Download FedViews

Twelfth Federal Reserve District
FedViews
May 12, 2016
Economic Research Department
Federal Reserve Bank of San Francisco
101 Market Street
San Francisco, CA 94105
Also available upon release at
http://www.frbsf.org/economic-research/publications/fedviews/
Rob Valletta, vice president at the Federal Reserve Bank of San Francisco, stated his views on the current
economy and the outlook as of May 12, 2016.

The U.S. Bureau of Economic Analysis (BEA) reported real GDP grew at a sluggish 0.5% annual
pace in the first quarter of 2016. Weak measured first-quarter growth has been a consistent pattern
in recent years, and research conducted at the San Francisco Fed suggests regular seasonal
fluctuations are not fully captured by the BEA’s current adjustment methodology. Using a more
complete seasonal adjustment suggests that growth exceeded 2% in the first quarter and, relative to
four quarters earlier, GDP growth remains in line with last year’s pace. We expect this pace to
continue through 2016, spurred by further growth in household income and spending.

Increasingly supportive financial conditions have bolstered the growth outlook. Interest rates have
declined this year across a broad spectrum of maturities and risk classes. In addition, the U.S. dollar
has retraced some of its earlier appreciation, and domestic stock market indexes are up more than
10% from their mid-February lows.

Following a quarter-point increase in December, the Federal Open Market Committee (FOMC) has
left the federal funds rate target unchanged. The accommodative stance of monetary policy aims to
support further improvement in labor market conditions and a return to 2% inflation. The FOMC
has emphasized that future increases in the funds rate target will be gradual, with the timing
dependent on labor market data, the inflation outlook, and readings on financial and international
conditions.

Job growth has stayed strong, with the six-month average gains remaining above 200,000. Though
the April reading of 160,000 new jobs represents a slowdown from prior months, it is well above
the level needed to support further improvement in overall labor market conditions, estimated to be
around 100,000 or fewer new jobs per month.

Unemployment has been largely unchanged this year, and April’s unemployment rate of 5% equals
our estimate of its natural or normal rate. This flat rate of unemployment reflects an ongoing pickup
in labor force participation, consistent with improving labor market conditions. As the labor market
expansion continues, we expect the unemployment rate to fall a bit further and then head back up
toward the natural rate beginning in mid-2017.

Over the past few quarters, inflation has moved up noticeably, reflecting in part the expected
waning of disinflationary effects from the prior dollar appreciation and energy price declines. We
anticipate that inflation will continue to firm, with the overall and core measures converging on the
FOMC’s 2% target over the next two years.
The views expressed are those of the author, with input from the forecasting staff of the Federal Reserve Bank of San Francisco.
They are not intended to represent the views of others within the Bank or within the Federal Reserve System. FedViews generally
appears around the middle of the month. The next FedViews is scheduled to be released on or before June 17, 2016.

In addition to strong job growth and the low rate of unemployment, other indicators of strength in
the labor market include ample job vacancies and high rates of voluntary quitting by workers who
seek improving job opportunities.

By contrast, the elevated rate of long-term unemployment suggests labor market conditions may not
have fully returned to normal. Long-term unemployment, defined as active job search for longer
than six consecutive months, still remains above the historical highs observed prior to the Great
Recession.

Movement in long-term unemployment over the business cycle largely reflects changes in jobfinding rates. During and immediately after the Great Recession, finding a job was difficult. As the
economy improved and job opportunities increased, job-finding rates recovered, especially for
those unemployed for less than six months. This in turn reduced the fraction of those who
subsequently become long-term unemployed. However, job-finding rates for the long-term
unemployed remain somewhat low as a result of long-term changes in the composition and
behavior of the labor force.

Older workers are less likely to lose jobs than younger workers but are more likely to undertake
prolonged searches when job loss occurs. As the population ages, older job seekers have comprised
a rising share of the total unemployment pool, which mechanically increases long-term
unemployment.

Rising labor force attachment for women during the 1980s and 1990s has also contributed to higher
long-term unemployment. Fewer labor force transitions by women has lengthened reported
unemployment and contributed to a secular increase in overall long-term unemployment.

These higher rates of long-term unemployment among both older workers and women generally
reflect more dedication to sustained job searches, rather than a lack of education or other skills that
would typically limit job prospects. Hence, the currently high long-term unemployment does not
appear to signal broad labor market weakness.
Interest rates have declined this year
Moderate growth expected
Interest rates
Real GDP
%
Percent change from 4 quarters earlier
%
Weekly average
8
4
FRBSF
Forecast
7
3
6
2
Q1
1
5
30-year mortgage
05/06
0
4
-1
3
-2
Ten-year Treasury
2
-3
-5
2008
2009
2010
2011
2012
2013
2014
2015
2016
2008
2017
2009
2010
2011
2012
2013
1
Fed
funds
rate
Two-year Treasury
-4
2014
2015
0
2016
Source: FAME
Source: Bureau of Economic Analysis and FRBSF staff
Job growth still strong
Unemployment to edge down
Nonfarm payroll employment
Thousands
350
Seasonally adjusted, monthly change
Monthly
change
Unemployment rate and forecast
%
Seasonally adjusted monthly observations, forecast is quarterly average
12
300
10
6-month
moving
average
250
Apr.
160,000
150
8
200
Apr.
5.0
6
FRBSF
forecast
100
2
50
0
2013
2014
Source: Bureau of Labor Statistics
2015
4
2008
2016
2009
2010
2011
2012
2013
2014
2015
2016
2017
0
Source: Bureau of Labor Statistics and FRBSF staff
Long-term unemployment still high
Inflation slowly returning to target
Long-term unemployment (>6 months)
PCE price inflation
%
Percent change from 4 quarters earlier
%
Percent of total unemployment; seasonally adjusted
50
5
4
Overall PCE
price index
40
3
FRBSF
forecasts
Core PCE
price index
30
2
4/16
1
Q1
20
0
10
-1
2008
2009
2010
2011
2012
2013
2014
Source: Bureau of Economic Analysis and FRBSF staff
2015
2016
2017
-2
1976
1981
1986
1991
Source: Bureau of Labor Statistics
1996
2001
2006
2011
0
2016
Job finding recovering but low
Aging raises long-term unemployment
Job-finding rates, by unemployment duration
%
12-month moving average
40
Unemployed age 45+
%
Percent of all unemployed; 12-month moving average
35
35
4/16
3/16
25
25
Short-term unemployed
30
30
20
20
15
Long-term unemployed
15
10
5
1977
1982
1987
1992
1997
Source: Author's calculations using CPS microdata.
2002
2007
2012
10
1976
1981
1986
1991
Source: Bureau of Labor Statistics
1996
2001
2006
2011
2016