U.S. Labor Market Conditions Index at Six-Month Low

March 9, 2015

Now that an upward trend in the federal funds rate is closer at hand, central bank forward guidance regarding policy normalization has become less specific, less time duration-oriented, and more data driven.  Two types of data matter most, the labor market and inflation.  On the first of these criteria, policy guidance has also been modified from a stress initially upon the unemployment rate to a more eclectic approach that considers a wide variety of labor market dimensions, and to synthesize these elements of labor market conditions, the U.S. central bank has compiled a summary statistic, which is reported monthly and known as the labor market conditions index.  The LMCI in February had a value of +4.0, down from 4.8 in January, 7.1 in December, and an average of 6.9 in November-December.  The latest reading represents a six-month low; +3.0 last August was the most recent score to be even lower than February’s.  By comparison, the low-point during the Great Recession was -39.6 in December 2008.  +4.0 matches the level of labor market conditions as long ago as December 2012, and is well below the best post-Great Recession level of +11.6 back in December 2012.

The LMCI includes 18 other labor market indicators in addition to the unemployment rate.  These are the labor force participation rate, the percent of the labor force working part time for economic reasons rather than because of personal preference, the hiring rate, the job quit rate, the percent of the population in private employment, the percent of the population working for government, the percent of population in temporary work, two measures of average hours worked each week, average hourly earnings, posted job vacancies, the transition rate from jobless to employed, jobless insurance claims, job losers unemployed less than five weeks, job leavers unemployed for less than five weeks, and survey diffusion indices covering the perception of job offers being plentiful or hard to get, the difficulty of filling vacancies, and company hiring plans.

Financial markets reacted strongly last Friday to news of another 295K increase in U.S. nonfarm employment, a drop of 0.2 percentage points to a new low for the move in unemployment of 5.5%, and a downtick in the labor participation rate.  The broader lens used by the Federal Reserve staff for assessing overall labor market conditions, which gets reported on the Monday following the Labor Department data release, in fact went down.  Because the LMCI is less timely than the monthly labor force survey and due to a frequent revision of historical LMCI statistics, however, it’s doubtful that the LMCI will ever acquire the cult market following of the Labor Department’s labor force survey even if the LMCI proves to be a better predictor of the future path of central bank rate normalization.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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