Monday, August 16, 2010

Labor Market confirms slowdown in the second derivative

Normally, I do not do data analysis, it makes me feel like a labrat, and I don't see the point since I am not a market economist anymore, but I was asked to interpret the unemployment numbers and always being your friendly neighborhood economist, I complied. And since I emailed the text below, I thought- why not post it as well?

One small addition is on seasonality; although you can use econometrics to weed out seasonality, there is a simple graphical approach as well:
The graph above, where I show changes in unemployment and non-farm unemployment from April to June for the previous few years, hints that the mom fall in April is more or less in line with seasonal averages for unemployment, but is far too large to be explained by seasonality alone for non-farm unemployment. Anyway, here's is my quick  unemployment take; I wrote the whole thing in 15 minutes or so, so feel free to point out to any errors, grammatical or conceptual alike...

Anyway, on to my take on the latest employment figures:

Unemployment and non-farm unemployment came in at 11 and 13.8 percent respectively in May. While these numbers look impressive on a year-on-year, or yoy, basis, most the 2.6 and 3.2 percent respective improvements is due to the weak base from last year. In fact, seasonal numbers look less impressive, as seasonally-adjusted unemployment remained unchanged from the previous month and seasonally-adjusted non-farm unemployment even registered a small decrease.

Overall, the figures show that the improvement in labor market conditions is coming to a halt. They are also consistent with the slowdown in leading indicators in May: PMI, capacity utilization, real & consumer confidence had all paused in the same month, reflecting that Europe's woes had somewhat spilled over to Turkey.

As for the future, in line with the recent improvement in the same leading indicators and the improvement in Europe, it is possible for the unemployment rate to pick up with its slow downward trend. But at the current rate and taking into consideration the seasonal trends in unemployment, it is quite unlikely that unemployment will touch the 10 percent target set by PM Erdogan some time ago.

Due to the lagging nature of labor market indicators and the mixed signals coming from other data, it is difficult to infer much on the implications of today's data the Turkish economic recovery. Forecasting has been tough of late due to the recent mixed data. For example, while leading indicators still look healthy, industrial production, usually a good predictor of growth, did decline 2.1 percent month-on-month in June.

As for monetary policy implications, today's data are supportive of the Central Bank's hold-for-longer strategy, and other statistics are far from indicating an overheating of the economy as well. Therefore, it is unlikely that the Bank will start raising rates before well into next year, even without taking into consideration the political economy considerations of starting a hiking cycle before the elections.

One complication that has escaped many analysts is that Turkish NAIRU might have moved as a result of the crisis. This would mean that the Bank does not have as much leeway as previously imagined, so it would be important to look for such signs in future releases. Therefore, despite being a lagging indicator and being released two and a half months late, unemployment still needs to be tracked carefully.

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