Most investors would agree that the unemployment rate, which was reported to be 4.7% in May, isn't the best indicator of broad labor market health. It isn't a very good leading indicator either, considering that the last time it fell to 4.7% was in November 2007, just two months before the onset of the Great Recession. The Federal Reserve clearly agrees, which is why it created a more broad-based labor market indicator in 2014 to address the shortcomings of the unemployment rate.
The Labor Market Conditions Index, or LMCI, is comprised of 19 different labor market indicators. While this index accounted for the drop in the unemployment rate last month, it also accounted for the increase of more than 400,000 in what are called involuntary part-time workers. In other words, these are individuals that are looking for full-time jobs, but can only find part-time work. A complete list of all 19 indicators that comprise this index can be seen below.
The index decreased to a reading of -4.8% in May, which indicates deteriorating labor market conditions, and was the worst reading in seven years. While this index was initially introduced in 2014, the data series was compiled going back to 1976, so we can look at it in a historical context. What is notable in the chart below is that this deterioration began immediately following the Fed's initial interest-rate increase in December 2015.
If we take a longer-term view, as can be seen below, you will notice that the current downturn in the index looks very similar to the downturn that we saw in 2007. This corroborates the deterioration in a different series of data, which I introduced at the beginning of this year. In what I referred to as our "revision index," the rising number of negative revisions to the initial estimate of the number of jobs being created each month by the Bureau of Labor Statistics was a warning sign. This data is not one of the 19 components of the Fed's Labor Market Conditions Index. It told me in January that the labor market was weakening, when the Fed and the consensus of economists on Wall Street were asserting the exact opposite.
Why then do members of the Federal Reserve Board, as well as Fed Chair Janet Yellen, continue to suggest that the economy is at, or near, full employment, and that the economy continues to strengthen? I have no idea, but I am certain that they realize conditions have deteriorated since their initial interest-rate increase, and that they probably missed the opportunity to further normalize interest-rate policy. While jawboning financial markets over the past six months, they have been in a wait-and-see mode.
I am also certain that these conditions are not going to improve between now and the end of the year. As a result, I do not think that the Fed will raise interest rates in 2016.
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