Fed labor market Index

November 9th, 2015 10:37 am | by John Jansen |

Via Stephen Stanley at Amherst Pierpont Securiites:

The Federal Reserve Board’s Labor Market Conditions Index (LMCI) increased in October to +1.6 (anything above zero indicates that the labor market is absorbing slack).  Every month but one going back to March was revised higher, adding up to over 3 more points of improvement.  The Board only reports the index in change terms, but it is easy enough to convert the gauge into a level measure, which is what we really care about (i.e. how tight is the labor market today relative to past cycles).  With the October gain and the upward revisions, the level index, as I have calculated it, has moved up to -3.4.  That number by itself has no meaning, but it is helpful to compare the current reading with past cycles.  Here’s the chart:

There are two things that you can see:

1)      The current level of the index is quite high by historical standards.  In fact, the October reading is roughly at the 75th percentile mark over the history of the index (going back to 1976).

2)      The doves continue to argue that there is an immense amount of slack above and beyond what the classic U-3 unemployment rate would suggest, but the Fed’s own LMCI suggests otherwise.  The LMCI includes the labor force participation rate as well as the part-time for economic reasons tally, so all of the purported “extra” slack is reflected in this gauge, and yet the level form of the index has tracked the narrow U-3 unemployment rate quite well since the crisis.

The LMCI supports my view that the labor market is rapidly moving toward a pretty mature stage of the expansion.  In the past three cycles, the LMCI did not reach the October 2015 level until October 1987, June 1998, and December 2005.  Does anyone want to guess how many times the Fed had already tightened in each of those cycles and the respective levels of the funds rate at those dates?  Hint: in no case, is the answer is to either question zero!  I know, I know, there is that pesky little inflation issue.  That is certainly a fair point, but the labor market piece of the dual mandate, taken alone, indicates that the Fed is already woefully behind the curve.

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