What is the Federal Reserve Watching When it Comes to Employment Data?

There has been a lot of speculation about when the Federal Reserve will raise interest rates. The Federal Reserve has been clear that they are monitoring employment and inflation as their keys for determining when to raise interest rates. With the unemployment rate falling to 5.8%, questions have arisen over whether the employment side of the equation has reached the point to support an increase in interest rates. Although the unemployment rate is a popular economic data point, it is not the sole employment data point that the Federal Reserve is watching. Federal Reserve Chairman Janet Yellen has identified nine employment data points that she calls her “dashboard” for determining when the employment situation is back to normal. Bloomberg.com ran an article recently highlighting this dashboard. Here is a look at where her dashboard stands.

Nonfarm payrolls: For the Federal Reserve’s purposes, this is the three month moving average of the number of jobs added each month. From the Federal Reserve’s perspective, the more jobs being added, the healthier the employment situation. Remember that this number only measures the number of jobs being added. It does not measure whether those jobs are full time or part time or whether they are high paying jobs or low paying jobs.

Pre-recession level (2004-2007 average): 161,800

Worst level during the recession (March 2009): (826,000)

Current level: 224,300

Status: Fully recovered

 

Layoffs/discharges rate. This measures layoffs and discharges as a percent of paid employees. The theory behind this number is that a low layoffs/discharges rate shows that companies are not reducing employees. The message from this data point is that the lower the percentage, the healthier the employment picture.

Pre-recession level (2004-2007 average): 1.4%

Worst level during the recession (April 2009): 2.0%

Current level: 1.2%

Status: Fully recovered

 

Job opening rate: This is calculated as job openings as a percent of job openings plus paid employment. The theory behind this data point is that job openings lead to job hirings (i.e. companies would not list a job opening if they were not intending to hire someone to fill the opening). So, the higher the percentage, the stronger the signal that companies will be hiring more people.

Pre-recession level (2004-2007 average): 3.0%

Worst level during the recession (July 2009): 1.6%

Current level: 3.3%

Status: Fully recovered

 

Quits Rate: This measures the number of employees who quit their job as a percentage of paid employees. The theory behind this data point is that employees would not quit their jobs unless they were confident that they could find another job or unless they had already found another job. The higher the quits rate, the stronger the signal that the jobs market is healthy.

Pre-recession level (2004-2007 average): 2.1%

Worst level during the recession (February 2010): 1.3%

Current level: 2.0%

Status: Nearing a full recovery but not there yet.

 

Hires rate : This measures the number of employees hired as a percentage of paid employees. The Federal Reserve wants to see this rate increasing since the more that companies are hiring, the healthier the employment situation.

Pre-recession level (2004-2007 average): 3.8%

Worst level during the recession (June 2009): 2.8%

Current level: 3.6%

Status: Nearing a full recovery but not there yet.

 

Unemployment rate : This measures the percentage of the labor force that is unemployed. As I have discussed previously, the Bureau of Labor Statistics’ definition of unemployed is that you have been actively seeking work the prior four weeks from when the survey is taken (monthly). The lower the unemployment rate, the healthier the employment situation.

Pre-recession level (2004-2007 average): 5.0%

Worst level during the recession (July 2009): 10.0%

Current level: 5.8%

Status: Nearing a full recovery but not there yet.

 

U-6 Underemployment rate : This is a broader measure of unemployment/underemployment. It takes all of the unemployed, adds in discouraged and marginally attached workers as well as people working part-time who want full time work. The lower the underemployment rate, the healthier the employment situation.

Pre-recession level (2004-2007 average): 8.8%

Worst level during the recession (July 2009): 17.2%

Current level: 11.5%

Status: Approximately three quarters of the way to full recovery.

 

Long-term unemployed percentage: This is the percentage of the unemployed who have been unemployed for 27 weeks or longer. The lower the percentage, the healthier the employment situation.

Pre-recession level (2004-2007 average): 19.1%

Worst level during the recession (April 2010): 45.3%

Current level: 32.0%

Status: Approximately half-way to full recovery.

 

Labor Force participation rate : This data point measures the number of people in the labor force as a percentage of the working age civilian noninstitutional population. The higher the percentage, the healthier the employment situation.

Pre-recession level (2004-2007 average): 66.1%

Worst level during the recession (December 2013): 62.8%

Current level: 62.8%

Status: Recovery has not started. It is important to note that there is active debate occurring regarding the labor participation rate. One side argues that it is a cyclical issue and that as the employment situation continues to improve, people will return to the labor force and begin looking for work. This would raise the labor participation rate. The other side argues that it is structural because of retiring baby boomers permanently leaving the labor force as well as people who now live on social assistance and have given up looking for work. If it is structural, then “normal” may be at a far lower level than what existing before the last recession.

If you viewed each of these data points independently, you might draw different conclusions, depending on which data point you are examining. This is why Chairman Yellen argues that you need to look at all of the data points together. From that perspective, only 3 out of the 9 data points have returned to pre-recession levels. This is why the Federal Reserve maintains that the employment situation has not fully recovered yet and why they still believe that suppressing interest rates is still appropriate.

What the data may indicate, is that, since 7 out of the 9 data points are more than halfway to recovery, then the Federal Reserve may feel that the employment situation has improved enough to remove the language that they have used (i.e. a considerable period of time) in describing how long they will wait before raising short-term interest rates.

For those readers who love data and like to track the data themselves, all of the above data comes from the Bureau of Labor Statistics. The following data comes from their monthly employment report:

Non-farm payrolls

Unemployment rate

U-6 Underemployment rate

Long-term unemployed percentage

Labor force participation rate

 

The following data comes from the Job Openings and Labor Turnover (JOLT) report:

Layoffs/discharge rate

Job opening rate

Quits rate

Hires rate

 

 

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