MNI INTERVIEW: KC Fed Index Implies Jobless Rate Nearing 3%

Adjusting the unemployment rate to incorporate information from the Kansas City Federal Reserve's Labor Market Conditions Indicators measure suggests the labor market is tighter than the unemployment rate alone implies and is consistent with a 3.1% unemployment rate, KC Fed senior economist Andrew Glover told MNI.

The LMCI-implied unemployment rate is below the Bureau of Labor Statistics' official 3.8% rate and "certainly could" go under 3%, said Glover about updated analysis for February data, adding that it is likely to continue to fall reflecting that activity has increased. "The LMCI essentially says labor markets are stronger than the unemployment rate alone would tell you."

"Currently, the LMCI's activity has fully recovered and importantly in terms of thinking about near-term expectations or where things are trending momentum has come down a bit over the last four months, but it's still positive and it's still pretty large, historically speaking, suggesting that these measures see further improvements possible for the labor market," said Glover, who has conducted the analysis with Jose Mustre-del-Rio.

"That's essentially because the LMCI looks at the unemployment rate, but it also looks at the job finding rate and that was very high and it looks at the quits rate," he said. "A high quits rate signals a healthier labor market than maybe the unemployment rate alone would suggest."

The KC Fed's LMCI gives two monthly measures, activity and momentum, based on 24 aggregate variables. A positive value indicates that labor market conditions are above their long-run average.

(See: MNI INTERVIEW: Job Mkt Tighter Than Last Boom-Chicago Fed Econ)

NO WAGE SPIRAL

Fed officials have often cited the LMCI as one of the leading indicators suggesting a tight labor market. Some former Fed officials have noted the LMCI and the unemployment rate are highly correlated, with a 0.92 correlation coefficient between the unemployment rate and the LMCI.

Still, Glover said the LMCI offers evidence against a wage-price spiral explanation for recent inflation and pushed back against the notion that recent inflation is due to the labor market.

"It's not really that the inflation is coming from wage pressures then pushing up prices, but input costs and other dimensions pushing up prices," he said. "It's consistent with other cost channels pushing up inflation rather than others in labor markets."

"Historically, the only time that the labor market measures from the LMCI are really strong predictors of price inflation would be situations where momentum is negative," he said. "Currently it's positive and it's as positive as it was before the pandemic and so according to the LMCI the effect on the inflation is not coming from the labor market conditions."

The FOMC's March projections saw unemployment reaching 3.5% by the end of the year. Total nonfarm payrolls to be released Friday are expected to grow by 480,000 in March, according to the Bloomberg consensus, lowering unemployment to 3.7%.