Tuesday, January 16, 2018

FRBSF FedViews: Current Economy and the Outlook

From Vasco Curdia of the SF Fed:

Vasco Curdia, research advisor at the Federal Reserve Bank of San Francisco, stated his views on the current economy and the outlook as of January 11, 2018.

Above-trend growth continues

Real GDP grew at an annual rate of 3.2% in the third quarter, according to the final estimate of the Bureau of Economic Analysis. We forecast that GDP growth averaged 2.5% for 2017. The momentum in GDP growth reflects strong gains in personal income and consumer confidence, supported by continued strength in the labor and financial markets. As monetary policy continues to normalize over the next two to three years, we expect growth to gradually fall back to our trend growth estimate of about 1.7%.

Job growth remains strong

We continue to see strengthening in labor market conditions. Nonfarm payroll employment increased by 148,000 jobs in December, a bit below expectations. Over the past six months, job gains have averaged close to 166,000, well above the amount needed to absorb the flow of new workers into the labor force.

Unemployment below natural rate

The unemployment rate was unchanged in December from its November value of 4.1%. We expect the rate to fall below 4.0% in 2018 as the economy continues to strengthen. With the gradual removal of monetary policy accommodation, we expect the unemployment rate to return gradually to our estimate of the natural rate of unemployment of 4¾%.

Inflation expected to increase gradually

Inflation remains below the FOMC’s target of 2%. In November, the personal consumption expenditure (PCE) price index rose 1.8% over the past 12 months, and the core PCE price index, which removes volatile food and energy prices, rose 1.5%. Transitory developments for a few categories of goods and services held down inflation in 2017. As these developments loosen their hold, we expect continued tightness in the labor market will push inflation up in the coming year.

Short-term interest rates heading up

At the December meeting, the FOMC raised the target range for the federal funds rate by a quarter to 1.25% to 1.50%. Short-term rates followed suit, while longer-term yields did not respond as much to the FOMC announcement.

Phillips curve, 2001-2017

The relationship between economic slack and inflation is often referred to as the Phillips curve. The theory behind this relationship maintains that conditions that push the economy beyond full employment lead to increased cost pressures on firms and capacity constraints. Cost pressures lead to higher wages and labor costs, while capacity constraints and strained supply chains in the face of high demand push up intermediate costs. In response to these higher costs, firms tend to increase the prices they charge for their goods and services, leading to price inflation.
Various factors can influence cost pressures independently of economic strength. For example, labor market frictions, such as changes in bargaining power, labor force participation, or long-term unemployment can push up the natural rate of unemployment. Oil prices, the strength of the US dollar, or import prices can similarly affect cost pressures in the economy.
Inflation expectations also can affect the transmission from cost pressures to price inflation. For example, high inflation expectations in the early 1980s contributed to elevated price inflation for some time, despite high unemployment. If individual firms expect economy-wide prices to increase at a fast pace, they will be reluctant to slow their own price increases. If many firms follow the same reasoning and expect other firms to keep raising prices, then overall inflation will remain strong. Similarly, strategic industry-specific considerations may affect price inflation. For example, recent price wars in the telecommunications sector have led to weaker inflation numbers.
Staff statistical analysis finds a negative relationship between the unemployment gap and the cyclical component of inflation (excluding components that are not sensitive to business cycle conditions) over the period 2001 to 2017, consistent with economic theory. Currently, the economy is beyond full employment and thus, based on the Phillips curve, we are likely to see an increase in cyclical inflation, in turn pushing up overall price inflation.
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. Please send editorial comments to Research Library.

    Posted by on Tuesday, January 16, 2018 at 12:46 PM in Economics, Monetary Policy | Permalink  Comments (20) 

    Paul Krugman: Know-Nothings for the 21st Century

    "So will our modern know-nothings prevail?":

    Know-Nothings for the 21st Century, by Paul Krugman, NY Times: These days calling someone a “know-nothing” could mean one of two things..., you might be comparing that person to a member of the Know Nothing party of the 1850s, a bigoted, xenophobic, anti-immigrant group that at its peak included more than a hundred members of Congress and eight governors. More likely, however, you’re suggesting that said person is willfully ignorant, someone who rejects facts that might conflict with his or her prejudices.
    The sad thing is that America is currently ruled by people who fit both definitions. ...
    The parallels between anti-immigrant agitation in the mid-19th century and Trumpism are obvious. ...
    After all, Ireland and Germany, the main sources of that era’s immigration wave, were the shithole countries of the day. Half of Ireland’s population emigrated in the face of famine, while Germans were fleeing both economic and political turmoil. Immigrants ... were portrayed as drunken criminals if not subhuman. They were also seen as subversives: Catholics whose first loyalty was to the pope. A few decades later..., immigration ... of Italians, Jews and many other peoples inspired similar prejudice.
    And here we are again..., there are always new groups to hate.
    But today’s Republicans ... aren’t just Know-Nothings, they’re also know-nothings. The range of issues on which conservatives insist that the facts have a well-known liberal bias just keeps widening.
    One result of this embrace of ignorance is a remarkable estrangement between modern conservatives and highly educated Americans... Remarkably, a clear majority of Republicans now say that colleges and universities have a negative effect on America. ...
    Think of where we’d be as a nation if we hadn’t experienced those great waves of immigrants driven by the dream of a better life. Think of where we’d be if we hadn’t led the world, first in universal basic education, then in the creation of great institutions of higher education. Surely we’d be a shrunken, stagnant, second-rate society.
    And that’s what we’ll become if modern know-nothingism prevails. ...
    Trumpism is as an attempt to narrow regional disparities, not by bringing the lagging regions up, but by cutting the growing regions down. For that’s what attacks on education and immigration, key drivers of the new economy’s success stories, would do.
    So will our modern know-nothings prevail? I have no idea. What’s clear, however, is that if they do, they won’t make America great again — they’ll kill the very things that made it great.

      Posted by on Tuesday, January 16, 2018 at 09:40 AM in Economics, Education, Immigration, Politics, Universities | Permalink  Comments (212) 

      Monday, January 15, 2018

      Links for 01-15-18

        Posted by on Monday, January 15, 2018 at 10:04 AM in Economics, Links | Permalink  Comments (128) 

        Saturday, January 13, 2018

        Links for 01-13-18

          Posted by on Saturday, January 13, 2018 at 10:27 AM in Economics, Links | Permalink  Comments (168) 

          Friday, January 12, 2018


          We have a shithead president.

          That is all.

            Posted by on Friday, January 12, 2018 at 01:13 PM in Politics | Permalink  Comments (185) 

            Tuesday, January 09, 2018

            Links for 01-09-18

              Posted by on Tuesday, January 9, 2018 at 02:21 PM in Economics, Links | Permalink  Comments (273) 

              Paul Krugman: The Worst and the Dumbest

              "Republicans in Congress are increasingly determined to participate in obstruction of justice":

              The Worst and the Dumbest, by Paul Krugman, NY Times: Like millions of people around the world, I was reassured to learn that Donald Trump is a “Very Stable Genius.” You see, if he weren’t — if he were instead an erratic, vindictive, uninformed, lazy, would-be tyrant — we might be in real trouble.
              Let’s be honest: This great nation has often been led by mediocre men, some of whom had unpleasant personalities. But they generally haven’t done too much damage, for two reasons.
              First, second-rate presidents have often been surrounded by first-rate public servants. ...
              Second, our system of checks and balances has restrained presidents who might otherwise have been tempted to ignore the rule of law or abuse their position. ...
              But that was then. Under the Very Stable Genius in Chief, the old rules no longer apply.
              When the V.S.G. moved into the White House, he brought with him an extraordinary collection of subordinates — and I mean that in the worst way... And many incredibly bad lower-level appointments have flown under the public’s radar. ...
              And while unqualified people are marching in, qualified people are fleeing. There has been a huge exodus of experienced personnel at the State Department; perhaps even more alarming, there is reportedly a similar exodus at the National Security Agency.
              In other words, just one year of Trump has moved us a long way toward a government of the worst and dumbest. It’s a good thing the man at the top is, like, smart.
              Meanwhile, what about constraints on presidential misbehavior? Hey, checks and balances are just so 1970s, you know? ...Republicans in Congress are increasingly determined to participate in obstruction of justice. ...
              In other words, even as much of the world is questioning Trump’s fitness for office, the only people who could constrain him are doing their best to place him above the rule of law.
              So far, the implosion of our political norms has had remarkably little effect on daily life... The president spends his mornings watching TV and rage-tweeting, he has wreaked havoc with the government’s competence and his party doesn’t want you to know if he’s a foreign agent. Yet stocks are up, the economy is growing and we haven’t gotten into any new wars.
              But it’s early days. We spent more than two centuries building a great nation, and even a very stable genius probably needs a couple of years to complete its ruin.

                Posted by on Tuesday, January 9, 2018 at 02:18 PM in Economics, Politics | Permalink  Comments (30) 

                Monday, January 08, 2018

                Links for 01-08-18

                  Posted by on Monday, January 8, 2018 at 01:02 PM in Economics, Links | Permalink  Comments (163) 

                  Data Lining Up For The Fed’s Rate Hike Forecast

                  Tim Duy:

                  Data Lining Up For The Fed’s Rate Hike Forecast, by Tim Duy: Last Friday the Bureau of Labor Statistics released a fairly lackluster employment report. In most ways, the story remains the same – steady improvement in the labor market but no signs of overheating in the form of wage growth. The mix will keep the Fed on track for three rate hikes this year, as the consensus policymaker will view this kind of report as a reason to neither accelerate nor slow the pace of tightening. ...Continued here...

                    Posted by on Monday, January 8, 2018 at 10:32 AM in Economics, Monetary Policy | Permalink  Comments (21) 

                    Friday, January 05, 2018

                    Job Growth Slows Modestly, But Black Unemployment Falls to Record Low

                    Dean Baker:

                    Job Growth Slows Modestly, But Black Unemployment Falls to Record Low: The Bureau of Labor Statistics reported slightly weaker than expected job growth in December, with the economy adding 148,000 jobs. There was a modest downward revision to the data for the prior two months, which brought the three-month average to 204,000. The unemployment rate remained unchanged at 4.1 percent for the third consecutive month.
                    The best news in this report was the drop in the unemployment rate for blacks to 6.8 percent, the lowest since these data were first collected in 1972. The previous low was 7.0 percent in April of 2000. This is consistent with the view that a low unemployment rate disproportionately benefits the most disadvantaged groups. The black unemployment rate averages close to twice the white unemployment rate. This ratio has been reduced somewhat as the labor market tightened. The unemployment rate for whites in December was 3.7 percent.
                    Healthy job growth has continued to pull more prime-age workers (ages 25 to 54) into the labor market with the employment-to-population ratio (EPOP) edging up to 79.1 percent. This is a new high for the recovery, but it is still more than a full percentage point below its pre-recession level and 2.8 percentage points below the peak high in 2000.
                    It is worth noting that the EPOPs of varying demographic groups have not followed a predictable pattern since 2000. In the last recovery, women in the 25-to-34 age group showed the sharpest falloff in EPOPs. At present, they are one of the groups closest to recovering their 2000 EPOP. While men in the 25 to 34 grouping now show the sharpest falloff in EPOPs among prime-age workers, their EPOPs pretty much moved with the EPOPs for other prime-age workers in the last recovery. This suggests caution in assuming that changes in these EPOPs are due to supply-side issues as opposed to the strength of the labor market.
                    In this respect, it is worth noting that less-educated workers continue to be the biggest gainers from the continuing expansion. The EPOP for workers with just a high school degree has risen by 0.6 percentage points over the last year. For workers without a high school degree it has risen by 0.5 percentage points. By contrast, for workers with a college degree it is unchanged.
                    Other news in the household survey was mixed. All the duration measures of unemployment fell, with the average and median duration hitting new lows for the recovery, albeit still slightly higher than pre-recession levels. On the other hand, the percent of unemployment due to voluntary quits edged down to 10.9 percent. By comparison, it was over 13.7 percent in 2000.
                    On the payroll side, a disproportionate share of the job growth occurred in the goods-producing sector with construction adding 30,000 jobs and manufacturing adding 25,000 jobs. Employment in the mining and logging sector overall was unchanged, although coal mining lost jobs for the third consecutive month.
                    Health care added 31,400 jobs and restaurants added 25,100 jobs, both in line with their averages over the last year. The professional and technical services lost 4,700 jobs, the first decline in more than two years. This was driven by a loss of 15,400 jobs in accounting, a decline that is sure to be reversed as a result of the new tax law. The big loser was retail, which lost 20,300 jobs. Employment in the sector is down by 66,500 over the last year or 0.4 percent.
                    The most troublesome item in this report is the continued weakness of wages. The average hourly wage rose 2.5 percent over the last year, but this may actually be slowing. The annual rate for the last three months compared with the prior three months has been just 1.7 percent.
                    The weakest wage growth has been in manufacturing, where wages have risen by just 1.6 percent over the last year, and mining and logging, where the increase has been just 0.3 percent. This is consistent with production shifting from higher-paying union sites to lower paying non-union sites. Wages in retail have risen by a weak 2.1 percent, while in accommodation and food services they have risen by 3.6 percent, likely reflecting the impact of higher minimum wages.
                    On the whole, this is a positive report, but it certainly indicates no basis for concern about the labor market overheating.

                      Posted by on Friday, January 5, 2018 at 07:08 PM in Economics, Unemployment | Permalink  Comments (108) 

                      Links for 01-05-18

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                        Wednesday, January 03, 2018

                        Links for 01-03-18

                          Posted by on Wednesday, January 3, 2018 at 05:52 PM in Economics, Links | Permalink  Comments (293)