Full text of FedViews : May 10, 2018

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Twelfth Federal Reserve District

FedViews
May 10, 2018

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/

Nicolas Petrosky-Nadeau, senior research advisor at the Federal Reserve Bank of San Francisco, stated his
views on the current economy and the outlook as of May 10, 2018.


Gross domestic product in the first quarter of 2018 increased 2.3% at an annual rate according to the
latest estimate from the Bureau of Economic Analysis. This follows the strong pace of 2.9% in the
fourth quarter of 2017. While consumer spending was softer than expected, we view this change as
transitory and expect a rebound in the second quarter of this year. We estimate 2.8% GDP growth in
2018, a full percentage point above our estimate of the long-run sustainable growth rate.



This faster pace of growth is supporting a robust labor market. The economy added 164,000 jobs in
April, and the unemployment rate fell to 3.9%. We expect unemployment to decline further this year
and through 2019, and remain below our estimate of the long-run rate of 4.7% for some time.



Although interest rates have increased as the Federal Open Market Committee (FOMC) gradually
raises its target rate, financial conditions remain supportive of continued growth. These increases also
reflect inflation moving close to the FOMC’s 2% target. We expect core personal consumption
expenditure price inflation to end 2018 at 2%.



While many indicators point to a strong and growing economy, labor force participation has remained
level for the past few months and is likely to resume a downward path, driven by demographic and
economic factors unrelated to the business cycle.



Looking north to Canada provides some insights into the reasons for declining participation in the
United States and how to raise future participation. Labor force participation rates were around 76% in
both countries until 1996. Then Canada began to pull ahead principally due to strong gains by primeage (25 to 54) Canadian women relative to their U.S. counterparts. By 2017, Canada reached 83%, a
full 8 percentage points above the U.S. participation rate.



Canada has made greater strides increasing the rate of post-secondary education relative to the United
States since the 1990s. The bulk of the difference in Canada’s labor participation trends is explained by
the changes in the participation rates within education groups. Over the past two decades, participation
rates for Canadian women with a college degree have increased, and rates for Canadian women with a
high school diploma have stayed the same. American women of both levels of educational attainment
instead have reduced their rates of participation in the labor force over the same period.

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 18, 2018.



One way to understand the importance of this difference is to consider a scenario in which American
women in these two educational attainment levels were participating in the labor force at the same rate
as Canadian women. If this were the case, most of the gap observed between the two countries would
disappear.



There is certainly a mix of factors at play in explaining these trends. However, one likely key to the
story is the mix of policies in Canada aimed at providing employment protection for parents, and
expansions of parental leave with income support. Indeed, a large gap has developed between the
participation rates for women with children in the United States and Canada over this same period,
which mirrors the overall gap between prime-age women’s participation rates in both countries.

Growth expected to remain above trend

Healthy rate of job gains

Real GDP

%
4

Percent change from 4 quarters earlier

Q1

Nonfarm payroll employment

400
350

Monthly
change

3
FRBSF
forecast

Thousands

Monthly change; seasonally adjusted

300
6−month
moving
average

2

Apr.
164,000

Sustainable
growth rate

1

250
200
150
100
50

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

0

2020

2014

Source: Bureau of Economic Analysis and FRBSF staff

2015

2016

2017

0

2018

Source: Bureau of Labor Statistics

Unemployment rate near historic lows

Inflation near target and may overshoot

Unemployment rate

%

Monthly; seasonally adjusted; forecast is quarterly average

12

Personal consumption expenditure (PCE) price inflation

%

Percent change from 4 quarters earlier

4

10
Overall PCE
price index

8

3

FRBSF
forecast

Fed inflation
target

2

6

Sustainable
unemployment
rate
2010

2011

2012

2013

2014

Apr.
3.9

2015

2016

2017

2018

4
FRBSF
forecast

2019

2020

1

Q1
Core PCE
price index

2
0

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

0

Source: Bureau of Economic Analysis and FRBSF staff

Source: Bureau of Labor Statistics and FRBSF staff

Treasury curve continues to flatten

US labor force participation falling behind

Interest rates

%
8

Weekly average

Labor force participation in the US and Canada

%

Prime age workers (age 25−54)

100

7
Canada

6
30−year mortgage

5
United States

4
05/04

Ten−year Treasury

90

80

70

3
2

60

Two−year Treasury
Fed
funds rate
2010

2011

Source: FAME

2012

2013

2014

2015

2016

2017

2018

1
0

1976

1980

1984

1988

1992

1996

2000

2004

Source: Bureau of Labor Statistics and Statistics Canada

2008

2012

2016

50

Gains in Canada driven mostly by women

Canadian women more likely to work

Labor force participation in the US and Canada

%

Prime age workers (age 25−54)

100

Labor force participation by educational attainment

%

Prime age female workers (age 25−54)
Canada − associate's,
bachelor's, or
higher degree

Canada male
90

90

US male
Canada female
US female

80

US − associate's,
bachelor's, or higher degree

80
Canada − HS and
some college

70

1976

1980

1984

1988

1992

1996

2000

2004

2008

2012

2016

50

Source: Bureau of Labor Statistics and Statistics Canada

70

US − HS and
some college

60

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

60

Source: Bureau of Labor Statistics and Statistics Canada

What's driving the divergence?
Labor participation scenario, US and Canada

Work−life balance likely explanation
%

Prime age female workers (age 25−54)

84

Labor force participation, women with children under 3

%

Prime age female workers (age 25−54)

80

Canada
82

70

Canada
80

60
US using LFPR
from Canada

78

United States
50

76
US

40

74

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Source: Bureau of Labor Statistics and Statistics Canada

72

1976

1980

1984

1988

1992

1996

2000

Source: Bureau of Labor Statistics and Statistics Canada

2004

2008

2012

30
2016