Yesterday the preliminary second quarter GDP numbers were released with a strong growth of 4%. Though promising the strong growth was a bounce back from the dismal first quarter numbers where GDP shrank.
In addition to yesterday’s GDP report the FOMC met and shifted their policies indicating that tightening may be coming sooner than indicated before. For the first time there was not a unanimous vote on whether to keep rates low for a considerable amount of time after the end of QE. Philadelphia Fed President Charles Plosser was the lone dissent. In addition Financial Times also reports the change in the Fed’s view on the employment crisis:
“The rate-setting Federal Open Market Committee dropped a sentence that had described the US unemployment rate as “elevated”. But it was replaced with a new line that argued there was still a lot of spare capacity in the labour market.
‘A range of labour market indicators suggests that there remains significant underutilisation of labour resources,’ the statement now says. The Fed looks at measures such as the number of part-time workers who want full-time jobs.
The changes on unemployment and inflation offset each other. They suggest the Fed thinks that the downside risk to the economy is getting smaller, but that it still has room to keep rates low in order to push improvements in the labour market.”
Though the economy grew at a preliminary rate of 4% during the second quarter of the year it has only grown 0.9% over the first half of the year (slowest half year growth rate since 2011). The Fed has taken a cautious approach to bad economic information and should be cautious with the good numbers coming from the second quarter of 2014 rather than indicating that it is willing to tighten the money supply at a faster rate. There is still an underlying employment issue that the Fed must address before true economic lift off can occur.
To illustrate Chair Yellen’s concern with the “significant underutilization of labor resources,” Bloomberg has created this useful graphic showing the indicators at their pre-recession level, recession low, and current level.
The editors at Bloomberg View believe more can be done to help end the job crisis more quickly. Primarily increasing worker mobility:
“High mobility of labor was always seen as a particular strength of the U.S. economy, but lately it has been more myth than reality. Even before the recession, the U.S.’s advantage had been fading. Recently, labor mobility has fallen to its lowest since records began in the 1940s. Removing some of the obstacles that the government has put in the way of people looking for work would help a lot.”
James Pethokoukis, at AEI, muses why businesses are not investing in the future while having large levels of savings. He looks to the effect of a slack labor market compounded by investor expectations and CEO pay.
Over at Vox, Matt Yglesias, looks at a Council of Economic Advisors report on the decline of labor force participation. Most interesting is that a sixth of the drop in participation cannot be explained by retirement and the cyclical effect of the low availability of jobs:
As Yglesias aptly states, “basically we don’t really know what’s going on.”
Matt Yglesias also highlights the odd economic recovery by the UK. Concluding that the US, especially the Fed, can learn from British monetary policy to take on the employment crisis. Stating:
“Monetary policy doesn’t solve all problems. But the very fact that the UK economy has so many problems, underscores the reality that monetary policy is extremely potent in fighting the particular scourge of unemployment. Here in the USA, productivity and total output have gone much better, but monetary policy has been less aggressive and joblessness is a bigger problem despite a better overall economy.”
Finally, a study on wealth levels before and after the Great Recession, financed by the Russell Sage Foundation, has been gaining attention.
Tyler Cowen at Marginal Revolution highlighting the findings that “The inflation-adjusted net worth for the typical household was $87,992 in 2003. Ten years later, it was only $56,335, or a 36 percent decline.” While Wonkblog states that:
“Nostalgia is just about the only thing the middle class can still afford. That’s because median wealth is about 20 percent lower today, in inflation-adjusted dollars, than it was in 1984.
Yes, that’s three lost decades.”
Fix the wealth is intimately related to Fix the Jobs: it’s no coincidence that exactly the same households that have seen their wages stagnate for the last thirty years (i.e. the median and below) have now seen their wealth drop as well.