Eyes on: The Fed, worker shortages, NAFTA

Eyes on: The Fed, worker shortages, NAFTA

After a traumatic week, a Latin American policy tilt gets sidetracked as NAFTA re-negotiations start; major central bankers head to Jackson Hole for an annual confab as Fed consensus fades; U.S. jobs go begging


“[Whatever] you like in life, it’s going to be affected by living out of a truck.”
University of Pennsylvania sociologist and former driver Steve Viscelli, on one factor affecting the low supply of drivers.

North American trade: Three-way standoff  Negotiators for Canada, Mexico and the U.S. have begun discussions about readjusting the terms of the North American Free Trade Agreement (NAFTA). The renegotiation was a long-standing campaign promise of President Donald Trump, but Mexico has shown enthusiasm for adjusting the terms as well – due in part to the economic success brought about by the original agreement.  A resurgent Mexico has shown eagerness to replace manufacturing for U.S. companies with similar arrangements for China, possibly the result of joining the Trans-Pacific Partnership trade agreement, which now excludes the U.S.
 

Central bank roundup: Going to Jackson The Federal Reserve Bank of Kansas City hosts the annual economic symposium in Jackson Hole this week, attended by many key central bankers. This year, the challenge may be to how best to lay low. The week after the symposium, European Central Bank President Mario Draghi is scheduled to make a closely-watched statement about the strength of the euro and the future of the ECB’s massive bond-buying program, just as the region’s economy is showing signs of sustainable strength.  Draghi has vowed to stay silent; time will tell. 

Meanwhile, Fed Chair Janet Yellen’s views were on open display in the just-released minutes of last month’s Federal Open Market Committee meeting, which revealed divided opinions about the timing of the next rate hike. The Fed’s own guidance has retreated in recent months. Another hike in 2017 was once considered certain; now, the fed funds futures market is trading as if it won’t happen until March 21, 2018 or later. As the delay deepens and inflation stays muted, some economists wonder if the longstanding assumptions about the relationship between inflation and unemployment still hold.

One unwelcome wrinkle: the expected battle over the U.S. budget – and deficit ceiling – in October. With a tumultuous political environment as backdrop, the odds of smooth sailing seem long, and the fed funds market could be distorted by buyer unwillingness to own U.S. Treasuries if they mature in October or later.
 

U.S. job market: Tightening up Two indications of changing dynamics in the labor market.  First, long-haul trucking companies and shippers are having increasing trouble finding willing drivers. With Boomer drivers retiring and Millennials reluctant to sign on at today’s lowered income and increasingly demanding schedules, the annual driver turnover rate at large truckload fleets was 74% in Q1, and the American Trucking Associations estimate the business was short about 48,000 drivers two years ago (more recent estimates aren’t available). Companies are responding by improving cab design and paying bonuses to fill seats – including stock.

Second sign: summer youth unemployment has hit new lows. The jobless rate for Americans between16 and 24 years old fell to 9.6% in July from 11.5% the year-ago July. The figures only count those actively seeking but unable to find work. While that’s the lowest rate since 1969, it also reflects the fact that a far smaller share of young people are actually looking for jobs. That labor participation rate now stands at 60.6% last month, but that’s well below the 1989 peak of 77.5%.  Two possible reasons could be insufficiently strong wages and changing preferences for types of work. Time will tell if employers will – or can afford to -- address the shifting supply-demand balance the old fashioned way – by raising wages.

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