woensdag 8 oktober 2014

The real picture beneath the strong jobs numbers

We recently got news about the outstanding jobs numbers. The U.S. economy added 248000 jobs in September 2014 and the unemployment rate dropped to 5.9% (see chart below from FRED). The correlation between the unemployment rate and the Fed funds rate suggests that an interest rate hike will soon happen in 2015. But here is why that can't happen.

If we look deeper, we see that most of these added jobs are in the category of 55-69. This tells me more and more older people are applying for jobs because they are forced to do so due to a decrease in living standards. Moreover, the labor force participation rate has been falling. The correlation between the labor force participation rate and unemployment rate paints a different picture to me. Normally, when the labor force participation rate drops, the unemployment rate would go up, but this is not the case. So something fundamental must have happened after 2008. I believe it's due to discouraged workers giving up and leaving the labor force.

Wages aren't going up, which means there is no inflationary pressure yet. This tells me there is no reason for the Federal Reserve to increase interest rates soon, especially when the U.S. dollar index has soared almost 10% in 3 months.

On top of that, we got a lot of bad economic news this week, which suggests the Federal Reserve will be reluctant to step on the brakes.

Read all of it here.

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