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Tags: Janet Yellen | FOMC | Federal Reserve | jobs

Fed Losing Credibility as Factory Production, Labor Market Weaken

Fed Losing Credibility as Factory Production, Labor Market Weaken
Federal Reserve Chair Janet Yellen (Photo: AP file)

By    |   Wednesday, 08 June 2016 06:20 AM EDT

Whatever her other faults, and they are legion, Federal Reserve Chair Janet Yellen has impeccable timing.

On the day the Federal Open Market Committee actually voted to raise the irrelevant federal funds rate last December, thus signifying to the world the soundness of the economic circumstances, the Fed calculated that industrial production had contracted for the first time (for the month of November).

It was a significant shift, as factory output is one of the longest and most reliable economic accounts in existence. The appearance of a negative number at the headline is reserved almost exclusively for recession -- leaving the Fed to declare both recession and recovery on the very same day.

If that set up something of a debate or battle between competing narratives, it has only gotten worse for Yellen’s side.

Industrial production has since been revised lower such that the start of the steady contraction is now set two months earlier at September, and by the time the Fed “raised” rates (RHINO) industrial production had actually declined by more than 2 percent. That level in the historical data that has precluded any other cyclical condition but recession.

Time and again with each new and “unexpected” appearance of the negative sign, the refrain from policymakers and economists alike has been in unison: “but the labor market.”

With the Friday’s payroll report, even the unemployment rate takes on very different connotations. To which Chairman Yellen, unsurprisingly, replied on Monday as if the report never happened:

"I see good reasons to expect that the positive forces supporting employment growth and higher inflation will continue to outweigh the negative ones. As a result, I expect the economic expansion to continue, with the labor market improving further and GDP growing moderately."

Her comedic timing is just flawless.

Just in time for “labor market improving further,” the Fed released its May 2016 update to the Labor Market Conditions Index. The index is a factor model expressly produced so that monetary policy and policymakers would not be reliant upon just one metric for their analysis of the labor market; recognizing, as anyone with common sense, that the unemployment rate in this condition is very flawed.

The latest release is, as IP in December, the opposite of what Yellen says.

The index change for May was nearly -5, a further deceleration from April’s heavily revised -3.4. That suggests from the Fed’s own crafted labor quantification attempt the jobs market not only got worse but did so at an increasing rate.

And you have to in at least this one instance hand it to the regressions of the factor model, as in the past two cycles whenever the 6-month average turns negative the Establishment Survey does too. In the current case, though we don’t have a negative headline payroll print to match, this most recent decline in the LMCI certainly seems to match up with the trend in the monthly variation, almost predicting not just Friday’s disappointment but perhaps finally a negative sign in the very near future, as well (likely unleashing still future downward revisions to all of it).

Again, even the latest revisions (non-benchmark) were more egg to Yellen’s already spattered face. She still says the labor market is more improving than not, but now both the index and revisions to it are aligned squarely against her.

Yellen all but has to say the economy is improving because without her shaky, narrative voice there is truly nothing left to her economy.

If she doesn’t say the word “overheating,” and all the obfuscating mush that goes with it, then the media can’t report it as if it were the only fact of this economy. She should think about suing Ben Bernanke (and Alan Greenspan) for leaving her no choice but to dutifully play the idiot.

Jeff Snider is head of global investment research for Alhambra Investment Partners. To read more of his work, CLICK HERE NOW.


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Whatever her other faults, and they are legion, Federal Reserve Chair Janet Yellen has impeccable timing.
Janet Yellen, FOMC, Federal Reserve, jobs
Wednesday, 08 June 2016 06:20 AM
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