Plosser’s Economic Outlook: Slow But Steady Growth
“We are now in the fourth year of an economic expansion that officially began in mid-2009,” said Charles Plosser, president and CEO of the Federal Reserve Bank of Philadelphia, in a January 11 speech at the New Jersey Economic Leadership Forum. “The general path has continued to be forward, but we’ve made far slower progress than anyone would like.”
Plosser is preaching to the choir, so to speak. Any rational actor attempting to navigate the current economic environment in the United States is rightfully both confused and angry. An economy that was brought to its knees by special interest, a byzantine tax code that incentivizes irrational economic behavior and fiscal gamesmanship, and a lack of competent oversight, is now in the hands of one of the least favored Congresses in history.
Policymakers demonstrated their mettle during the fiscal cliff negotiations, and as a result, faith in U.S. leaders evaporated. Ideology and limited foresight on both sides of the aisle prolonged damaging uncertainty and delayed decision making at a time when what is needed most is action. A tax agreement was reached, but the sequester was delayed for two months. Adding some spice to America’s cocktail of fiscal problems, the debt ceiling was hit on December 31, and post-hoc financing is expected to last just until a decision on spending cuts has to be made.
But all things considered, Plosser maintains some optimism about the condition of the labor market…
National unemployment is, at best, 7.8 percent, and by some measures as high as 14 percent, when those who are marginally attached to workforce and those who have given up searching for work entirely are factored in.
Plosser points out that 8.8 million jobs were lost between January 2008 and February 2010. Since 2011, the U.S. economy has employed just 153,000 people per month on average, a pace that by any definition is painfully slow. Unemployment has fallen 1.7 percent over the last two years, and Plosser optimistically projects that it will fall towards 7 percent by the end of 2013.
One of the major problems, as Plosser points out, is that “the labor force needs to be at least partially retooled to match the skills employers demand. Even within sectors such as manufacturing, the skills of workers now being hired are different from those who were let go.”
But Plosser argues that education and re-training will not only take time, but that alone it’s not enough. “Establishing training programs, investing in education, and adopting immigration reforms can increase the quality of our work force and enhance future productivity growth,” he said. Beyond that, the policies coming out of Washington set the stage for the unemployed and employers both.
The health of the labor market is the backbone of long-term economic growth and should be the focus of economic policy making. Unfortunately, the current stimulus strategy employed by the Federal Reserve misses the core problem (the labor market) and may backfire in the long run…
“Consumers have strong incentives to save,” said Plosser. “They are trying to restore the health of their balance sheets so they will be able to retire or put their children through college. They are behaving wisely and in a perfectly rational and prudent way in the face of the reduction in wealth.”
That reduction of wealth came on the back of the housing collapse. In a down economy, saving behavior is not necessarily anyone’s friend. Consumer spending accounts for nearly 70 percent of economic activity, and if saving goes up, spending goes down. Plosser believes that aggressive monetary easing has not only frustrated the ability of people to save effectively, but has failed to bring up demand.
“In my view, until household balance sheets are restored to a level that consumers and households find comfortable, consumption will remain sluggish. This is likely to take some time, and attempts to increase economic ‘stimulus’ may not help speed up the process and may actually prolong it.”
Plosser’s expectation for 2013 and 2014 is annual growth of about 3 percent. However, long-term economic growth fueled by a strong labor market is still in the hands of policymakers.
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