"Kee Points" with Jim Kee, Ph.D.

According to the Bureau of Labor Statistics, 227,000 jobs were created in the month of January 2017,which was far better than the 175,000 new jobs expected by consensus surveys. Wage growth (average hourly earnings) was disappointing, which is consistent with a labor market that has more “slack” than you would expect given the 4.8%unemployment rate. As a basic concept, the labor force is defined as the members of the population that are either employed or unemployed but actively seeking employment; people who are neither employed nor seeking employment arenot in the labor force. The story here is that the labor force participation rate — the percentage of the population that is either employed or unemployed —has been declining since 2000, and this decline has been accelerating since the Great Recession. That would lead to a falling unemployment rate (the number of people looking for a job but unable to find one) even with no new job creation. Most economists expect the labor force participation rate to start moving back up as growth and hiring expands and more people re-enter the labor force. That increase in the participation rate could also keep the unemployment rates from moving lower, even if job creation stays strong. This is all based upon a cyclical view of unemployment, by the way. The structural view, in contrast, argues that fundamental transformations in the economy have driven the participation rate down (demographics, skill mismatches, etc.), so it is unlikely to materially rise back up any time soon. There is probably some truth to both the structuralist and cyclicalist views.  


The jobs number matches the Institute for Supply Management (ISM) Manufacturing and Services Purchasing Managers’ Indices (PMIs) for January, which were also released last week. Both came in very strong (46% and 57.2% respectively),indicating GDP growth in the 3% to 4% range based upon historical relationships. Those estimates have been running a little high during this expansion, and I prefer the Atlanta Federal Reserve’s GDP Now estimate, which is currently measuring 3.4% GDP growth so far (the New York Fed’s model is at2.9%). That would be pretty good for a first quarter, because historically the first quarter of the year is the lowest on average. Stocks have responded positively, punctuated with declines driven by signals of policy uncertainty coming from Washington. 


Interestingly,the Eurozone economy has also been exceeding expectations, with 14 consecutive quarters of growth, strong sentiment, and unemployment at least down to single digits (Financial Times). And speaking of Europe, European Central Bank President Mario Draghi expressed concerns Monday regarding the Trump administration’s plans to roll back the 2010 Dodd-Frank financial regulations. Nobody really knows what form such deregulation would take (as Draghi pointed out), but I can say that the legislation has far fewer advocates among economists than it did when it was first passed. Jeb Hensarling, chairman of the House Financial Services Committee, recently introduced the Financial CHOICE Act to reform Dodd-Frank. The idea is to increase bank capital, which would decrease the vulnerability of banks to runs that would threaten the entire banking system (“systemic risk”). In a nut-shell, the act would rather cleverly allow banks to voluntarily opt out of or be exempt from a lot of Dodd-Frank regulation by increasing their capital, which can be done by issuing equity shares (which could dilute the shares of existing shareholders) or cutting dividends for a while in order to retain cash and build capital. Economist John Cochrane points out that the cleverness in the act lies in the fact that it could lead to less regulation without entirely repealing and replacing Dodd-Frank: “Would you rather be free to do things as you see fit and not spend all week filling out forms? Then stop whining, issue some equity, or cut dividends for a while.” (Chicago Booth Review). I like any bank regulatory simplification that sounds less divisive than “repeal and replace”!