the same effect as a rising FFR in an environment where there weren't excess reserves.  If there weren't excess reserves, I imagine that IOR could move around below FFR without much effect on the money supply.  So, it appears that they can use IOR to manage the reduction in the Fed balance sheet.  But, it seems to me that the level of FFR relative to natural interest rates would work basically the same way that it has without IOR.

This leaves the question, however, of whether the implementation of IOR in 2008 was that contractionary to begin with.  Generally, IOR is considered to be a floor for FFR because if IOR was higher than FFR, banks could borrow at the low FFR and hold it as reserves, pocketing the difference in rates.  They would bid the FFR up to a level near the IOR rate, in that case.

 

In October 2008, the Fed implemented IOR, and over the course of a month, ratcheted up the IOR rate until it was equal to the FFR target.  But, throughout this period, the effective federal funds rate was volatile, and tended to run below the FFR target.  So, from November 5, when the Fed pegged the IOR rate to the FFR, until December 16, when the FFR (along with IOR) was finally reduced to 0.25%, the effective FFR was running 0.5% to 0.75% below the IOR rate.  During this time, the Fed had accumulated a substantial amount of non-traditional assets, but it was not purchasing treasuries, and in fact would not start adding to securities held outright until March 2009.

There were so many things going on at the time with the Fed balance sheet, and I am no expert on the micro structure of trades between the Fed and commercial banks.  But, something in November and December 2008 was pushing the effective FFR well below the IOR rate while excess reserves ballooned.  It looks to me like the Fed should have pushed the FFR to 0% in October with no IOR, since the market risk free rate was in free fall, and the economy was desperate for cash.  Instead, the Fed sucked all the panicked cash out of the economy with IOR above the market risk free rate, to the tune of more than half a trillion dollars.


IOR and Excess Reserves at the End of QE

With regard to the amount of excess reserves currently outstanding, I wonder if there is a point where rising short term rates with stable IOR rates would actually be expansionary.  Further, if reserves aren't the only constraint on bank lending, then I think short term rates could rise even while excess reserves remain in the system.  With FFR, IOR, and the level of securities on the Fed balance sheet, there are several moving parts to consider now, but I think, regardless of Fed policy in the very short term, natural short term interest rates might behave fairly typically as the economy continues to recover.  It looks like the Fed is planning on raising IOR and FFR together. But, normally a rising FFR rate resulting from the Fed selling securities would be contractionary.  In the current environment, if the Fed raised FFR but held IOR constant, some of the sterile excess reserves at the banks would be injected into the economy, so that a rising FFR resulting from some Fed selling could still be expansionary.  If this is the case, then the liquidity effect of Fed open market operations would have a very different shape in the context of high excess reserves.

I'm not a banking expert, but it seems like if capital constraints on the banks led to an increase in short term interest rates while reserves remained high, deposit interest rates would remain low, incentivizing depositors to purchase securitized assets from the banks or loan funds outside the banks until the interest rate, new bank assets, and reserve levels reached a new equilibrium.  Peek and Rosengren at the Boston Fed show that for capital constrained banks, loans can expand in response to monetary tightening, or at least that capital constrained banks will not markedly change their credit activity in response to monetary policy.  Is it possible that velocity would be self-correcting as excess reserves decline?

It seems unlikely for the expansionary counter-effect to be greater than the original contractionary effect of reduced reserves.  But, if I imagine an extreme world with $15 trillion in excess reserves with only $1 trillion in treasuries left in private hands, it seems clear to me that a rise in interest rates due to Fed OMO could happen with a large amount of reserves still in place, leading to a strong increase in credit and velocity.  So, at some quantity of excess reserves, a reduction in the Fed's asset base must be expansionary.

I had been wondering if rates would rise slowly as we leave the zero lower bound, but now I am starting to wonder if this context, market rates could rise, which would require the Fed to either overshoot the FFR or raise IOR rates along with FFR in order to counter these odd expansionary effects.  If that is the case, there shouldn't be a drag on the rise in short term rates - at worst they would rise at a pace typical of past recoveries.

Please let me know in the comments if I'm completely out of my element here, but be gentle with me.

Homeownership and the wisdom of markets

Here is an article from Meta Brown, Sydnee Caldwell, and Sarah Sutherland at the New York Fed (HT: Mark Thoma).  Here's the take-away:

(T)he failure of young consumers, and particularly the comparatively skilled young consumers of our student loan group, to re-enter the housing market remains a puzzle. Many factors could be contributing to this phenomenon, including growing student debt balances, limited access to credit, lowered expectations for future earnings, and perhaps even a cultural shift by which young people—whether they went to college or not—are deferring home purchases. Whatever the cause of student borrowers’ reticence, the housing market rebound of 2013 appears to have proceeded without the help of this skilled set of young buyers.

This is good news, and it's a good example of the wisdom of markets.  With real long term interest rates at 1%, home prices should be high and volatile.  Homes are very bond-like in this environment, and, speaking strictly from a portfolio construction point of view, they have no place in a young person's portfolio.  Young families should size-down, rent, and put their money in the stock market.  In 20 years, when the baby boomers are selling their homes and long term real rates are at 4%, then these young families should buy.

It might be a good rule of thumb for portfolio management for non-boomers to just ask, "What do the boomers need to hold", and then take the opposite position.

Homes have always been a good investment for just about everyone who could arrange the financing.  They are still a great investment for people who need bond-like exposure (baby boomers) but they are not currently a good investment for everyone.  The market represented by young families has figured this out, even if individual families, social convention, regulators, the GSE's, and the New York Fed haven't.

Update on QE and the ZLB

Here are the graphs of the estimated escape from the zero lower bound, inferred from treasury yields.  The schedule of the escape continues apace, in the face of the taper, suggesting that we might finally be heading back to normalcy.

The first graph is the expected date of the first short term rate increase on a stationary calendar. 

The second graph is the expected date of the first short term rate increase, measured in number of years from present.  As hopeful as this looks, it's also a reminder that we are basically just getting back to where we were 3 years ago, when QE2 ended.  How much further into a recovery would we be today if QE2 had been maintained until sustainable inflation pressures were established?

Bank Credit Momentum

April numbers are out in the Fed's H.8 report of bank balance sheets.  Bank credit is smokin'.  The engines are revving in this economy.  Seasonally adjusted annualized rates of growth are moving up across categories.

Normal Interest Rate Behavior

Here are a couple of graphs looking at past interest rate behavior.  This first one is a variant of the Taylor Rule.  It came back above 0% in July, and with the recent drop in the unemployment rate, will signal a target rate between 1.5% and 2% for April, depending on the April inflation level, and conservative expectations of inflation and unemployment should add about 1% a year to this indicator.

The second graph compares the actual Fed Funds rate to a simple forecast of the Fed Funds rate, using the growth rate of Commercial & Industrial Loans and inflation.  The model uses the period through 1990, so the last 24 years are out of sample.  Again, this shows fairly predictable movement until recently, with a current forecast rate of more than 4%.

The third graph compares corporate spreads to the Fed Funds rate.  If corporate credit spreads continue to decline another 1/2 point or so, they would be where, typically, short term risk free rates would start to rise.  Note, that spreads are still fairly wide, despite all the chatter about investors reaching for yield.

Now, there clearly has been a shift in these relationships in the past 5 years, so we shouldn't expect to see perfect co-movement.  But, this does point to a potential return to normalcy.  I do wonder if some of the recent debate among economists about how increasing interest rates could, counterintuitively, be inflationary, could be on to something in this context.  If banks ceased to be strictly capital constrained, and the Fed cut interest on reserves (IOR) to 0% and started selling treasuries, banks would be highly incentivized to convert their cash reserves into credit.  The end result of those processes could be expansionary, depending on the relative quantities of Fed assets and bank reserves that ended up moving.

It's hard for me to wrap my head around all the possible ramifications of the current Fed position.  It seems like, regarding interest rates as a standalone issue, a lot depends simply on the mechanics of monetary policy chosen by the Fed over the near term.  My impression is that they intend to kind of sterilize the excess reserves and slowly reduce them in a way that is intended to have minimal cyclical effects.  Please correct me in the comments if anyone has contrary knowledge.

Side note on IOR:
1) I disagree with the notion that IOR is a giveaway to the banks.  I see the banks as having an operational balance sheet apart from the items related to the excess reserves.  Regarding those parts of their balance sheets, there is some set of competitive forces that is leading to an equilibrium level of total profits.  Now, due to Fed activity, the banks have $2.5 trillion in cash, which is earning some minimum level of interest, and they also have an additional $2.5 trillion in deposits, on which they are paying some minimum level of interest.  I don't see any reason to expect there to be any significant net gain to the banks from these extra assets and liabilities.  If the competitive landscape led to $x profits without the excess reserves, that same landscape should be expected to lead to $x profits with the reserves, plus some insignificant extra profit for the trouble of servicing the accounts.  Now, considering where we are, the excess reserves probably benefit everyone to the extent that they represent accommodative monetary policy, but I just don't see the direct transfer of cash to the banks adding up to much.

QE3 replaced credit with cash

Bank balance sheets continue to explode as QE3 tapers.  Here is a comparison of excess reserves at the Fed with Loans and Leases in Bank Credit at Commercial Banks:

I view the QE programs as a type of bank credit supplement, in the form of cash.  The Fed is a sort of bank that can only take deposits through other banks, so the excess cash and its corresponding deposits sit on commercial bank balance sheets, but are totally disconnected from the banks' operational balance sheets.  I have speculated that the inverse movement of these quantities might suggest that QE has served as funding for profitable investment, crowding out the banks' supply of credit for a limited supply of viable investments.  Now that QE is tapering, banks have a pent up supply of capital available to extend credit as a replacement for the cash that was previously being provided through QE3.  Bank credit has suddenly begun expanding at a rate that more than makes up for the decline in QE cash.

In a way, it is simply a semantic difference.  Cash rich non-banks have been buying up bank loans and real estate mostly as a result of this fact that credit since the fall of 2012 has been coming into the economy in the form of QE cash instead of in the form of bank credit.  Here is a measure, from soberlook.com of the collateralized loan market.  Notice that it seems to rise along with QE3.  And, in the next graph, also from soberlook.com, we see inflows declining along with the taper.

It seems to me that if the Fed can arrange a mechanism where they eventually trade the banks treasuries in exchange for excess reserves, while minimizing transaction mechanisms that would temporarily pull cash out of the economy (a reverse hot potato effect) the Fed's inflated balance sheet is relatively benign and mostly unconnected to the eventual position of monetary policy.

HTCH 2014 2Q

Hutchinson Technology is really trying my patience.  They just keep pushing along in that gray area between success and failure, with plausible excuses.  Now it looks like they will hit 130 million units, maybe in 2Q 2015.  Nine months ago, the hoped-for date was 4Q 2014.

It's not a problem of losing share.  It's just that the new programs which should increase share are taking longer to ramp than expected.  Having made that adjustment, things are moving about where they should be.  Gross margins, even at these low volumes are nearing 10% as production moves to Thailand.

This valuation can move quickly with margin improvements, margin improvements can move quickly with volume, and volume can change quickly.  And, all of these things can happen with just a 5% gain in hard drive sales and a 5% market share gain, both of which could legitimately happen in a few quarters.  And, they have made progress since the Thai floods in 2011.  Losses are significantly lower.  The previous quarter was the best quarter since the floods.  If we had seen a positive shift of 15 million units this quarter instead of a negative shift, we'd be at breakeven now.  So, am I being greedy, waiting for the big payoff that's never going to come?  Or am I being greedy, missing the obvious improvements that the firm has seen, because I'm being impatient?

In a couple of years, this will either look like a brilliant position, or it will be a position where I was being obtuse and I'll wonder why I didn't see how obvious it was that this wasn't panning out.

Some of these are easy and some, like this one, are hard.  The problem is that the hard ones frequently work out ok in the end.  The ones that seem easy are probably mostly a product of lucky timing, where I just happened to find the company right before things turned positive, but that if I had found it 2 years earlier, I would have found it just as compelling and I would have been frustrated and doubting.

For now, I am keeping this position on, but if the options market becomes a little more efficiently priced, I will continue to look for ways to change my exposure to call options.

Minimum Wage, Labor Force, and Expected Job Losses

I have previously compared the historical level of minimum wage employment with the relative level of the minimum wage, in an effort to forecast employment loss resulting from the minimum wage.  I had used the Average Hourly Earnings of Production and Non-supervisory Employees series as my average wage basis.  But, over time, this series appears to have lagged other indicators of wage growth, and the effect on my analysis was to create a positive drift in the ratio of minimum wages to average wages.

I have looked at this analysis again, substituting the DOL's Compensation per Hour index.  This doesn't have the negative drift over time that AHETPI does, and it produces a much stronger linear relationship between relative minimum wage and the proportion of the labor force working at or under the minimum wage.

This relationship is surprisingly linear, but it doesn't necessarily suggest job losses without a job level to use as a comparison.  Luckily, there are available measures of the number of workers in a non-minimum wage context to compare this with.

One comes from The Economic Policy Institute.  They issued a report on the minimum wage that included a count of the current number of workers earning $10.10 or less - about 21.3 million, or 13.5% of the labor force.  I can compare this number to the number of actual minimum wage workers measured the last time the minimum wage was at that relative level.  If the actual number of workers was significantly less than the current number, that would suggest that the high minimum wage caused some unemployment.

Here is the relationship, using Compensation per Hour.

The relationship is very tight, and the number of workers was much lower than 13.5%.  It is highly unrealistic to think that the level of employment at minimum wage will deviate from the long term trend to anywhere near what it would need to in order to assume that there will be no job loss.  This relationship can be used to estimate the number of job losses that a minimum wage increase will cause.

(Note that the relationship levels out below about 25% of the average hourly compensation, which suggests that this is essentially the natural minimum wage level.  It also suggests that the initial MW hike in 2007 probably had negligible disemployment effects, but that the 2008 and 2009 hikes had more typical effects.)

One reply to this problem would be that a minimum wage hike would lead employers to boost the wages of some workers to levels slightly above the new minimum wage, and that would cause the number of measured workers at or below a minimum wage of $10.10 to be less than the current number of measured workers at $10.10.  But (1) it is implausible to imagine that two thirds of workers currently earning between $10.10 and $7.25 would see wages increased to above the new MW level.  And (2) this would create a sort of asymmetrical reaction to MW hikes, where we would expect to see a deviation from the long term trend as employers made relative adjustments to workers' wages after a MW wage shock, but then the proportion of workers would revert back toward the trend as the new minimum wage level aged and declined in real terms.

The relationship we do see is very linear.  As the real MW level decreases over time, the number of MW workers follows the trend closely, and when MW was raised in 1990-91, 1996-97, and 2007-09, the number of workers moved right back up the trendline, with very little deviation.  This suggests a surprisingly efficient labor market.

As one last exercise, I have used a previous regression of the employment-population ratio against RGDP and minimum wage levels to estimate the total potential MW labor force.  I had found a correlation of the loss of .168% in EPR for each 1% rise in the ratio of the minimum wage to the average wage.  I added this estimate of the number of job losers to the historical measured number of MW workers.  (In all of these graphs, I am using the total number of workers at or below minimum wage.)

My regression would estimate a total decrease in employment of 4.5 million if the minimum wage were raised from $7.25 to $10.10 today.  That would leave 7 million workers unaccounted for, who could be workers who start out below the new minimum but receive raises to above the new minimum upon implementation, or could be unemployed workers that weren't counted by my regression analysis.  My regression was based on 2-year periods of serial MW-hikes, so the changes it was measuring would have included some period of time following the last hikes of a series where employment would have been recovering.  This would cause it to understate disemployment.  I think it might be realistic to expect that 7 million workers to be split between mostly workers who are bumped to above the new MW and some additional workers who would lose employment.

One could trifle with the precise estimates I am using, but I don't see how anyone could look at this very linear and long-term relationship, compare it to the current number of workers making $10.10 or less, and dismiss the expectation of significant job losses.

One note concerning the 21.3 million workers at $10.10 or less, estimated by EPI:  This is based on their assumption of no job losses from MW.  If one does accept my analysis here that the MW does cause job losses, then one would add the additional 1.3 million workers who are currently (as of 2012 data) unemployed because of MW to the total number of potential workers at $10.10 or less.  That would increase the EPI estimate of current sub-$10.10 workers to 22.6 million workers, and it would leave 8.3 million workers unaccounted for instead of 7 million workers.

 

Another follow up point:  My regression measured unemployment across the economy.  The graph above is measuring only MW workers.  This difference could be interpreted in several ways.  One could wonder if my regression is undercounting the job losses by even more than it seems.  One could also suggest that the MW hike would cause 12.8 million minimum wage jobs to disappear, but that substitutions across the economy would lead to the creation of 12.8 higher paying jobs to replace them.

 

Minor tweaks in interpretations can get us from point A to point Z, but this relationship looks regular enough and compelling enough that those interpretations have a pretty big gap to fill.

April Employment and EUI

Previously I had modeled long term unemployment by comparing long term unemployment durations to short term unemployment durations.  Here I have modeled long term unemployment rates as a linear combination of the shorter duration unemployment rates, to compare the results to the other model.  The results turn out to be similar.

Here is the 66 year history of the model.  The specification is based on the relationship from 1948 to 1991.  The deviations of the model in 1992 and 2002 coincide with the previous two recessions and the previous two EUI episodes, which were much less generous than the recent episode.

Next is the difference between the modeled Long Term Unemployment Rate (over 26 weeks) and the actual LT Unemployment Rate.  This is similar to the numbers I have arrived at through other methods.  And, I believe the story is similar for the current labor market.  The very long term unemployed seem to have a linear behavior that is not related to EUI policy at this point, because this group had probably mostly already timed out of the program.  As with my previous estimates, this estimate suggests that this group is shrinking by about 0.05% of the labor force each month.  So, if this continues, the unemployment rate should continue to decline by about 0.6% over the next year.

I think that this method does help show how the end of EUI has filtered through to recent declines in the unemployment rate.  Beginning in the fall of 2013, unemployment durations of 5 to 26 weeks acquired a new, sharply declining trend, which has continued through April.

Durations from 15 to 26 weeks might continue to decline by about 300,000 (about 0.2%) over the next few months, but that would bring it near to probable trough levels.  These recent declines in short term unemployment should filter through to long term (>26 week) unemployment, with 0.1 - 0.2% in future declines already in motion and another 0.2 - 0.3% decline possible if the 15-26 week category continues to decline.

I think this realistically adds up to declines by the end of 2014 of about a 0.4% UE decrease from the VLT group and another 0.4% UE decrease from the trends that began in late 2013 in shorter duration categories and the expected declines those trends should produce in the long term category.  That puts us at 5.5% unemployment by the end of 2014.

It is possible that these trends will dissipate, but there is no evidence of that happening now.  And there might be some snap-back from the April number, but I don't see any reason to expect anything above, say 6.4%, even figuring on some noise over the next couple of months as the downtrend continues.

Labor Force Participation

The Employment to Population Ratio has shown some slight momentum over the past couple of years, but labor force participation continues to show weakness.  This doesn't quite fit with my amended theory of the EUI.  I would have expected some weakness coming out of EUI as some relatively small proportion of long-term unemployed would have exited EUI by exiting the labor force.  However, if there is this bifurcation among long term unemployed, and if the end of EUI didn't really affected the behavior of the very long term unemployed, I wouldn't have expected there to have been much LFP weakness.  If the end of EUI mostly caused an exit from unemployment among unemployment durations of, say, 5 to 40 weeks, I would have expected a smaller portion of those beneficiaries to have left the labor force.  But, there does seem to be some weakness in LFP coincident with the end of EUI.

We might continue to see more of this weakness over the next few months before LFP finally settles back into a direction parallel to (or reverting to) the demographically adjusted trend.

April 2014 Employment Review

The noise went back the other direction this month & took us all the way to 6.3%.  Let's take a look at the parts & pieces.

First is unemployment by duration.  I suspect there was some statistical noise this month that moved unemployment down.  Here we can see that unemployment declined across durations.  But, all the excess unemployment is currently in the ">26 weeks" category.  The other categories are pretty much at normal levels.  They might have a few 100,000 to give between now and the cyclical peak, almost entirely from the 15-26 week category.  (As a percentage of the labor force, that dip in 0-4 week unemployment in December was the lowest level ever recorded.)  So, while it's a good sign to see them declining, there is likely to be some bounce-back there in the coming months.  Also, keep this is mind when reading the inevitable misreadings of statistical noise as desperate workers giving up.  That story doesn't match up well with the significant declines in short-duration unemployment.

That statistical noise looks like it helped the ">26 week" category, too.  I am not seeing any unusual decline in my estimated number of very long term unemployed this month, so I don't believe that this month's decline is strong evidence of an EUI effect, although the trends remain relatively positive, in general.  Most of the decline in unemployment over the past few months has been among workers under 45 years old.  There appears to be a correlation between older workers, EUI, and very long term unemployment, so the relatively small decline in unemployment among older workers also suggests that the unemployment decline is not particularly related to the termination of EUI.

I have been watching the churn in long term unemployment.  The gross number of people leaving long term unemployment over the past 3 months has been remaining strong at about 2 million.  It dipped down to about 1.8 million last month.  It recovered to about 1.9 million this month, so it didn't get all the way back to 2 million, but at least it's heading in the right direction.  January wasn't an easy month to compare against, either.  If this flow remains at 2 million a quarter, long term unemployment should be below 3 million by July.

It's a similar story if we look at this flow as a percentage.  It bounced back this month to above 35%, and the moving average continues to improve, but I would have liked to have seen a stronger shift in the trend coming out of the end of EUI.  As I mentioned yesterday, though, the problematic portion of very long term duration unemployment probably did not have much of a direct involvement with EUI by the end of 2013.  The re-engagement of that group of workers with the labor force will probably be a little more complicated and slow than we would like.  I still expect to see an acceleration in the exits from long term unemployment, but this is a process that will continue for many months.  Here's a graph of the duration categories back to 2006, for reference.  Keep in mind that population growth and demographic shifts probably will keep the longer duration unemployment levels from declining all the way back down to 2006 levels.

In the comparison between continued unemployment claims and the unemployment rate, this month obviously pulled us back toward the long term relationship.  But, as we can see in the graph, there is a long way to go, and this month's movement, in terms of this relationship, was not unusual.  The question will be how quickly this convergence happens.  It's hard to see that in this graph.

Here's a graph of the ratio over time.  This shows a few interesting things.  First, we can see how when a recession first affects the labor market, the ratio decreases, because an uptick in involuntary unemployment creates a sharp increase in unemployment claims.  The ratio then increases as sclerosis in the labor market leads to longer unemployment durations, so that the unemployment rate includes many workers who are not collecting standard UI benefits.  Then, the ratio declines back to typical levels under 3.0 as the labor market recovers.  Second, it is interesting to see that in this cycle, EUI was implemented before there was the typical cyclical increase in standard unemployment insurance claims.  Third, it would be unusual to see a decline to the level that would correspond to full recovery in less than about 18 months, at the soonest.  But, the current relationship is highly unusual, so it wouldn't be out of the question to see the return to a normal ratio level happen more quickly than it has in the past.

It really is pitiful, the extent to which the federal government damaged the labor market in 2008.  In June, they instituted EUI, which would have the effect of making the labor market less flexible because it would have some marginal influence on sticky wages.  Then, in July, they instituted the second in a string of minimum wage hikes.  So, in a context where Congress is clearly concerned about labor market health, they force a wage hike on the most vulnerable workers.  Talk about sticky wages.  Then, at the Fed meeting in September - a meeting where FOMC members explicitly state that they believe that EUI has already had a negative effect on the unemployment rate, the committee decides to inflict the labor market that has been freshly seasoned with significant wage inflexibility with a whopping deflationary shock.

Flows

Looking at flows, we can see some of the likely statistical favors this month's employment report received.  In every single pair of flows, this month's movement was favorable.  These tend to be very noisy, so this was likely a one-time improvement.  But, it is important to keep in mind that all these flow pairs are going in the right direction, and the previous 3 months have had noise-movements in the other direction, so that it is likely that 6.3% is a legitimate reading and the unusual movement was the result of the movements in the other direction in previous months.

Even with the drop in "NtoE", the cumulative flow from NtoE over the past 4 months is still very high.  The flows between U and E (green and blue) have been showing tremendous strength, and this month's positive movement is part of a well established and positive trend.  The decrease from "NtoU" follows several months of unusually positive readings compared to the longer decreasing trend.  And, this is counterintuitive, but a decrease in this flow is bullish.  We tend to see this through a narrative of desperate workers coming into the labor force.  But, it is just as likely that a decrease is the result of a lack of desire for work among those who are not in the labor force.  The fact that this pair of flows has a clear pattern of being low during booms and increasing during busts strongly suggests that something like the positive interpretation is dominant.  This set of flows is the one set that has been unusually high relative to other measures of the labor market - probably due in part to EUI - so a decline in this flow pair is something we should expect after the end of EUI.  The complicated relationship between EUI and very long term unemployment is evidenced by the high level of this flow pair compared to historical levels.  I'm disappointed that we haven't seen more decline in this flow pair since the end of the year.

Lastly, looking at the flows into and out of unemployment, we can see a little bit each of legitimate strength and statistical noise.  The extreme decline in unemployment owes partly to the unusual decline in the net "NtoU" movement.  But, we can see that this net flow has been unusually high since December.  The trend in this net flow has been flat since the beginning of 2011, and the cumulative net flow of the last few months is roughly in line with that trend.  Net flows from Unemployment to Employment have been trending up nicely since the beginning of 2011, which is a sign that the labor market is actually gaining momentum.  This month had a strong net flow here this month, but it wasn't highly divergent from trend.

I think the totality of these indicators suggests that 6.3% as of April 2014 is a good estimate of long term trends in the labor market.  Labor markets look relatively strong even though there is no clear indication yet of an EUI-related 2014 boost.