Chicago Federal Reserve's Real-Time Model for US Labor Market Analysis

Amidst uncertainties surrounding official labor market data releases, the Chicago Federal Reserve's estimated model offers a timely and comprehensive view of the US labor market. This model predicts a stable unemployment rate of 4.3% for September, integrating both private sector real-time data and official statistics.

Key Points Summary

• Introduction to Labor Market Analysis

  This analysis, conducted by Zeinab, a macroeconomic analyst at Ramzali Academy, focuses on the Federal Reserve and Chicago's labor market data. It addresses the significant uncertainties surrounding the timely release or non-release of official labor market data, such such as Non-Farm Payrolls.

• Chicago Federal Reserve's Estimated Model

  Due to data release uncertainties, the Chicago Federal Reserve's estimated model is employed, which forecasts a stable unemployment rate of 4.3% for September. This model combines real-time private sector data with official labor market statistics to present a current and extensive overview of the labor market situation.

• Components of Chicago Fed Indicators

  The Chicago Federal Reserve's labor market indicators are updated twice monthly, utilizing BLS data for revisions. These indicators encompass layoff rates (including terminations and resignations), the hiring rate for unemployed workers, and a monthly forecast of the BLS unemployment rate.

• Methodology for Real-Time Unemployment Forecast

  The methodology for forecasting the real-time unemployment rate involves integrating real-time data with monthly data. Calculations are performed using Partial Least Squares (PLS) to establish the best fit between job separation rates and new job finding rates, derived from both general and real-time data sources.

• Real-Time Data Sources

  The real-time data integrated into the model includes initial jobless claims as a share of insured jobs, the insured unemployment rate, Bloomberg's social unemployment and forecast index, and various institutional indices for unemployment and job search activity. Additionally, layoff and hiring rates from the JOLTS survey, the Conference Board Labor Market Differential Index, job postings from Indeed and Lightcast, and ADP employment data are utilized.

• Labor Market Inflows and Outflows

  The Chicago Fed indicators estimate both an inflow rate to unemployment and an outflow rate from unemployment, which are instrumental in understanding changes in the unemployment rate. The inflow rate represents layoffs and other job separations, while the outflow rate signifies the hiring of unemployed workers. These rates are scaled so that the ratio of inflow to the sum of inflow and outflow aligns with the BLS unemployment rate, expressed as a percentage of the labor force.

• Impact of Inflow and Outflow Rates

  An increase in the inflow rate, which measures the number of workers entering unemployment either voluntarily or involuntarily, places upward pressure on the unemployment rate. Conversely, an increase in the unemployed worker hiring rate, reflecting the percentage of individuals who secured employment or exited the labor force in the BLS reference week, mitigates upward pressure on unemployment.

• Unique Measurement Considerations

  These labor market measurements differentiate from other calculations primarily by using Current Population Survey (CPS) data instead of establishment employment statistics. Furthermore, the rates are constructed by aggregating and scaling data to directly correspond with BLS rates, and the estimates combine official BLS statistics with private sector data, such as ADP employment figures, to cover both sources comprehensively.

• September 2023 Forecasts

  For September 2023, the latest estimates from this model predict a layoff and other separations rate of 2.1% for workers and an unemployed worker hiring rate of 45.2%. The real-time unemployment rate for this period is specifically forecasted at 4.3%.

• Conclusion and Data Utility

  In scenarios where official data releases like Non-Farm Payrolls might be unavailable, utilizing existing data and models, such as those provided by the Chicago Federal Reserve, becomes crucial for economic analysis. This approach, also adopted by the Federal Reserve, enables continuous monitoring and understanding of the US economic trajectory.

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