File It Under ‘You Can’t Make This Up’
I’m not a conspiracist, and because of that I am often placed in the tough position of having to defend the otherwise indefensible. The Federal Reserve is not a cabal of evil geniuses dedicated to bringing down the global order so as to create a new one with its Wall Street masters in complete control. They are instead a clown-show, a remedial class of halfwits and empty suits opining on topics they would in a just society be banished from entirely.
On occasion, however, they wander in decision far closer to the conspiracy position than is helpful for legitimate critique. One of those was their policy to discontinue M3 at a time when actually investigating M3 in full could have been globally profitable in the sense of maybe mitigating the worst aspects of 2008. Many criticized the central bank for trying to hide inflation, when in fact the Bernanke Fed was interested instead in disguising for as long as possible its own grave monetary ignorance (which could be subcategorized as hiding inflation).
In August 2014, to some mild fanfare, the Federal Reserve debuted its Labor Market Conditions Index (LMCI). The justification for such a statistic was its broad reach; as a factor model, it would seek to isolate outliers in favor (meaning greater weight) of those among its nineteen inputs that corroborated each other.
Within a few months, however, the LMCI began to suggest serious weakness that didn’t comport with the dominant everything-is-awesome narrative. Janet Yellen preferred the hope expressed in the unemployment rate, which by the middle of 2015 became that outlier statistics and therefore surely (we don’t know for sure, the guts of the LMCI have to my knowledge never been released) and increasingly isolated from the rest of the overall outputted number.
Having accepted that the LMCI was actually correct in suggesting looming weakness, as GDP following several revisions now corroborates in no uncertain fashion with a near-recession starting in Q4 2015, the statistic’s real transgression has been in the aftermath. Despite a now ridiculously low unemployment rate, having been low for nearly two years, the LMCI has failed to accelerate off the downturn. Its reward for this treachery?
As of August 3, 2017, updates of the labor market conditions index (LMCI) have been discontinued; the July 7, 2017 vintage is the final estimate from this model. We decided to stop updating the LMCI because we believe it no longer provides a good summary of changes in U.S. labor market conditions. Specifically, model estimates turned out to be more sensitive to the detrending procedure than we had expected, the measurement of some indicators in recent years has changed in ways that significantly degraded their signal content, and including average hourly earnings as an indicator did not provide a meaningful link between labor market conditions and wage growth.
Sometimes it is truly hard to defend the stupid from accusations of nefariousness. I have to believe this official reference to “detrending” was as described above; the unemployment rate is increasingly alone in its indication for robust growth, therefore as a factor model it would be given much less weight so long as nothing else agrees with it (such as wages and labor costs). It really does appear as if the Fed wants to believe in the unemployment rate no matter what.
What other choice do they have at this moment? As I wrote yesterday:
The media is still stuck on the idea of the economy being fixed, however, though policymakers have more than a year ago shifted to figuring out why it won’t ever be. Inflation for them is now the measure of who’s to blame, not what will happen.
It still doesn’t make them corrupt in the sense of immorality, just corrupt in the more openly desperate kind ideological rigidity so often demands. After all, it was hard to say the near-recession was “unexpected” when their own statistic warned of something like it ahead of time.
If the unemployment rate is an accurate picture of the economy, then wages will rise as will (they believe) inflation, therefore proving monetary policy did as good a job as ever possible. If the LMCI is right in its low, meandering rebound from the 2015-16 downturn, then the answer to “who’s to blame?” is narrowed to the people running the very agency that created the statistic in the first place. They are, after all, data-dependent.