On Friday, April 4 (the first Friday of the month), the March employment and unemployment numbers will be released amid much fanfare.  The February employment change was a negative 63,000, although subject to revision on Friday and again in May.  The January number was a smaller negative, and it too is subject to revision Friday.  The unemployment rate (calculated from a separate household survey) declined in February to 4.8 percent, but the celebration was muted because the decline resulted primarily from a decline in the labor force, presumably related to discouraged workers not job hunting.

I've been honored by an invitation to be a guest host during the second and third hours of CNBC's Squawk Box on April 4, during which time the employment numbers will be released.  I will be on the Squawk Box set if the Dallas rains don't intervene and ground me, as they did last time. 

I'm likely to embarrass myself trying to guess what the employment number will be.  I'll wait until the new claims for state unemployment insurance are released on Thursday, April 3, before formulating my guess, but I imagine it will be a small change one way or another, more likely down than up.

Partly to redeem myself for a bad guesstimate on employment, I hope to have an opportunity to call attention to an aspect of the employment numbers that I wrote about here on July 9, 2007, titled Job Angst: It's the Churn, Stupid.  The point of that posting was to call attention to a little-recognized, but important fact about the job numbers.

My point then, and again now (with more numbers) is that the net changes in monthly employment, even large net changes, are tiny compared to the gross changes in job gains and losses that produce the small net change.  A change of 100,000 net new jobs in March, in either direction, would likely obscure job gains and losses 20 to 30 times larger.  That is an important reason for people's angst about the job situation that seem out of proportion to the size of the reported job changes.  The job churn produces a swift undercurrent even under the best of circumstances.

Let me give you some numbers and calculations derived from a very useful series, but apparently not well known, from the Bureau of Labor Statistics, titled Business Employment Dynamics.  The numbers are for total private jobs only, and thus may not jibe precisely with the numbers you are familiar with.

First, let me make a broad generalization based on those numbers:

In recent years, the quarterly gross job gains and job losses have ranged roughly between 7 and 8 million, or between 2.33 and 2.66 million per month.  Compare that 2.33 to 2.66 million monthly average to the net job gains or losses each month that are usually under 300 thousand.

In 2004, there were 30.9 million private job gains and 28.9 million private job losses, for a net annual increase of 2 million or 171,000 per month.  The gross changes were roughly 14.5 times the net change.

In 2006, a weaker year for net job growth, 30.7 million new jobs were created while 29.1 million jobs were lost, for a net gain of 1.67 million, or 138.6 thousand per month.  That's roughly 16.5 jobs gained and lost for every net job gained.

The even weaker job market in 2007 raises that ratio further.  During the first two quarters of 2007 (the latest data available), 15.2 million jobs were created while 14.5 were lost, for a net gain of almost 700 thousand, or 117 thousand per month.  For each net new job created, over 22 jobs were gained and over 21 were lost.  

No wonder the angst about jobs and the economy seem to bear little relation to the job numbers reported on the first Friday of the month.

It's gross angst.

I gave the following brief (lightly edited) commentary on the dollar March 19 on BBC World Service.  See the link in the previous posting. Also see my Wall Street Journal op-ed on the dollar on March 8, also reproduced in a previous blog posting.

Lord, give us a strong dollar, but not just yet.

When rock and roller Buddy Holly was four years old, he insisted on playing his toy fiddle in his uncle's band.  It made a terrible sound; so his uncle waxed Buddy's bow.  He could still fiddle, but he made no sound.

Alan Greenspan waxed my bow when, as president of the Federal Reserve Bank of Dallas, I served with him on the Fed's Federal Open Market Committee for almost 14 years.  He wouldn't let me or other committee members, including himself, talk about the dollar.  That delicate task was reserved for the Secretary of the Treasury, who also tried to avoid it, for good reason.  The market always reacted badly.

Now that my bow is no longer waxed, I feel a perverse urge to talk about the dollar.  Unfortunately, my viewpoint currently differs from that of other "talking heads" on financial TV and Radio.  They want a strong dollar, by jingo, as if they could just order it off a menu with everything else they want, no matter their compatibility.  They worry, especially, about the dollar's recent decline against the Euro and the implications for U.S. inflation and prestige abroad.

I think the strong Euro will do more damage to Europe than our weak dollar will do to us.  The cheerleaders for a strong Euro may soon feel like the dog that finally caught the car. What now?

Normally, I prefer the advantages of a strong currency, but, by definition, all currencies can't be stronger than average.  Strong currencies help consumers hold down prices and keep the pressure on producers to remain competitive in the world market.  But, under current circumstances, I feel about the dollar what St. Augustine felt about chastity.  To paraphrase his famous prayer, "Lord, make our dollar strong, but not just yet."

For now, our weaker dollar serves us well in two principal ways.  First, by boosting our exports and discouraging imports, it provides a shot in the arm for our weak economy.  A smaller trade deficit will boost economic growth, and help us avoid or, at least, moderate a recession.  Second, we need to shrink our trade deficit in goods and services to slow the relentless flow of dollars abroad.

Each year's deficit adds that much more to the huge dollar holdings of foreign central banks and others and means greater foreign indebtedness for the United States.  The persistence and size of our trade deficit also lead to calls for protectionism, a cure worse than the disease.

Normally, a trade deficit would adjust automatically through a decline in the dollar.  That hasn't happened yet because the U.S. has been such a magnet for foreign investment.  Foreign capital inflows have kept the dollar too high for trade to adjust.  Only recently has the capital inflow diminished enough to allow the dollar to depreciate, and depreciation's positive impact on our trade is just now beginning.  We shouldn't interrupt that correction prematurely by trying to talk the dollar up, or by intervening in foreign exchange markets, neither of which helps for long anyway, if at all.

The dollar won't fall forever.  The lower it goes, the sooner foreign importers, and, especially, investors will return to take advantage of the bargains.  At that point, the dollar will rebound, but hopefully from a sounder basis of more balanced trade.  So, I repeat my prayer: "Lord, give us a strong dollar, but not just yet."

Bob was featured extensively on CNBC's Squawk Box, discussing the economy, the Fed's role in the buyout of Bear Stearns and the continuing role of the Fed in stabilizing the economy.  To view some of Bob's segments on the show, click here, here, here and here.  Bob also spoke with BBC World Service about the weak U.S. dollar, saying it could provide a shot in the arm to the economy by boosting exports and reducing the trade deficit.  To listen, click here.  In addition, Bob talked with Jim Blasingame, host of The Small Business Advocate Show, about some of the new tools the Fed is using to deal with current economic challenges.  To listen, click here. 

Ride me down easy, Lord

Ride me on down

Leave word in the dust where I lay   

 Billy Joe Shaver

People ask me, "How is he doing?"  How is Ben Bernanke doing as Fed Chairman?  Is he making it up as he goes, making monetary policy by the seat of his pants?

My answers are that he is doing quite well, thank you, after a slow start in the summer. But, from that first cut in the discount  rate through yesterday (Sunday), he has been right on, innovating (seat of the pants innovation) to make up for the fact that the traditional tools of monetary policy aren't well suited for the current crisis in financial markets.

This crisis is unique — literally.  It's a crisis of fear that you won't be repaid for loans you make and fear that your counterparties in large transactions may go belly up, or otherwise stiff you.  There is a massive shift from the absence of meaningful risk premiums to overly large premiums not only on risk but on instruments that hardly seem risky (like Fannie and Freddie-backed securities, for example).

Chairman Bernanke's creation of auctions for money to take away the perceived stigma of using the discount window was right on, as was the decision to liberalize borrowing and collateral terms and requirements.  The quick intervention over this past week-end to assure an orderly resolution of Bear Stearns was handled with excellence.

One issue I've heard no-one mention during this slow-moving train wreck is what the proper relationship between the Fed funds rate and the discount rate is.  During my tenure on the FOMC, the discount rate was at a discount much of the time, which was contrary to conventional wisdom dating back to Walter Bagehot's Lombard Street, which could have been titled as a guide to central banking in times of crisis.

Chairman Greenspan and the Committee looked forward to opportunities to restore the premium to the discount rate.  At the conclusion of that long process the discount rate was essentially pegged one percentage point above the target Fed funds rate.  After about three years of this passive status, the discount rate was largely forgotten by financial talking heads.

The Bernanke Fed was correct to focus first on the discount window and dropping the discount rate by 50 basis points.  Subsequent target reductions in Federal funds included equal reductions in the discount rate, thereby keeping the differential constant at 50 basis points. Sunday's move, in cutting the discount rate another 25 basis points puts the premium at only one quarter of one percent.

I assume that the choice of 25 basis points on Sunday was designed to dovetail with what Chairman Bernanke had in the back of his mind to recommend to the FOMC on Tuesday.  My experience tells me there was no open discussion of what Tuesday's decision should or would be, but the tone of the discussion probably gave all the members a clue as to what the Chairman is likely to recommend.

Not long ago, I thought the FOMC should either do nothing tomorrow or next to nothing.  That is no longer possible, and I now expect another large move.

Originally appeared March 8th in:

When I was president of the Dallas Fed, Alan Greenspan wouldn't let me, or other members of the Federal Open Market Committee (including himself), talk about the dollar. The dollar was so sacred, or so fragile, that only Treasury secretaries were allowed to discuss it — but convention silenced them too.

Treasury secretaries always retreated into ritualistic claims of having a strong dollar policy to maintain a strong economy, although economic theory doesn't necessarily support that causation. Reporters, presumably for sport and amusement, occasionally lured one of them into the dollar-talk trap, so they could then write about his naïveté for going there.

Now I'd like to say something provocative about the dollar. Here goes: While our currency, the dollar, may be sacred to you and me as an institution — it's ours out there competing with theirs on the world playing field — we shouldn't treat any particular dollar exchange rate as sacred.

A strong dollar usually serves us well, but occasionally, and temporarily, a weaker dollar serves us better. Dollar depreciation boosts our exports relative to imports and, right now, is our best hope for avoiding or cushioning a recession.

I prefer a strong dollar for eternity, but right now I feel about the dollar what St. Augustine felt about chastity. To paraphrase his notorious prayer, "Lord, make our dollar strong, but not just yet."

Currency strength is a more arbitrary concept than most people realize. For example, the Canadian dollar recently reached parity with the U.S. dollar. Parity means they trade one for one, dollar for dollar; yet the Canadian dollar is considered strong and ours weak.

Contrary to most talking heads and Treasury secretaries, strong currencies don't guarantee strong economies, or vice versa. Other things equal, a strong domestic economy stimulates import demand and weakens the home currency, as we have to sell more dollars to buy foreign goods.

The prospect of good investment opportunities at home and future currency appreciation, on the other hand, strengthens the currency by attracting foreign capital, which requires dollar purchases by the foreign investors, even if trade remains in deficit. This has been the U.S. pattern in recent years — a combination of large trade deficits and capital inflows.

The Japanese yen, which had been trading above 110 to the dollar, recently strengthened to below 110. That's relative strength, but when I joined the Fed in 1968, the rate was 360 yen to the dollar. Now that's real yen strength for you — from 360 to 110 — and real dollar weakness. But I wonder if the Japanese benefited from their strong yen and we were harmed by our weak dollar. I'm not so sure.

Current focus is on the strong euro relative to the dollar, but who really believes the strong euro is good for Europe under today's circumstances? The euro zone's unemployment rate has declined to a recent low of 7.2% while the U.S. unemployment rate is 4.8%. While inflexible labor markets are mostly to blame, I wonder what role an overly strong euro and overly tight ECB may have played. The strong euro's cheerleaders may soon feel like the dog that caught the car, if they don't already.

While the dollar may be sacred, no single dollar exchange rate should be. Exchange rates are a compromise among legitimate competing interests.

Consumers benefit from the greater purchasing power of a stronger dollar, and we're all consumers. But our interests as producers and workers are more concentrated. Exporters prefer a weak dollar (i.e., they benefit when foreigners can purchase more of our goods with their strong currency) while importers like it strong. We wisely leave it to the market to achieve the necessary compromise, but a compromise it remains.

Any exchange rate will hurt many market participants through no fault of their own, and give an unearned windfall to others. A good, efficient and productive business that has adjusted well to the prevailing exchange rate may suddenly go belly-up thanks to an adverse exchange-rate movement caused by a completely unrelated development on the other side of the planet. More ethanol production in Iowa may increase hunger in Africa.

The price of one currency in terms of another is a different animal from other market prices. The price of bread adjusts until the quantity of bread demanded equals the quantity supplied at that price. The price may turn against the consumer for various reasons, but mostly having to do with the supply and demand for bread. A market-determined exchange rate also adjusts to clear the market for foreign exchange — but that balance is likely to be a balance of imbalances.

Nevertheless, if a cleanly floating rate remains fairly stable for a while, we label it the appropriate or equilibrium rate and make it the baseline from which future movements are judged to represent strength or weakness.

An ideal equilibrium exchange rate might involve balanced trade in goods and services with the rest of the world. But, with independently motivated capital flows in addition to financing capital flows, there is no economic mechanism to produce that result. Equilibrium can just as easily involve large persistent trade deficits matched by large capital inflows (our situation) or large trade surpluses matched by capital outflows.

A trade balance with the rest of the world would still include huge bilateral imbalances with countries (China) or strategic goods (oil) — but the overall balance would halt the rapid accumulation of dollar assets by surplus countries and keep us from falling deeper into debtor-nation status. To reverse the process would require, not a trade balance, but a surplus. And a stronger dollar any time soon would delay or prevent these needed adjustments.

The late economist, Herb Stein, is famous for saying that, if something is inevitable, it will happen. I assume he meant sooner or later, because the large and growing current account deficit has made dollar depreciation inevitable for years now.

Yet that only recently began to happen because strong capital inflows, especially from Europe, supported the dollar and prevented the depreciation needed to increase exports and bring the trade deficit into balance. We weren't fully paying for our imports with exports of goods and services; so we made up the difference by selling bonds and other assets to strong-currency countries like China.

The accumulation of massive dollar reserves in China led to worry that they would diversify those holdings at some point, a diversification that would involve moving the dollar into other currencies, especially the euro — with such a sell-off depressing the dollar and leading to higher U.S. interest rates. Instead, the diversification so far has been from Treasury securities into private-sector dollar assets. To continue the current account deficit is to continue the fire sale of U.S. assets to foreigners.

My preference would be for dollar depreciation to reduce the current account deficit and slow the accumulation of dollar assets abroad. That process has recently begun. Exports of goods and services in December were up $2.2 billion from November while imports were down by the same amount, more than accounting for the annual December to December improvement in the deficit of only $1.5 billion. Hopefully, that reduction in the trade deficit will continue, but chances are the recent appreciation in the dollar from its lows will slow or halt that improvement.

The level of the dollar is important for trade. But for foreign investors, the level of the dollar is not as important as its expected future movement.

They want to get into U.S. assets when the dollar is cheap and get out when the dollar is dear. The more the dollar depreciates, the sooner it will be expected to reverse, and the sooner foreign investors will resume their participation in the most dynamic, creative economy in the world.

A premature strengthening of the dollar would slow needed trade adjustment and neutralize foreign trade as a source of domestic demand as we try to avoid a severe recession. Once again, Lord make our dollar strong, but not just yet.

The "Again" in the title above has two meanings.  First, the question is whether we may repeat the stagflation experience of the 1970s.  Will it happen again?  Second, my last blog posting was on stagflation, and, upon reflection, I need to try again.  I think it was correct (economically); but I got carried away by some issues of my student days.  Reminiscing took over, and I abandoned the KISS principle and became pedantic.  My apologies.  Let me do it again here in a more user-friendly manner.  But the serious reader might still do well to read the previous one first and treat this one as a summary review.

My main point is there are major differences between the 1970s and the current decade that make stagflation less likely now:

*The seeds of 1970s inflation were sown in the 1960s with the guns and butter (Vietnam and Great Society) approach of the Johnson Administration.  Inflation growth led to an ill-advised and counter-productive decision by President Nixon in 1971 to impose wage and price controls, which distorted prices and ultimately made matters worse.

*The decision to break the link between the dollar and gold in 1971, may or may not have been a beneficial move for the long run, but it probably did take a lid off suppressed inflation at the time. 

*The Arab oil embargo in 1973 was a supply restriction on a necessary commodity that both "pushed" some prices up, contributing to inflation, and weakened the economy generally because of reduced purchasing power for other goods and services.  This action alone contributed directly to both sides of stagflation, at a time when the U.S. economy was energy inefficient and vulnerable.

*In contrast, today's high oil prices are primarily demand driven, which, while it raises some prices and reduces purchasing power elsewhere, it also generates a different dynamic in the economy.  Think of supply and demand curves.  Given supply, higher demand increases both prices and output.  Lower supply increases prices but restricts output.  Hence, lines at the pumps.

*Another significant difference is in productivity growth, or growth in output per hour worked, which was much lower (by about half) in the 1970s than in the years since the mid-1990s.  Recent higher productivity growth has multiple benefits:  It allows higher wages without higher unit costs.  That means companies can pay higher wages without a profit squeeze, and the Fed has more leeway to "give growth a chance," i.e. allow faster output-income growth without triggering higher inflation.  Productivity growth raises the growth potential of the economy and increases the Fed's "speed limit."

[Footnote to the point above. Chairman Greenspan always emphasized that it wasn't higher productivity that benefited monetary policy, but an increase in the rate of productivity growth.  It had to be accelerating.  His emphasis here and elsewhere on the rate of change tempted me to nickname him "Mr.Second Derivative Man."]

*The Fed contributed its part to higher inflation in the 1970s because of faulty operating procedures.  FOMC members understood that "money is always and everywhere a monetary phenomenon" but they were trying to hit their money targets indirectly by hitting the Fed Funds target consistent with the desired money growth based on the econometric models.  The Fed Funds targets chosen weren't sufficient to slow money growth sufficiently to hold inflation down, as became evident when they changed to direct control of money growth in October 1979.  Another way to look at the error is that they thought the rising interest rates were a sign of monetary restraint when they were as much a sign of very strong underlying demand in the economy.  Presumably the FOMC is better now at distinguishing between the causes of a change in rates — supply or demand.

*With the strong demand and growing inflationary pressures from various sources in the late 1970s, monetary and fiscal restraint tended to raise unemployment more than curb inflation — at least that trade-off was less favorable then than it has been lately.  The major villain in the 1970s was insufficient downward price and wage flexibility, which makes rising unemployment too close a substitute for lower inflation. 

*As I just said, downward price and wage flexibility were relatively lacking in the 1970s:  Major industries had not yet been deregulated, including banking and finance, transportation, etc.  That was before the seminal event of President Reagan's firing of the air-traffic controllers, which shifted the balance of power between labor and management.  Wage increases greater than productivity growth, because of the monopoly power of unions and the government (minimum wage) are similar to an oil supply restriction in that the higher wages add to inflation while attempts to offset them with policy adds to unemployment.  So they got both.

This is my list.  It isn't complete, and I haven't proven all my assertions, but I think it gives some reassurance that stagflation is not necessarily in our near future because of huge differences in the economic environment.  But, then again, I could be wrong.