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Fed Reserve Economists Say Two More Years Before We Get Back to ‘Normal’

by
John Zappe
Jul 22, 2013, 1:56 pm ET

fed reserve labor market chartUnless new economic shocks should upset the rate of improvement, it will take at least two more years before the U.S. labor market returns to its historic norms.

Crunching together 23 different labor market indicators, two economists with the sometimes-contrarian Federal Reserve Bank of Kansas City said that though the rate of change is well above the average of the last 20 years, it hasn’t translated into an equivalent rate of improvement in labor market conditions.

What that means is that despite the acceleration in job creation, temp hiring, job availability, and other labor market measures, the national unemployment rate will continue to decline only slowly.

The indicators developed by the Fed Bank’s economists measure:

  1. Level of activity: How far are labor market conditions from historical averages?
  2. Rate of change: How rapidly are conditions changing compared with the past?

Neither is a direct indicator of unemployment or underemployment, though the level of activity takes into both measure — and other measures — into account. As the rate of change accelerates, the level of activity should, which would mean a reduction in unemployment.

Whether the U.S. economy will ever return to the historical unemployment rate of about 5 percent is a subject of much debate among economists. Economists at the Federal Reserve Bank of San Francisco examined   unemployment rate changes, saying:

…the “normal” unemployment rate may have risen as much as 1.7 percentage points to about 6.7 percent, although much of this increase is likely to prove temporary. Even with such an increase, sizable labor market slack is expected to persist for years.

The report from the Kansas City Fed doesn’t talk about what the new ‘normal’ is or will be. Its purpose is to offer a better way of making sense of the monthly economic data that can more resemble a roller coaster than a rocket. Aggregating the various reports, and their often contradictory data, into two measures provides a sharper look at what the data means.

Besides helping economists forecast labor availability and giving recruiters and workforce planners a heads-up about sourcing and hiring, the measures also have implications for Fed policy. Esther George, president of the Kansas City Fed Bank, has taken a contrarian view of the Fed Board’s bond buying program. She has argued that the market is growing faster than economists think, and for that reason, the Fed should begin cutting back on its aggressive stimulus program and allow interest rates to rise.

 

This article is provided for informational purposes only and is not intended to offer specific legal advice. You should consult your legal counsel regarding any threatened or pending litigation.

  1. Keith Halperin

    Thanks, John.
    Keith still sez:
    The Great Recession for Unemployment is over when the unemployment rate stays below 7% for three straight months.

    -kh

    …………………………………………………

    Recent Economic Forecasts
    http://myweb.rollins.edu/wseyfried/forecast.htm

    Recent Forecasts

    Wells Fargo Securities Economic Forecast (latest monthly forecast, July 2013; latest forecast, July 19-latest weekly analysis): economic growth = 1.2% in 2013Q2 and 2.2% in 2013Q3; 1.6% in 2013 and 2.4% in 2014; PCE inflation = 1.1% in 2013, 1.9% in 2014; core CPI inflation = 1.8% in 2013, 2.1% in 2014; unemployment rate = 7.4% by end of 2013 and 7.2% by the end of 2014

    Economic forecasting survey, July 2013 (WSJ): economic growth = 1.5% in 2013Q2, 2.4% in 2013Q3; 2.1% in 2013, 2.8% in 2014 and 3% in 2015; unemployment = 7.3% at end of 2013, 6.7% at end of 2014, 6.2% at end of 2015; inflation = 1.7% in 2013, 2.1% in 2014 and 2.3% in 2015; expect interest rate hike in late 2014; Fed begins to reduce QE3 in late 2013, end of QE3 in Spring 2014

    OMB (July 2013 – see page 6-7): economic growth = 2.4% in 2013, 3.4% in 2014 and 3.5% in 2015; unemployment (Q4) = 7.3% in 2013, 6.8% in 2014, 6.3% in 2015; inflation = 1.3% in 2013, 2.2% in 2014-2015; natural rate of unemployment = 5.4%; see pdf page 9 for comparison with other forecasts

    IMF (July): US economic growth = 1.7% in 2013, 2.7% in 2014

    Fed Forecast as of June 2013: economic growth = 2.3%-2.6% in 2013, 3-3.5% in 2014 and 2.9-3.6% in 2015; long-run economic growth = 2.3-2.5% (note: these are from 4th quarter to 4th quarter); unemployment rate = 7.2-7.3% in 2013, 6.5-6.8% in 2014, 5.8-6.2% in 2015 (estimates are for 4th quarter of the respective year); natural rate of unemployment = 5.2 to 6%; inflation as measured by PCE index of 0.8-1.2% in 2013 (core = 1.2-1.3%), 1.4 to 2% (core = 1.5-1.8%) in 2014, and 1.6-2% (core = 1.7-2%) in 2015

    Univ. of Michigan Economic Forecast (executive summary – June 17, 2013): economic growth = 2.2% in 2013, 3% in 2014; inflation (CPI) = 1.4% in 2013 and 2014 (core inflation = 1.7% in 2013 and 1.8% in 2014); unemployment rate averages 7.5% in 2013 and declines to 6.8% by end of 2014

    Livingston Survey (latest survey – June 6, 2013): economic growth = 2.2% in first half of 2013, 2.3% in second half of 2013, 2.8% in first half of 2014; unemployment rate = 7.5% in June 2013, 7.4% in Dec 2013, 7.2% in June 2014; inflation (CPI) = 1.5% for 2013 and 2% in 2014; long-term economic growth = 2.6%, inflation averages 2.5% over the next decade

    NABE Forecast: economic growth = 2.4% in 2013, 3% in 2014; unemployment rate = 7.4% by end of 2013, 6.8% in late 2014; inflation = 1.9% in 2013, 2.1% in 2014

    Survey of Professional Forecasters (latest survey May 2013): economic growth = 1.8% in 2013Q2, 2.3% in 2013Q3; 2% in 2013, 2.8% in 2014, 3% in 2015; core inflation (PCE)=1.5% in 2013 and 1.9% in 2014 and 2015 (overall PCE inflation=1.4% in 2013, 2% in 2014 and 2015); unemployment rate = 7.4% in 2013Q4; average unemployment rate = 7.1% in 2014, 6.6% in 2015

    Quarterly economic survey (USA Today – May 2013): economic growth = 2.2% in 2013Q3, 2.7% in 2013Q4; unemployment rate = 7.3% by end of 2013

    CBO (Feb 5): economic growth = 1.4% in 2013, 3.4% in 2014 (baseline assumes the implementation of spending cuts); unemployment rate = 8% at end of 2013, 7.6% at end of 2014, 6.8% at end of 2015; PCE inflation = 1.3% in 2013, 1.8% in 2014; growth in potential GDP = 2.3% for 2019-2023; potential GDP grows by 1.8% in 2013, about 2% in 2014-2015, 2.3-2.4% afterwards; natural rate of unemployment = 6%, but begins to decline very slowly in 2014

    World Bank (Jan 2013): economic growth = 1.9% in 2013, 2.8% in 2014, 3% in 2015; inflation = 2.4% in 2013, 2.5% in 2014 and 2015

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