Perspectives Blog

Slack and inflation

Zach Pandl, Portfolio Manager and Strategist | July 21, 2014

Today’s low unemployment rate indicates modest slack in labor market, which implies earlier Fed rate hikes and/or more inflation risk. The decline in labor force participation in recent years now looks mostly structural. Investors should remain cautious around U.S. interest rate risk despite a solid first half of 2014. Excerpted from Zach Pandl’s newest whitepaper Structural weakness in labor force participation means there is less slack in th…

Steady as she goes

Marie M. Schofield, CFA, Chief Economist and Senior Portfolio Manager | April 7, 2014

The March labor market report was solid, with the overall private level of employment finally exceeding the pre-recession high. The Household Survey had the unemployment rate holding steady at 6.7%. A recurrent problem is the poor quality of job growth in terms of underemployment/part timers and wage growth. The March labor market report from the BLS can be characterized as solid and showing little weather effects and probably some catch-up fr…

U.S. rates — View update

Zach Pandl, Portfolio Manager and Strategist | April 4, 2014

…bility “targets” Taking each of these issues in turn: Slack: Today’s employment report was most notable for favorable supply-side news: although employment showed solid gains, measures of slack were unchanged or worsened. The labor force participation rate ticked up, and is now four tenths above its level in December. Average hourly earnings growth also slipped to 2.1% year-over-year. However, we would caution against reading too much into a sing…

U.S. rates – An intriguing six point three

Zach Pandl, Portfolio Manager and Strategist | June 9, 2014

…are focused on much broader measures of slack, and have perhaps put renewed emphasis on wages as well. For instance, a recent paper by economist Andrew Levin (previously Janet Yellen’s chief of staff) puts the degree of broad labor market slack at around 5.5 million full-time equivalent workers (see figures 1 and 2; these are our estimates using Levin’s methodology). Although FOMC members frequently talk about cyclical weakness in labor force par…

Gaps, not growth

Zach Pandl, Portfolio Manager and Strategist | February 25, 2014

Monetary policy is primarily about “gaps” not growth: the Fed is trying to reduce spare capacity in the economy, not bring about a rapid expansion per se. Despite concerns over cyclical weakness in labor force participation, the unemployment rate is sending similar signals as most other output gap proxies. The output gap improved despite a relatively slow expansion, suggesting weak potential growth. While it’s far too soon to revise any medium…

More heat than light

Zach Pandl, Portfolio Manager and Strategist | October 3, 2013

Recent comments from the Fed have provided relatively little information about future QE tapering decisions. Officials have expressed contradictory views on several major policy concerns, including the state of the labor market. If economic growth continues over the next few months, tapering may commence in December. Following their surprising decision to maintain the current pace of quantitative easing (QE), Fed officials provided more detail…

Dovish feathers showing through

Zach Pandl, Portfolio Manager and Strategist | April 14, 2014

…oader U6 unemployment rate, the “true” U3 unemployment rate would be around 7.0-7.5% instead of 6.7%. The drop in the unemployment rate is broadly consistent with other measures of economic slack from a verity of sources. The labor force participation rate has declined very sharply since 2007, but 45% of labor force exits represent retirements and 20-25% represents new disability recipients—categories that historically have seen very low re-entry…