While the markets were surprised last month when the Federal Reserve’s Open Market Committee decided to chop off about $10 billion per month in monetary stimulus (also known as quantitative easing), it’s becoming clear that the jobs situation was not one of the driving forces behind the decision.
While the topline jobs rate has plunged, it’s only because the labor force is contracting as people stop looking for work.
It looks like the Fed decided to cut down QE is spite of the poor jobs market. And that can only mean the Fed theoreticians are beginning to be worried about inflation.
The reduction in labor force in the U.S. is comparable to losing the state of Maryland or Missouri in terms of productivity and GDP. We are missing between $250 and $300 billion in lost GDP because of these jobs losses, which is right around 1.5 to 2% of GDP growth. Not coincidentally, that’s the same number that has been historically missing from Obama's stewardship of the economy.
And things are getting worse, not better.
The missing workers in August of 2012 were 4.4 million. Now it's grown 5.9 million according to an estimate from the union run Economic Policy Institute (EPI). It’s worth noting that only 1,374,000 jobs have been created since Dec 2012, while an additional 1,500,000 workers have left the workforce according to the EPI estimate.
“The economy still needs the support of a very accommodative monetary policy,” said William Dudley, last fall in a speech in New York according to the text of the speech provided by Bloomberg.com. Dudley is vice chairman of the Federal Open Market Committee, the committee that decides on continued quantitative easing measures. “Improving economic fundamentals versus fiscal drag and somewhat tighter financial conditions,” he said, “are pulling the economy in opposite directions, roughly cancelling each other.”