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Making the Same Mistake Twice: Why the Fed Shouldn’t Raise Rates

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Many are convinced that the November Employment Report from the Bureau of Labor Statistics was positive enough to finally give the Federal Reserve Open Market Committee (FOMC) the room to raise interest rates.  The report extended the record straight months of job gains, and because the numbers for the previous months were adjusted upward, the report made the last two months more positive.

The problem with record strings of course, is that they have to end.  And, as they extend longer, the chances increase they won’t be able to continue the string.  Unfortunately, November had some grey clouds.  For one, manufacturing work, which had been recovering from its over correction during the downturn, showed weakness.  The strong dollar from the confidence the world is showing in the U.S. economy is also rising because of increased uncertainty in the Euro area.  But, U.S. manufacturing is facing a headwind from slow global growth that is hurting exports.  And, in particular, the slowdown in China is now showing in the dumping of Chinese steel and aluminum inventory on the global market.  A rise in interest rates will add speculative demand for the dollar that will exacerbate all these problems, adding one more straw onto the back of manufacturing.

But, November’s report was troubling for more reasons.  Despite a strong number of net jobs being created, they were only enough to keep the unemployment rate flat.  That is very puzzling.  The Council of Economic Advisers put out a reaction to the report to explain why it has proved difficult to increase the share of employed workers.  They mostly blame changes in the work force; an aging work force that is larger than the young work force means a decline in the active work force.  But, such an explanation is not consistent with key elements of the data.  Young workers also have a low labor force participation rate, much lower than in the past.  This means it should take fewer jobs created to lower the unemployment rate.  Yet, that has not been the case.  The new young job entrants are better educated than the older workers retiring.  This should help less educated young workers gain employment as they take up the jobs being left behind.  Yet, the unemployment rate for 20 to 25 year olds is stuck stubbornly high, and the share of 20 to 25 year olds holding a job stays woefully low.  Even without net job growth, if a retiring older work force is driving the numbers, then the younger workers should have great success.

But, the mistake the FOMC is most likely to make is to ignore the black unemployment rate.  Monthly changes in the Black unemployment rate show great variation, they rarely follow a smooth path.  Yet, after three strong months of job growth, the Black male unemployment rate took a sudden spike up.  While this often occurs because of variation from month-to-month in the labor force participation rate, in November the number spiked because the number of Black men reporting being employed dropped.  While the white male unemployment rate has stayed near 4.0%, the black male unemployment rate has not fallen to below 9.0%.  Typically black unemployment rates are twice that of whites.  So, this stubbornly high number is disturbing, and its spike is a bad sign.  Further, the unemployment rate for adult black college graduates remained stuck near the level of white high school graduates instead of moving toward the level of whites with associate’s degrees that normally occurs when the market truly tightens. So, these also are not good signs.

The mistake is to ignore weakening of the labor market for black workers, as happened in late 2007 and early 2008.  Black workers are the canary in the coal mine.  The lack of income growth, and the lower wealth of blacks, shows in increased debt to keep up with the expansion.  In this case, to meet the requirements of the job market, black automobile purchases have increased, but at the cost of rising debt, and as with the housing market boom of the 2000s, loans from unscrupulous lenders.  It makes the black community very vulnerable.  The best solution is a continued expansion that keeps unemployment low, and forces wages to rise so the resolution of the debt is through repayment from rising incomes.  But, if the labor market slows, and the most vulnerable workers lose their jobs, the debt will be resolved in defaults; this time from car repossessions.  As in 2008, this will not have an isolated effect.  Dumping thousands of new model cars on the market will depress new auto sales, which will hurt employment chances for everyone.  Let’s hope the FOMC isn’t going to make the same mistake twice.

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