The Problem with Janet Yellen's Recovery Outlook

"Today, we are starting with very low inflation. Core PCE price inflation has averaged just under 1.5% over the past 12 months, which is already below the 2% rate that I and most of my FOMC colleagues consider an appropriate long-term price stability objective. With slack likely to persist for years, it seems likely that core inflation will move even lower, departing yet farther from our price stability objective.

"From a monetary policy point of view, the landscape will continue to present challenges. We face an economy with substantial slack, prospects for only moderate growth, and low and declining inflation. With our policy rate already as low as it can go, it's no wonder that the FOMC's last statement indicated that "economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

"I can assure you that we will be ready, willing, and able to tighten policy when it's necessary to maintain price stability. But, until that time comes, we need to defend our price stability goal on the low side and promote full employment. Thank you very much."

It's a long speech, well worth a read in its entirety. Unlike much of the praise Bernanke seems to heap upon himself (see Orwellian Madness "Bernanke Saved The World"), Yellen's speech feels genuine.

Moreover, Yellen doesn't sugarcoat the grim jobs picture or the credit problems that are ahead. Indeed what she's describing seems more like an L-shaped recession than a U-shaped one. In contrast, I often wonder if Bernanke really believes what he's saying or if he's simply trying to absolve himself of blame, just as I think Greenspan does.

On April 8, 2008, I made the Case for an "L" Shaped Recession and I don't see any reason to change that stance.

Certainly the recession has already gone on longer than most thought. Although we're coming out of recession now, it's important to note that Yellen is calling for "another so-called jobless recovery."

Well, a jobless recovery when unemployment is at 5% is one thing; a jobless recovery is another thing indeed when the rate is 10%-11%.

For more on jobless recoveries, please see Dismal Unemployment Situation in Chart Form.

Here's one of the charts from the article.

Job-Loss Recovery


Click to enlarge

No Driver for Jobs

In the 1980s and 1990s, an Internet boom created massive numbers of jobs. Between 2000 and 2007, a housing boom created massive numbers of jobs. I keep asking what the next driver for jobs will be. Inventory replenishment won't do it, nor will one-time stimulus efforts like road-building.

Nothing on the energy front seems capable at this time of producing such a boom. Commercial real estate is massively overbuilt as is the retail sector. So don't look for Home Depot (HD), Lowes (LOW), Target (TGT), or Walmart (WMT) to lead the way. Forget about banking, too, as Citigroup (C), Wells Fargo (WFC), and Bank of America (BAC) have their hands full and then some.

And although one can never tell in advance when technology breakthroughs will happen, as we've seen, internment booms aren't that common. In 2001, everyone was waiting for the next "killer app." Everyone is still waiting, so don't look at Intel (INTC), Microsoft (MSFT), or the technology sector, either.

So while everyone is tooting horns and cheering the end of the end of the recession before it's even ended, those graphs and comments from Bernanke himself will put the pending job-loss recovery into better perspective.