Commentary Directory
- Q1 GDP Growth Jumps 1.1% on Strong Personal Consumption
- A Strong March Leads to a Surge in Chinese GDP in Q1 2023
- Durable Goods Retail Sales Suffer from High Interest Rates and Wary Consumers
- Choppy GDP Means UK Should Avoid Q1 Recession
- Japanese Consumer Confidence Jumps to Highest Level in Over a Year
- The End of Summer Sees the End of Disinflation in Europe
- Labor Market Indicators are Starting to Unify on Easing in Hiring
- Inflation and Tight Financial Conditions Weigh on the German Consumer
- Euro Area Money Supply Contracts for the First Time Since 2010
- Dismal Economic Data Out of Germany
- Core Durable Goods New Orders See Gentle Uptrend in July
- More UK Data Pointing to Q3 Decline
- Whispers of a UK Contraction in Q3
- Japan's Core Inflation Resumes Uptrend in July
- Early July Economic Data Leads to a Sharp Increase in Q3 Growth Expectations
- UK CPI: Energy Inflation Crashes but Services Inflation is Still Sticky
- China's Weak Start to Q3 Means More PBoC Easing
- A Breather for the Eurozone as Inflation Hits Two-Year Low
- Germany's September CPI Report: A Clearer Picture of Inflation Trends
- US Manufacturing Demonstrates Resilience Amidst Volatility in August
- The ECB Prepares to Address Excess Liquidity Through the MRR
- Bank of Japan is Too Optimistic on Inflation
- The Bank of England Pauses in a Near Split Decision
- UK Inflation August Update: A Precursor to the Bank of England's Announcement
- Housing Starts Tumble in August Amid Rising Mortgage Rates
- US Retail Sales Grow at Fastest Monthly Rate Since the Start of the Year
- US Consumer Prices Surge in August Driven by Energy Costs
- August NFIB Survey Showed a Tough Environment for Small Businesses
- All Signs Point to a Weaker Labor Market in August
- Chinese CPI Trying to Buck the Deflation Trend
- Energy Prices Rise but the Core Disinflationary Trend is Maintained in September
- PPI's Quiet Rise and the Energy Elephant in the Room
- Small Businesses Grapple with Inflation and Financial Strain in September
- A Wacky September Jobs Report Shows Strong Labor Market
- A Look at the Fragile US Labor Market Ahead of the Nonfarm Payrolls Report
- Thoughts on GME and This Week in the Stock Market
- Record Home Price Levels Point to Strength in Post-Pandemic Economy
- The Stock Market Looks Overvalued, but It's Probably Not
- China GDP Growth Surpasses Expectations
- President-elect Joe Biden Introduces His "American Rescue Plan"
- Political Polarization Intensifies with Another Impeachment Along Party Lines
- Metal Demand Has a Bright Future in 2021 and Beyond
- What Happened to That US-China Trade Dispute?
- Civil Unrest, A Rising Threat to the 2021 Economy
- What's in the $900 Billion Relief Plan?
Yellen Aims for Full Employment
Jacob Hess
February 08, 2021
- Employment
- Policy
Newly promoted Secretary of Treasury Janet Yellen has been making her rounds marketing the new administration's economic plans. They include a bulkier stimulus package to build on the bill passed last December as well as bigger picture reforms like a $15 minimum wage. She made headlines this past weekend when she said, "I would expect that if this package is passed that we would get back to full employment next year" when discussing the stimulus package on CNN.
"Full employment" isn't just an abstract concept of the ideal state of employment. No, it refers to a specific level of employment that indicates that the economy is running at full capacity. The Bureau of Labor Statistics (BLS) has a specific definition for the term. It defines full employment as "an economy in which the unemployment rate equals the nonaccelerating inflation rate of unemployment (NAIRU), no cyclical unemployment exists, and GDP is at its potential." The BLS determines whether or not full employment is achieved based on what it calculates "potential GDP" to be and where actual GDP is in relation to it. An economy at full capacity is said to be using all its resources including its labor.
Using this definition, Yellen is claiming that if the $1.9 trillion stimulus package is passed, the economy will reach its full potential by 2022 which will increase capacity such that there is no gap in output. This indeed sounds like a bold claim. In 12 months, the public health situation will be a lot different with vaccines (hopefully) widely distributed and the vulnerable populations (hopefully) mostly protected. Regardless, the economy will have to recover from historic losses in employment including a -20 million monthly job loss in April and the highest unemployment rate of all time at 14.8% (which was arguably higher given a drop in labor participation rate).
This drop in unemployment has been more nuanced than in other recessions. It began optimistically as a furlough where workers were told that they had to stay home to obey public health recommendations. Therefore, the level of temporary layoffs rose more than permanent job losses. The ratio of permanently unemployed to total unemployed dropped from 22.7% in February 2020 to 8.7% in April 2020. The last two recessions since 1995 (in 2001 and 2007-2009) did not show this initial trend. However, the latest job report on January 2021 employment data showed that the ratio had surged higher to 34.6% which reflects the previous two recessions.
The leftover permanently unemployed after the temporary layoffs ease will emerge as the cyclical unemployment caused by the demand shock from the pandemic and resulting business losses. At the moment, the 3.5 million permanent job losers data point in the latest report looks to be that magic number. These job losses have been historically harder to resolve (the anemic recovery after the Great Recession is recent evidence). After the 2001 recession, permanent job losers fell at an average of -48,000 a month for the next 25 months. The Great Recession (which had more than twice the amount of permanent job losers than 2001) saw an average drop of -72,000. If the current economy were to follow the faster trend, permanent job losers would only fall -1.7 million in the next two years leaving a total of over 1.8 million at the end of 2022. At the slower pace, a drop of -1.2 million over the next year would leave us just under 2.4 million. Pre-pandemic levels averaged around 1.3 million.
Yellen's claim still looks bold, but that's just in hindsight. The US economy is currently experiencing the easiest monetary policy it's ever seen. On top of that, a $1.9 trillion stimulus bill looks imminent. The stock market at elevated levels is also communicating an expected increase in corporate earnings. In these conditions, things could be different and a fast recovery could be on deck.