Wanting Work Makes a Difference

As the Fed considers the precise timing of tightening monetary policy, a key consideration will be how many Americans want to get back to work. Monetary doves found an olive twig amid the floodwaters last week when the labor force participation rate increased slightly.

April 09, 2014    |    By Scott Minerd

Global CIO Commentary by Scott Minerd

When exactly the Federal Reserve begins raising interest rates will unfold as a battle between monetary policy hawks and doves which will play out over the coming year or more. Inflation appears now to be the Fed’s primary consideration, but how quickly the American economy reaches full employment will also be of significance. On inflation, monetary hawks want to stay ahead of rising prices for fear of losing control and having to raise interest rates even higher to regain price stability, while doves do not want to act until inflation is evident. On employment, the current focus for Fed hawks and doves is the labor force participation rate. Hawks believe the economy has fundamentally changed, that the downward trend in labor force participation since 2007 is structural and that frustrated long-term job seekers lack the needed skills. Doves believe roughly one third of the decline in the participation rate is cyclical, and that jobs will return as the economy heats up.

If the rise in U.S. labor force participation proves to be persistent, it could push back when the #Fed would have to raise rates.


Looking at the economic data through that prism, the specifics of the March jobs report were certainly interesting. Beyond the unchanged 6.7 percent U.S. unemployment rate for March, the most important aspect of the report may have been the increasing labor force participation rate, which rose 0.2 percent to 63.2 percent. For doves, this was a small olive twig, a sign that the flood of unemployment is finally receding. Paradoxically, however, as more Americans return to seeking employment and as the work force grows, the more time it will take for the economy to reach full employment.

The Fed believes the natural rate of unemployment is somewhere around 5.5 percent and so an argument can be made that policymakers will not raise rates until we reach that level. Getting to an unemployment level of 5.5 percent is highly dependent on how many people are actively participating in the labor force. If the participation rate returns to its previous downward trend and job growth continues at about 200,000 jobs monthly, the unemployment rate would drop below 5.5 percent during the second quarter of 2015. However, if the participation rate increases by a single percentage point, full employment is unlikely to be reached until 2016.

The pattern of recent months of a rebounding participation rate will add weight to the dovish position if it persists. Whatever happens, investors would be well advised to keep an eagle eye on the participation rate.

The U.S. Participation Rate and Employment

The U.S. labor force participation rate hit a 36-year low in December, but since then has turned around, rising 0.4 percentage points, and is showing evidence of stabilization after a 3 percentage point decline over the last four years. Whether the recent increases are temporary or a sign of a broader trend are crucial for the outlook on monetary policy, since changes in participation have a large impact on unemployment. If the participation rate stabilizes or even rebounds, the pace of decline in the unemployment rate could slow, pushing back the date when the Federal Reserve begins to increase interest rates.


Source: Haver Analytics, Bloomberg, Guggenheim Investments. Data as of 3/31/2014. *Note: In our flat participation rate scenario we assume the participation rate remains at 63.2 percent. The participation rate decline continues scenario assumes the participation rate falls by .025 percentage points per month. The participation rate rebounds scenario assumes the participation rate increases by .02 percentage points per month. We assume monthly employment gains of 200,000.

Economic Data Releases

U.S. Labor Market Shows Signs of Firming

  • Non-farm payrolls increased by 192,000 in March, slightly under the consensus forecast of 200,000. However, the prior two months were revised by a combined 37,000. Gains were broad-based, with only manufacturing and federal government employment falling.
  • The unemployment rate remained at 6.7 percent, however, the participation rate continued to rebound from December’s low.
  • A gain in average weekly hours to 34.5 from 34.3 was offset by flat average hourly earnings.
  • Job openings made a new high in the February JOLTs report, reaching 4.17 million, the highest in six years. The rates of hiring and quits were unchanged.
  • Initial jobless claims rebounded, up to 326,000 for the last week of March, an increase of 16,000.
  • The trade deficit widened more than expected in February to $42.3 billion as imports rose for a third straight month, led by autos.
  • NFIB small business optimism rebounded in March to 93.4, led by expectations of higher sales.
  • The ISM non-manufacturing index declined to 53.1 in March from 53.5 previously. Forecasts had expected a gain.
  • Wholesale inventories were up for an eighth straight month in February, rising 0.5 percent.

Euro Zone Retail Sales Surprise, Data Mixed in Asia

  • Euro zone retail sales surprised in February with growth of 0.4 percent with only four countries posting negative figures.
  • Industrial production in Germany rose for a fourth consecutive month in February, up 0.4 percent.
  • German exports fell more than expected in February, by1.3 percent, following January’s strong 2.2 percent gain.
  • The U.K. services PMI decreased for a fifth consecutive month in March, down to 57.6 from 58.2.
  • U.K. industrial production posted a strong 0.9 percent gain in February, the best since last June.
  • China’s non-manufacturing PMIs were mixed in March. The official PMI fell to 54.5 from 55.0 and the HSBC services PMI increased to 51.9.
  • Japan’s economy watchers survey of current conditions jumped to 57.9 in March, the highest since the survey began in 2000. However, the outlook index continued its three-month plunge, reaching the lowest level since the aftermath of the 2011 earthquake.


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