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The Much Hyped Speech of FRB Chair Yellen has Come and Gone With Little Impact.

The much hyped speech of FRB Chair Yellen has come and gone with little impact.  Yellen’s remarks were similar to that of the July FOMC Minutes which showed the Committee growing more aware that labor markets are approaching full employment albeit  the “underutilization of labor resources still remains significant.”

Yellen further commented recognizing a full recovery in the labor market is difficult given the “depth of damage” from the recession and structural changes.

The structural changes she cited include the aging of the workforce and other demographic trends as well as increased long term disability applications which she thinks may reflect “perceptions of poor job prospects.”

Yellen also commented about possible changes in the underlying degree of dynamism in the labor market and the phenomenon of “polarization,” that is the reduction in the relative number of middle skill jobs.

Commenting upon the growing long term disability rolls, the number of people added to disability rolls is greater than the numbers of jobs created since 2009.  Wow!  Is this a function of the ease as to which to receive long term disability benefits or is it a function of poor job prospects as Yellen stated?  I think it is a combination of the two.

Regarding the labor utilization rate, many times I have commented about the 36 year low participation rate (LPR).   Is the LPR declining because of the retirement of aging baby boomers as some are suggesting?

Referencing a February 2014 study by the St. Louis Fed, it stated today’s declining LPR is partially the result of baby boomers retiring but such is an insufficient explanation for the broad based reduction.

This study compared the LPR for people aged 55 years and up to the rate of those aged 25 to 54 concluding the LPR for those over 55 has maintained its pre-crisis (2008) rate but the rate for the adults in the prime working years (25-54) declined by 2.0%.

The St. Lois Fed further states the unemployment rate for the 25-54 cohort has declined to a little more than 6.0% from a peak of more than 9.0%.

Perhaps what is more shocking is the LPR of those aged 65 or older has increased substantially since the start of the recession.

I will argue the declining LPR for those aged 25-54 is the result of “polarization” or the reduction of middle skilled jobs.

As noted many times, the economy is considerably past the proverbial productivity hiring inflection point.  It was only four months ago the economy finally created all the jobs lost from the recession as the economy today is $2 trillion or 13.3% larger than the economic apex in December 2007.

In other words, it took 58 months to recover all lost jobs in the recession according to the BLS even though the economy increased its output by 13.3% during this period.  Historically lost jobs are recovered within 15 months after the recovery commenced.

I will continue to argue it is regulatory hurdles and animosity from Washington as major reasons as to why hiring has been so weak.

Friday’s WSJ referenced a study from the Philadelphia that stated 78.7% of businesses is their district have made no change to the number of workers they employ as a direct result of Obamacare and 3.0% are hiring more. More troubling 18.2% are cutting jobs.

The New York Fed had a similar response.  21% of manufacturers and 16.9% of service providers in this district stated they are cutting jobs because of Obamacare.

The Atlanta Fed found in an early month poll that 34% of businesses planned to hire more part time workers because of Obamacare.

The jobs that are being lost are these middle income jobs…aka the “polarization” phenomenon described by Fed Chair Yellen.

The mid-term election is about 75 days away.  As noted a gazillion times cash levels are gargantuan, cash demanding a more efficient use but will only be used more efficiently if confidence levels rise.  Will confidence rise if there is large and unexpected change in Washington?

As noted above, the economy is considerably past the proverbial inflection hiring point.  If confidence does rise I can argue there will be resurgence in these “middle income jobs,” the exact jobs that are not plentiful today because of government ineptness that has created hiring paralysis.

The economic calendar is heavy this week as numerous housing and manufacturing statistics, revised second quarter GDP, personal spending/income and a confidence survey are released.  How will this data be interpreted especially in the context of Yellen’s Jackson Hole speech?

Last night the foreign markets were up.  London was down 0.04%, Paris up 1.0% and Frankfurt up 0.99%.  Japan was up 0.48% and Hang Sang up 0.22%.

The Dow should open moderately higher on M & A and economic/earnings optimism.  The 10-year is up 5/32 to yield 2.38%.


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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.