Bloomberg - Unemployment may fall faster than both the Federal Reserve and the White House project as an aging population holds down the supply of workers and an expanding economy increases the demand.
The jobless rate will drop to near 7 percent by the end of 2012 from 9 percent in January, according to two former Fed officials, Peter Hooper and Neal Soss, now chief economist for Credit Suisse Holdings USA Inc in New York. The White House forecasts an 8.2 percent rate in the fourth quarter of next year, while Fed policy makers foresee a range of 7.6 percent to 8.1 percent.
“There will be a significant tightening of the labor market in the years ahead,” said Hooper, New York-based chief economist for Deutsche Bank Securities Inc. He said payrolls will soon start growing at a monthly clip of 200,000 to 300,000, compared with last year’s average monthly pace of 75,750.
A faster-than-forecast decline in unemployment during the next two years might be good for President Barack Obama’s re- election prospects and bad for Treasury bonds. Hooper sees the yield on the 10-year Treasury note rising to 4 percent by the end of this year and 5 percent by the end of 2012 as the Fed responds to falling unemployment and rising inflation by tightening credit. The yield stood at 3.4 percent at 5:01 p.m. in New York, according to BGCantor Market Data.
“Interest rates, on a cyclical basis, are going to go up,” Dan Fuss, who helps oversee $152 billion of assets as vice chairman of Boston-based Loomis Sayles & Co., said on Feb. 24 on Bloomberg Television’s “Surveillance Midday” with Tom Keene.
Obama Credit
Obama will get the credit if growth accelerates and unemployment plunges ahead of the November 2012 presidential election, said John Fortier, a research fellow at the American Enterprise Institute in Washington.
“If we see a significant strengthening of the economy, it will increase the president’s chances of winning re-election a good amount,” said Fortier, who has taught at Harvard University in Cambridge, Massachusetts, and the University of Pennsylvania in Philadelphia.
The jobless rate probably rose to 9.1 percent in February, according to the median forecast in a Bloomberg News survey of economists ahead of the March 4 Labor Department report. The rate fell to 9 percent in January from 9.8 percent in November, the biggest two-month decline since 1958. Payrolls likely rose by 193,000 last month, the survey showed.
Seeking Work
New York Fed President William Dudley said the drop in unemployment in the last few months reflected both an increase in hiring and a contraction in the labor force. The participation rate -- the proportion of Americans aged 16 and over who are working or seeking work -- was 64.2 percent in January, the lowest in almost 27 years, compared with 65.7 percent at the end of the last recession in June 2009.
“The key question is whether this decline is due to cyclical or structural forces,” Sven Jari Stehn, an economist with Goldman Sachs Group Inc. in New York, wrote in a Feb. 11 report.
If it’s the former, the participation rate should rise as the expanding economy entices discouraged workers back into the labor force. That would slow the forecasted fall in joblessness.
If it’s the latter, the participation rate may not increase much, if at all, and could even decline, accelerating any drop in the jobless rate.
The fundamental, long-term dynamic at work is the aging of America. As workers get older, they’re more likely to retire and drop out of the labor force. The Census Bureau projects that the proportion of Americans 65 years and older will rise to 18.3 percent of the working-age population in 2015 from 16.5 percent in 2010.
Staying in School
Other trends are in place as well. Young Americans are opting to stay in school longer, delaying the start of their working years. Female participation has crested. After rising to a high of 60.3 percent in April 2000 from 32 percent at the start of 1948, it fell to 58.3 percent in January of this year, according to the Labor Department.
Such long-term influences account for the bulk of the decline in the participation rate during the past few years, according to Stehn. He forecasts that the rate will rise only modestly as the economy strengthens, to 64.7 percent by the end of 2012, allowing unemployment to fall to 8 percent by then.
Soss sees no net rise in participation in the next two years and predicts the unemployment rate will be in “the low 7’s” by the end of 2012. In the two years before the recession began in December 2007, joblessness remained below 5 percent for 24 consecutive months.
Consensus Forecast
Most forecasters don’t see unemployment falling as far as Soss and Hooper do. The rate will average 8.3 percent in the fourth quarter of 2012, according to the consensus of 52 economists surveyed last month by Blue Chip Economic Indicators.
The rate will rebound to 9.4 percent in the second quarter of this year as workers re-enter the labor force, before falling to 8.6 percent in the final three months of 2012, said Edward Leamer, a professor at the University of California at Los Angeles and director of UCLA Anderson Forecast.
David Rosenberg, chief economist at Gluskin Sheff & Associates in Toronto, is even more pessimistic. He sees the unemployment rate rising to an average of 9.5 percent in the fourth quarter of this year and 10 percent in the final three months of 2012 as the economic expansion falters. Payroll gains “will be averaging something close to 100,000 per month this year,” he added in an e-mail.
Increased Efficiency
Companies so far have responded to increased demand for their products and services by getting more out of their existing workers through longer hours and increased efficiency. There is a limit, though, to how far that can go, Hooper said.
Home Depot Inc., the world’s largest home-improvement retailer, last month said it is hiring more than 60,000 temporary workers in the U.S., as well as adding permanent employees for the second year in a row. The Atlanta-based company is boosting staff as it prepares for the biggest selling season of the year, March through mid-June, Craig Menear, executive vice president of merchandising, said in a telephone interview Feb. 14.
Intel Corp., the world’s biggest chipmaker, announced Feb. 18 it plans to build a $5 billion microprocessor plant in Arizona and hire 4,000 employees in the U.S. this year. The workers will focus on product development, research and design, Chief Executive Officer Paul Otellini said.
Rising Hours
Average weekly working hours for private-sector employees rose in February to 34.3 from 34.2 in January and 33.8 at the start of the recovery, according to the median forecast of economists polled by Bloomberg. That would bring hours worked in line with the average of the past five years.
Productivity growth, meanwhile, slowed to a year-over-year rate of 1.7 percent in the fourth quarter of 2010 from 2.6 percent in the third quarter and a 49-year high of 6.3 percent in the first three months of last year, according to Labor Department data. Hooper forecasts it will settle at 1.5 percent in the next four years.
He compares the outlook for bonds to 1994. Treasuries lost 3.3 percent that year, according to data from Bank of America- Merrill Lynch & Co., as the Fed was in the process of doubling short-term rates to 6 percent to keep inflation in check. The jobless rate fell to 5.5 percent in December 1994 from 6.5 percent a year earlier.
Potential for ‘Selloff’
“The potential for a selloff this time around is substantially greater than we had in 1994,” Hooper said.
For the American Enterprise Institute’s Fortier, the comparison could end up being with 1984. The late President Ronald Reagan swept to re-election that year after the jobless rate fell to 7.2 percent in November 1984 from the post-World War II high of 10.8 percent in 1982.
If unemployment again falls that quickly, Obama will be one who benefits, Fortier said. “It will be very hard to beat an incumbent president if we have a very good economy,” he said.
With assistance from Chris Burritt in Greensboro, North Carolina, and Ian King in San Francisco. Editors: Christopher Wellisz, Melinda Grenier.
©washpost.bloomberg.com
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