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EMBARGOED UNTIL FRIDAY, SEPTEMBER 5, 2014 AT 3:50 P.M. EASTERN TIME OR UPON DELIVERY Observations on Labor Markets Eric S. Rosengren President & CEO Federal Reserve Bank of Boston September 5, 2014 New Hampshire & Vermont Bankers Associations Annual Conference Boston, Massachusetts bostonfed.org Labor Markets are Improving ▶ Labor markets continue to gradually improve ▶ Vermont unemployment – 3.7 percent ▶ New Hampshire unemployment – 4.4 percent ▶ Both are lower than the national unemployment rate of 6.1 percent ▶ How much labor market slack remains nationally is an important determinant of the path of monetary policy 2 August Employment Report ▶ Today’s employment report is somewhat disappointing ▶ Payroll employment increased by 142,000 jobs, below market expectations ▶ Unemployment declined slightly to 6.1 percent, but once again in part because 64,000 Americans left the labor force ▶ 7.3 million Americans remain part-time for economic reasons ▶ Significant labor market slack remains, so monetary policy needs to be patient in removing stimulus 3 Implications for “Forward Guidance” ▶ Forward guidance is appropriate when Fed is far from our goals and short-term rates are close to zero ▶ As we approach full employment my own view is that we should no longer issue guidance on approximate timing of policy changes ▶ “Liftoff” from near-zero short-term rates is going to be tied to the current and expected path of inflation and employment, which is shaped by incoming data ▶ Uncertainty around forecast makes reference to calendar dates as we approach targets potentially inaccurate 4 Recent Experience ▶ Economic variables have surprised forecasters ▶ Real GDP over the past two years has been weaker than most forecasters expected ▶ Unemployment has fallen faster than expected (particularly given the disappointment in real GDP) ▶ Many forecasters expected the inflation rate to reach the Federal Reserve’s target of 2 percent more quickly ▶ Primary Dealers Survey provides a wide distribution of possible dates for “liftoff” 5 Figure 1: Primary Dealers Survey Results: Average Distribution of Probabilities for the Timing of First Target Federal Funds Rate Increase Survey Results as of July 21, 2014 30 Percent 25 20 15 10 5 0 Q4 ≤ 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 ≥ Q3 2016 Quarter of First Target Federal Funds Rate Increase Source: Federal Reserve Bank of New York, Survey of Primary Dealers, July 2014 6 Figure 2: Private Sector Forecasts for the U.S. Unemployment Rate Forecasts as of August 2014 7.0 Percent Actual, 2014:Q2 Blue Chip Consensus Forecast (Average) Survey of Professional Forecasters (Median) 6.5 6.0 5.5 5.0 2014:Q2 2014:Q3 2014:Q4 2015:Q1 2015:Q2 2015:Q3 2015:Q4 Full Employment Estimate of 5.25% 11 9 7 5 3 1 2014:Q2 Source: Blue Chip Economic Indicators, Federal Reserve Bank of Philadelphia, BLS, Haver Analytics 7 Figure 3: Blue Chip Forecast for the U.S. Unemployment Rate Forecast as of August 2014 7.0 Percent Actual, 2014:Q2 Consensus Forecast (Average) Average of 10 Highest 6.5 Average of 10 Lowest 6.0 5.5 5.0 2014:Q2 2014:Q3 2014:Q4 2015:Q1 2015:Q2 2015:Q3 2015:Q4 Full Employment Estimate of 5.25% 11 9 7 5 3 1 34365 Source: Blue Chip Economic Indicators, August 10, 2014, BLS, Haver Analytics 8 Figure 4: Blue Chip Forecast for the U.S. Unemployment Rate and Actual Unemployment Rate Forecast as of March 2013 8.0 Percent 7.5 7.0 6.5 6.0 Consensus Forecast (Average) as of March 10, 2013 Actual 5.5 5.0 2012:Q4 2013:Q2 2013:Q4 2014:Q2 2014:Q4 Full Employment Estimate of 5.25% 11 9 7 5 3 1 Source: Blue Chip Economic Indicators, BLS, Haver Analytics 9 Errors in Unemployment Forecasts (Overestimating Unemployment Rates) – Are They Likely to Persist? ▶ Not necessarily ▶ Workers may reenter labor force as labor markets tighten ▶ The number of people moving from out of the labor force into employment is considerably larger than the number moving from being unemployed (but in the labor force) to employed ▶ The unemployment rate may decline more slowly than its recent trend and may not, by itself, give a full picture of labor market conditions 10 Alternative Measures of Labor Market Slack ▶ The U-4 measure includes the unemployed workers counted in the widely reported U-3, plus so-called “discouraged workers” ▶ The U-5 measure includes U-4 workers and all others marginally attached to the workforce ▶ And the broadest measure, U-6, includes unemployed workers, discouraged workers, all others marginally attached to the workforce, and workers who are part time for economic reasons 11 Figure 5: Alternative Measures of Labor Market Slack January 1994 - August 2014 18 Percent U-6: U-5 Plus Workers Part Time for Economic Reasons U-5: U-4 Plus All Other Marginally Attached Workers 15 U-4: U-3 Plus Discouraged Workers U-3: Civilian Unemployment Rate 12 9 6 3 0 Jan-1994 Jan-1999 Jan-2004 Jan-2009 Jan-2014 Recession Source: BLS, NBER, Haver Analytics 12 Figure 6: U-3 and Workers Part Time for Economic Reasons: 2014:Q2 Difference from Pre-Recession Average (2005 - 2007) Part Time For Economic Reasons: 2014:Q2 Minus Pre-Recession Average (2005 - 2007) 5 Percentage Points (Both Axes) y = 0.5336x + 0.9878 R² = 0.3221 AZ 4 MA TN CA NV NM 3 FL NH RI 2 DE GA SC 1 VT NE SD 0 ND AR AK -1 -2 -1 0 1 2 3 U-3: 2014:Q2 Minus Pre-Recession Average (2005 - 2007) Source: BLS, CPS 4 13 Figure 7: U-3 and Workers Part Time for Economic Reasons: 2014:Q2 Difference from Pre-Recession Average (2005 - 2007) Part Time for Economic Reasons Unemployment Rate (U-3) Measured in Percentage Points Number of States Number of States Below Pre-Recession Average 3 8 Close to Pre-Recession Average (0 - 0.5 Percentage Points Above) 4 9 Just Above Pre-Recession Average (0.5 - 1.0 Percentage Points Above) 6 5 Below or 0 - 1 Percentage Points Above Pre-Recession Average 13 22 1 - 2 Percentage Points Above Pre-Recession Average 19 16 2 - 3 Percentage Points Above Pre-Recession Average 14 10 3 - 4 Percentage Points Above Pre-Recession Average 3 2 4 or More Percentage Points Above Pre-Recession Average 1 0 Source: BLS, CPS 14 Figure 8: Change in Workers Part Time for Economic Reasons as a Share of Total Employment by Age Group: Percentage Point Difference from 2006 7 Percentage Points 7 20-24 Percentage Points 25-34 6 6 5 5 4 4 3 3 2 2 1 1 0 0 2007 2009 2011 2013 2007 2009 2011 2013 Note: Figures for 2014 are through August. Source: BLS, CPS, Haver Analytics 15 Figure 9: Change in Workers Part Time for Economic Reasons as a Share of Total Employment by Age Group: Percentage Point Difference from 2006 7 Percentage Points 7 35-44 Percentage Points 45-54 6 6 5 5 4 4 3 3 2 2 1 1 0 0 2007 2009 2011 2013 2007 2009 2011 2013 Note: Figures for 2014 are through August. Source: BLS, CPS, Haver Analytics 16 Figure 10: Workers Part Time for Economic Reasons as a Share of Total Employment by Age Group 2006 and 2014 12 Percent 2006 10 2014 Through August 8 6 4 2 0 16-19 20-24 25-34 35-44 45-54 55+ Note: Figures for 2014 are through August. Source: BLS, CPS, Haver Analytics 17 Figure 11: Employment Cost Indices for Civilian Workers 1994:Q1 - 2014:Q2 5 Percent Change from Year Earlier 4 3 2 1 Total Compensation Wages & Salaries 0 1994:Q1 1999:Q1 2004:Q1 2009:Q1 2014:Q1 Recession Source: BLS, NBER, Haver Analytics 18 Concluding Observations ▶ While we have approached full employment more rapidly than many expected, substantial slack remains ▶ PCE inflation remains at only 1.6 percent, with no sign of significant wage pressures from labor markets ▶ The lack of wage pressures suggests that we are not yet near full employment, and that there is no upward pressure on inflation coming from wages ▶ So it seems appropriate for monetary policy to continue to be patient, in the interest of ensuring that the economy reaches full employment and the 2 percent inflation target as quickly as possible 19