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Why Yellen says there’s more to do in terms of the labor market

Brent Nyitray, CFA, MBA

Janet Yellen's first testimony as Federal Reserve Chair: Key points (Part 3 of 4)

(Continued from Part 2)

Janet Yellen recognizes the progress in the labor market but acknowledges there’s more to do

While the labor market has been steadily improving, it’s nowhere near where it was pre-recession. While the unemployment rate has been falling, the decline has been largely due to a drop in the labor force participation rate, which is part of the reason why this recovery has been so unsatisfying. The Fed anticipates unemployment to move steadily downward. However, given the drops we saw in the December and January reports, we could see a revision in this forecast at the March FOMC meeting.

On job creation

Yellen addressed the labor market this way in her prepared remarks:

  • “The pickup in economic activity has fueled further progress in the labor market. About 1-1/4 million jobs have been added to payrolls since the previous Monetary Policy Report last July, and 3-1/4 million have been added since August 2012, the month before the Federal Reserve began a new round of asset purchases to add momentum to the recovery.”

On unemployment

Yellen said the following on unemployment:

  • “The unemployment rate has fallen nearly a percentage point since the middle of last year and 1-1/2 percentage points since the beginning of the current asset purchase program. Nevertheless, the recovery in the labor market is far from complete. The unemployment rate is still well above levels that Federal Open Market Committee (FOMC) participants estimate is consistent with maximum sustainable employment. Those out of a job for more than six months continue to make up an unusually large fraction of the unemployed, and the number of people who are working part time but would prefer a full-time job remains very high. These observations underscore the importance of considering more than the unemployment rate when evaluating the condition of the U.S. labor market.”

Structural versus cyclical issues

When asked about the decline in the labor force participation rate, Yellen said that the issue is “mostly structural.” This means that demographics are driving the drop as much as the economy is. Of course, it’s difficult to separate the two effects, as they influence each other.

Yellen also stressed that she believes in the dual mandate, which directs the Fed to minimize inflation and unemployment.

Impact on homebuilders

Labor market conditions are the biggest driver of business for homebuilders like Lennar (LEN), D.R. Horton (DHI), PulteGroup (PHM), and Toll Brothers (TOL). In fact, labor markets are more important than interest rates. The first-time homebuyer is still having a difficult time getting their foot on the first rung of the ladder, which accounts for some of the difficulties we’ve seen in the sector. The return of the first-time homebuyer remains the last piece of the puzzle for the housing market.

Continue to Part 4

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