Good News In Manufacturing Activity

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When economists try to predict future economic growth, they look to manufacturing output.  According to the Wall Street Journal’s Real Time Economics, the Federal Reserve reported a surprising rebound in output with a growth rate of 0.8 percent.  That almost erased the loss of 0.9 percent decline from the last month.  Overall, industrial activity rose by 0.6 percent.

Economic growth is highly correlated with the production of goods.  Over the last couple of months, we saw a decline in manufacturing, which caused concern that our economic recovery could be weakening.  However, February’s data gives credence that the decline could have been due to poor weather.

When industrial output rises, that indicates that businesses are ramping up production in anticipation of consumers buying more goods.  If more sales activity occurs, then that will lead to more hiring and incomes will rise.  That is why we should be encouraged by this data.

Not all of the news was good, though.  Home-related durable goods production fell for the second month.  Even though this could also be weather-related, it is also possible that this could be a precursor to a slowdown in home sales.  If that happens, then that will be a drag on economic activity.

When home sales fall, then that will lead to less spending on household goods and home furnishings.  Both are necessary to drive economic growth.  Therefore, let us hope that these last two months of decline do not become a pattern.

Only the future will tell us whether the trend in manufacturing will offset the slowdown in home-related goods.

Can monetary policy address U.S. long-term unemployment?

My latest contribution to Global Risk Insights examines whether monetary policy alone can cure the problem of chronic unemployment.  Key points include:

  • Can infer that new Fed Chair Janet Yellen will maintain current monetary policy due to continued labor market weakness, even though the unemployment rate is falling.
  • Impact of U.S. monetary policy can have negative consequences to emerging markets in Asia, Africa, and South America.
  • Questionable whether monetary policy can effectively address long-term unemployment.
  • Fiscal policy should be tailored to specifically address the needs of the low-to-medium skilled worker.

Global Risk Insights

With Janet Yellen newly confirmed as Chairman of the Federal Reserve, investors are now parsing her testimony to gain insight on the future direction of interest rates.  

One particularly interesting piece of her testimony involved the persistence of long-term unemployment and a high number of part-time workers: “These observations underscore the importance of considering more than the unemployment rate when evaluating the condition of the U.S. labor market.”

This statement is significant because previous Fed Chairman Ben Bernanke identified a threshold of 6.5% unemployment rate as a starting point for reversing bond purchases aimed at stimulating employment. Currently, the U.S. unemployment rate is very close at 6.6%, but it now looks as if the Fed is hedging its bets.

By continuing to purchase long-term bonds even if it is at a slower pace, the Fed will drive down the interest rate of the 30-year Treasury bonds. Since mortgage rates and…

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Do Jobless Benefits Hurt Or Help?

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This is a key debate that is covered in my Principles of Macroeconomics course.  Ben Leubsdorf of Wall Street Journal’s Real Time Economics cites two separate studies that suggest that extending unemployment insurance beyond twenty-six weeks caused the unemployment rate to rise up to 1.2 percent more.  They also qualify their findings by referring that this effect is stronger among higher educated workers.

Critics of extending jobless benefits will embrace these two studies and call for Congress to end extending unemployment insurance beyond 26 weeks because:

  • It causes people to slack on their job search because they have a safety net to delay reentering the labor force.
  • This effect was even present among higher educated workers, who conceivably would have an easier time finding a job than those with limited skills.

Supporters of extending jobless benefits will dismiss both studies and urge Congress to continue extending unemployment insurance beyond 26 weeks because:

  • Ignores the catastrophic effects of a financial crisis where firms were fighting for survival and not capable of taking on more payroll.
  • Neither study considered whether reentering the labor force quickly would result in underemployment where they find a job that is beneath their qualifications and skills.

If you believe that being out of work for an extended period of time will compromise the long-term job marketability of workers, then refusing to extend jobless benefits is the right course of action.  However, if you feel that the extended time is needed to find a job that matches their skills, then an extension remains necessary.

Yellen Infers Easy Money Strategy

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With newly confirmed Federal Reserve Chairman Janet Yellen, investors often parse her testimony to gain insight on the future direction of interest rates.  In last week’s testimony, Yellen inferred that easy money policy is still plausible because labor markets remain slack.  Here’s Jon Hilsenrath of Wall Street Journal’s Real Time Economics take,

“In her testimony to Congress Tuesday, Federal Reserve Chairwoman Janet Yellen said high levels of long-term U.S. unemployment signaled high levels of slack in the economy which will keep inflation low.”

First, Janet Yellen heads up the Federal Open Market Committee that influences interest rates through their monetary policy.  They have a dual mandate of stabilizing prices and achieving full employment.  While both are attractive, it is very difficult to choose a strategy that can accomplish both.

By saying that U.S. long-term unemployment remains high, while inflation is low, we can guess that Yellen will maintain an easy money strategy, as opposed to a tight money strategy.  This means that access to credit for consumers and businesses will continue to be relatively cheap, thus interest rates should not rise much based on the announcement.  It is hoped that this action will improve labor markets and alleviate the plight of the long-term unemployed.

The downside of this strategy is that it might continue to create turmoil in emerging countries.  Their concerns are rooted in U.S. exports being cheaper than theirs.  In order for them to compete more effectively, they might choose to devalue their currencies, which could result in rapid inflation, which erodes living standards and impedes growth.  Therefore, this policy can still be problematic even if current labor markets are keeping wages depressed, thus minimizing the impact of higher U.S. inflation.

With the U.S. economy so interconnected with the rest of the world, the long-term implications can be severe for the U.S., even if it might be bright in the near future.