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Home | Blog | Employment Growth, the True Money Supply, and Janet Yellen's Cold Feet

Employment Growth, the True Money Supply, and Janet Yellen's Cold Feet


Jeff Peshut has posted a nice article indicating the full dimensions of the stagnating recovery in labor markets.  Peshut focuses on the absolute level of employment and the rate of growth of employment rather than looking solely at the far rosier unemployment rate.  He shows that the employment growth rate was far lower during the Greenspan inflationary bubble years of   2003-2007  than  it was in the periods 1983 to mid-1990 and mid-1991 to 2000.  Furthermore, as Peshut points out, after almost five years of so-called "recovery" the level of employment has not even reattained its 2007 peak :

As a result of massive layoffs during the Great Recession, Employment reached a trough of about 129.4 million at the end of 2009 – a loss of almost 8.6 million jobs over two years.  This means that the U.S. economy lost 500,000 more jobs during 2008 and 2009 than it gained during the entire 2003 to 2007 growth period.  It’s no wonder that so many economic commentators refer to the period from 2001 to 1010 as “The Lost Decade”. Since the beginning of 2010, the U.S. economy has recovered about 7.5 million of these jobs – slightly less than 1.9 million per year — resulting in Employment of 136.9 million at the end of 2013.  This is still short of the 2007 peak.

Peshut also uses the Rothbard-Salerno TMS ("true money supply") aggregate, which is calculated by Michael Pollaro of  Contrarian Take at Forbs.com,  to forecast total non-farm employment.  Peshut observes:

Although TMS has been increasing over the past two years, its growth rate has been slowing, which is what really matters. The Fed’s reduction of bond purchases will likely decelerate growth of the TMS even further, setting the stage for the next credit crisis.  If the two-year lag between the TMS growth rate and the Employment growth rate holds true going forward, look for the Employment growth rate to begin to decelerate from its present rate during 2014. Extrapolating the TMS’s current trajectory into the future, TMS growth should approach zero in early 2015, setting the stage for a credit crisis near the end of 2015 or the beginning of 2016.

Of course, Peshut properly qualifies his projection, noting that the "trajectory of the TMS and the employment growth rate could change as a result of a change in the Fed’s current policy." As events unfold, there is much uncertainty about the Fed's future course which could suddenly veer toward ratcheting up monetary expansion.  Janet Yellen  seems to be getting cold feet in pursuing  further QE tapering even as the unemployment rate declined to 6.6 percent for January, a whisker's hair above the 6.5 percent target rate that the Fed had articulated in December 2012 for implementing serious monetary tightening.  In reaction to the January jobs report  released last week, however, Yellen expressed "surprise" at the weak jobs data, while unnamed  Open Market Committee officials "indicated that the target likely won't hold." 

Joseph Salerno is academic vice president of the Mises Institute, professor of economics at Pace University, and editor of the Quarterly Journal of Austrian Economics.

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