The Clinton Herald, Clinton, Iowa

February 15, 2014

Employment numbers will rebound, at some point

David Helscher
Special to the Herald
The Clinton Herald

---- — A little mental trick I have used to get through long winters is to proclaim March 1 as the beginning of spring.

Officially, spring begins later, I know, but it is the perception that winter is over and spring approaches. The days do not move faster, but a little psychological trick helps me get through the final weeks of winter.

Inflation is a common topic. The huge expansion of the Fed’s balance sheet feeds fears of a surge in inflation. There are two generally used measures of inflation: the consumer price index (CPI) or the Fed’s preferred metric, the core personal consumption expenditures index deflator (PCE). For the fourth quarter, the PCE was just above the post-recession low at 1.1 percent while core CPI came in at 1.7 percent. These two metrics of core inflation generally exhibit a high degree of correlation while their growth rates do not necessarily match.

This gap is largely due to different weighting factors used for the underlying components of each measure. Shelter/furnishings/household supplies make up 46 percent of core CPI versus 24 percent for core PCE. Nine percent of core CPI consists of medical care vs. 24 percent of core PCE and transportation is 15 percent of core CPI and 7 percent of core PCE. A substantial increase in rents would have a more pronounced impact on core CPI than core PCE while the reverse would hold true for an increase in medical care. Other categories have smaller differences between the two metrics, but you get the point.

The Fed’s inflation target is 2.0 – 2.5 percent before they would consider raising short-term interest rates. It had previously announced this target as part of two measures that would cause a rise in rates in order for it to fulfill its dual mandate of price stability and full employment. The other measure is unemployment.

Again, the perception of the strength of the labor market depends on which measure you use. The establishment survey, based on employer employment filings with the government, has shown weaker than forecast job growth the past two months. Analysts have credited the weather with inhibiting employment expansion. The household survey, based on telephone interviews, jumped by over 600,000 in January. This measure is more volatile and is somewhat suspect as a household may claim employment, when it might be, more accurately, termed underemployment or self-employment. Officially, the unemployment rate is 6.6 percent as of the February jobs report. The labor participation rate also increased, although this was a move off the 35-year low.

Previously, the Federal Reserve had sent a soft target of 6.5 percent unemployment before acting on short-term interest rates. Recent comments from Fed members have added additional softness to this rate, allowing that the official rate may not be a true indicator of the health of the job market. A tighter jobs market would lead to faster wage growth, fairly anemic over the past decade. Wage growth can be a major factor in increasing inflation as measured by both the CPI and PCE as the U.S. economy is dominated by service industries.

Depending upon which measurements are used, perception of the economic recovery will be similarly colored. At some point, employment numbers will rebound and inflation will increase. Spring may begin with the flip of the calendar, but that alone does not melt the mountains of snow and ice. For me, spring brings warmer temperatures and, of course, weeds.

David Helscher is a senior vice president and trust officer with Clinton National Bank.