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Fed Abandons “Yellen’s Favorite” Labor Market Conditions Index (Because It Just Won’t Fit The Narrative?)

Courtesy of ZeroHedge. View original post here.

Once Janet Yellen's favorite indicator (until it started to turn down, and became just "experimental"), The Fed's Labor Market Conditions Index (a 19-factor smoothed model that has historically correlated extremely well to recession) has been abandoned because The Fed "believes it no longer provides a good summary of changes in the US labor market."

The Fed writes

As of August 3, 2017, updates to the labor market conditions index (LMCI) have been discontinued.

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.

As Mike Shedlock noted so poignantly, "Using similar rationale, the Fed ought to disband itself."

Of course,  this is not the first indicator that The Fed has abandoned (Secondary Market CD rates, M3), which got us wondering, what is that really sparked the decision to abandon this broad, less-noisy, cyclical indicator?

Perhaps this is why…

  1. As The Fed ended QE3, the growth rate in the US Labor Market peaked for the cycle.
  2. As The Fed began raising rates, the growth rate in the US Labor Market was plunging… and was in fact negative when The Fed hiked rates in Dec 2016.
  3. And now, as The Fed starts to shift 'dovish' on rates (preferring to focus on the maturing balance sheet), the US Labor Market is showing signs of life.

So, maybe, just maybe, The Fed killed this 'signal' because it exposed their entire lack of data-dependence?

Perhaps The Fed should take a look at this Labor Market Breadth Indicator?


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