Benn Steil


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Why the Labor Data Point to a September Fed Taper

by Benn Steil and Dinah Walker
September 16, 2013


The August “jobs report is an important reminder that all this tapering talk is insane and dangerous,” pronounced Slate economics writer Matt Yglesias, reflecting the consensus of the econo-commentariat.  But as today’s Geo-Graphic shows, the report is actually wholly consistent with a September Fed taper.

“If the incoming data are broadly consistent with [the Fed’s economic] forecast,” Fed Chairman Ben Bernanke said in June, “the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year.” This was widely interpreted in the markets to mean a September taper, which jibes squarely with subsequent FOMC member comments (and Bernanke’s unwillingness to suggest that it didn’t).

The August jobs numbers were slightly weaker than the market consensus expectation, but the fall in the unemployment rate to 7.3% was one the Fed had in June not actually expected to see until the fourth quarter, as our figure on the left shows.  There was therefore no surprising negative news for the Fed in the unemployment numbers.

But is the unemployment rate the right number to be looking at?  “With the [labor force] participation rate still falling,” Reuters’ Felix Salmon pointed out, “the unemployment rate is less relevant than ever.”

Indeed, the participation rate—the percentage of the population in the labor force—fell in August to 63.2%, its lowest level in 35 years.  As our figure on the upper right shows, however, this decline is wholly on trend with the fall since 2001, and there is therefore no news for the Fed here either—the participation rate is precisely where the Fed should have expected it to be.

(The flattening out between 2003 and 2007 was driven by abnormally robust labor demand.  An aging population is over time consistent with a declining participation rate.  See our post from May 21 of last year.)

Importantly, as the bottom right figure shows, the decline in the participation rate was also not driven by a rise in discouraged workers—that is, the number of people who would like to work but have given up because of poor job prospects.

The bottom line is that if an imminent Fed taper is misguided, as Yglesias, Salmon, and others have argued, it is not misguided because of the August jobs report.  The Fed could not have gleaned anything more negative in it than they would have expected back in June.

CBO: Labor Force Projections Through 2021
Bloomberg: Unemployment Falling for Wrong Reason Creates Fed Predicament
Kahn: Our Long-Term Unemployment Challenge (In Charts)
Wonkblog: Three Reasons the U.S. Labor Force Keeps Shrinking


Follow Benn on Twitter: @BennSteil
Follow Geo-Graphics on Twitter: @CFR_GeoGraphics

Read about Benn’s latest book, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order, which the Financial Times has called “a triumph of economic and diplomatic history.”

Post a Comment 1 Comment

  • Posted by bouhan

    count me among the barbarian horde who thought the data and messaging had been signaling a taper – fooled yet again by our august central bankers. but the statement and minutes seem to suggest that, on balance, the risk of policy failure by the fiscal authorities meant the FOMC should stay the course. in light of today’s ‘deal’ on the debt ceiling/shutdown, i don’t see the fiscal authorities any closer to a policy environment that puts the FOMC at ease. so, more taper to come, then? to paraphrase a great sage: “do not try to price the taper – that’s impossible. instead, only try to realize the truth: there is no taper.”

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