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Economic Recovery and the Expansion Beyond :: June 4, 2009 :: Federal Reserve Bank of Cleveland home | news & media | careers | site map FEDERAL RESERVE BANK o f CLEVELAND A bout U Tours For the Public News & Media Com munit y D e velopm ent S tream ing Media Forefront M agazine Speakers Bureau I Our IRegion I Research I Ban kin g I Learning Center Savings Bonds Home > For th e Public > News and Media > Speeches > 2009 > Economic Recovery and th e Expansion Beyond Q SH H R E Economic Recovery and the Expansion Beyond Additional Information Sandra Pianalto Introduction I’v e b e e n w ith th e F e d e ra l R e serv e fo r m o re th a n 2 6 y e a rs now . At th e risk o f re s o rtin g to u n d e r s ta te m e n t, I c a n sa y w ith c o n fid e n c e t h a t th is p a s t y e a r h as b e e n u n lik e an y o th e r . O u r e c o n o m y has n o t e x p e r ie n c e d a sh o c k o f su c h in te n s ity sin c e th e 1 9 3 0 s . Even so , it is im p o r ta n t to n o te t h a t w h e n e v e r o u r c o u n try h as f a c e d e c o n o m ic c h a lle n g e s , it has alw ay s o v e rc o m e th e m an d has o f te n e m e rg e d s tr o n g e r fo r th e s tru g g le . President and CEO, Federal Reserve Bank o f Cleveland INVESTKentucky Conference L ouisville, K entucky June 4, 2009 T h e p a in fu l e c o n o m ic s to ry b ein g to ld to d a y is ty p ic a lly r e p o r te d in th e fin a n c ia l p re ss in b ro a d s ta tis tic s - e m p lo y m e n t d a t a , fo re c lo s u re ta llie s , GDP d e c lin e s . B ut i t ’s a s to ry b ein g f e l t by in d iv id u al h o u se h o ld s a n d b u sin e sse s. H ere in K entucky, you a r e fe e lin g th e s e c h a lle n g e s , to o , e s p e c ia lly in te rm s o f y o u r u n e m p lo y m e n t r a te , w h ich has risen to n e a rly 1 0 p e r c e n t. B ut m an y o f us, w h e th e r w e h a p p e n to b e b u sin e ssp e o p le o r p o lic y m a k ers, a r e a lre a d y th in k in g b ey o n d th e tro u b le s o f to d a y to an e c o n o m ic re c o v e ry a n d th e e x p a n sio n b e y o n d . In m y re m a rk s to d a y , I w ill b rie fly d e s c rib e so m e fo rc e s t h a t w ill h e lp p u ll o u r e c o n o m y o u t o f its s te e p d e c lin e . T h en I w ill d iscuss w h y s e v e ra l lo n g -sta n d in g im b a la n c e s w ith in th e e c o n o m y w ill likely c a u s e th e re c o v e ry to p ro c e e d slow ly. Finally, I w ill d iscu ss so m e s tr u c tu r a l c h a n g e s in th e la b o r m a rk e t an d th e d riv e rs t h a t w ill le a d us ag a in to lo n g -te rm p ro sp e rity . Of c o u rs e , th e v iew s I e x p re ss to d a y a r e m y ow n a n d do n o t n e c e s sa rily r e f le c t th e v iew s o f my c o lle a g u e s in th e F e d e ra l R eserv e S y stem . I. Forces that Will Lead to Recovery By now w e a r e all v e ry fa m ilia r w ith th e d r u m b e a t o f n e g a tiv e e c o n o m ic new s a s s o c ia te d w ith th is d e e p re c e ssio n - th e s te e p d e c lin e s in o u tp u t in th e f o u rth q u a r te r o f la s t y e a r an d th e firs t q u a r te r o f th is y e a r , c o u p le d w ith th e loss o f 4 m illion p r iv a te -s e c to r jo b s d u rin g th e p a s t six m o n th s. And u n f o rtu n a te ly , w e m ay h e a r m o re d is c o n c e rtin g new s o v e r th e co m in g m o n th s. N e v e rth e le ss, th e r e a r e s e v e ra l p o w e rfu l fo rc e s a t w o rk t h a t w ill p u t th e e c o n o m y b a c k on tr a c k fo r re c o v e ry . F irst am o n g th e s e fo rc e s a r e e x p a n sio n a ry m o n e ta ry an d fisca l p o lic ie s. On th e m o n e ta ry policy sid e , th e F e d e ra l R e serv e has b e e n a c tin g ag g re ssiv e ly fo r w e ll o v e r a y e a r now . W e b e g a n o u r s tim u la tiv e m o n e ta ry policy by lo w erin g o u r s h o r t- te r m in te r e s t r a te ta r g e t, a n d now t h a t r a te s ta n d s a t p ra c tic a lly z e ro . W e h av e c o n tin u e d to re sp o n d to th e fin a n c ia l crisis a n d th e re c e s sio n th ro u g h http://www.clevelandfed.org/For_the_Public/News_and_Media/Speeches/2009/Pianalto_20090604.cfm[4/29/2014 2:00:17 PM] Economic Recovery and the Expansion Beyond :: June 4, 2009 :: Federal Reserve Bank of Cleveland a v a r ie ty o f in n o v a tiv e p ro g ra m s t h a t h av e d r a m a tic a lly e x p a n d e d o u r b a la n c e s h e e t. T h e se p ro g ra m s a r e p roviding liq u id ity to th e fin a n c ia l s y ste m , o f fs e ttin g so m e o f th e d e le v e ra g in g in th e n o n b a n k fin a n c ia l s e c to r , a n d im p ro v in g th e fu n c tio n in g o f key c r e d it m a rk e ts . For e x a m p le , th e F e d e r a l R e se rv e is in th e p ro c e ss o f p u rc h a sin g up to $ 1 .2 5 trillio n o f m o rtg a g e -b a c k e d s e c u r itie s fro m g o v e rn m e n tsp o n so re d e n te r p r is e s by th e e n d o f th is y e a r . S in ce w e a n n o u n c e d o u r p la n s, th e 3 0 - y e a r fix e d , c o n v e n tio n a l m o rtg a g e lo an r a te has fa lle n c o n s id e ra b ly - e v e n th o u g h m o rtg a g e r a te s h av e in c h e d up a b it in r e c e n t w e e k s. Fiscal po licy also plays a key ro le . T h e A d m in is tra tio n an d C ongress h av e e n a c te d a v e ry siz a b le stim u lu s p a c k a g e t h a t w ill b o o s t sp e n d in g th ro u g h o u t th e e c o n o m y . M uch o f th e s p e n d in g on in f ra s tr u c tu re w ill b eg in to a p p e a r th is su m m e r, b u t th e stim u lu s bill has a lre a d y h e lp e d c e r ta in s t a t e an d lo c al g o v e rn m e n ts av o id im m e d ia te c u tb a c k s in p ro g ra m s a n d se rv ic e s . T h e se c o n d fo rc e is th e m o d e ra tio n in th e c o n tra c tio n o f th e hou sin g s e c to r . As w e a k as th e housing m a rk e ts m ay s till a p p e a r a t th e m o m e n t, w e know t h a t lo w e r m o rtg a g e in te r e s t r a te s c a n h elp in c re a s e th e d e m a n d fo r h ousing. In a d d itio n , th e A d m in is tra tio n has la u n c h e d e f f o rts to m a k e h o m e o w n e rsh ip m o re a f fo rd a b le fo r f ir s t tim e b u y ers a n d to h e lp m illions o f d is tre s s e d A m erican s c o p e w ith b u rd e n so m e m o rtg a g e p a y m e n ts w ith o u t losing th e ir h o m e s. L ow er m o rtg a g e r a te s , lo w e r h o m e p ric e s, a n d ta x in c e n tiv e s a r e co m b in in g to e n c o u ra g e an a c tiv e r e a l e s t a t e m a rk e t, w h ich sh o u ld f u r th e r slow th e d o w n w ard m o v e m e n t o f h o m e p ric e s. E xisting h o m e s a le s h av e s ta b iliz e d s in c e O c to b e r, a n d th e r a te o f d e c lin e h as ta p e r e d o ff fo r n e w sin g le -fa m ily h o m e s a le s o v e r th e p a s t fe w m o n th s. This is w e lc o m e new s fo r h o m e b u ild e rs, w ho w a tc h e d n e w h o u sin g s ta r ts re a c h a re c o rd low in April. A th ird f o rc e w o rk in g to le a d us to re c o v e ry is th e re tu r n o f s ta b ility an d c o n fid e n c e to th e fin a n c ia l s e c to r . U nderly in g o u r c u r r e n t e c o n o m ic p ro b le m s is a c o lla p s e in o u r fin a n c ia l m a rk e ts . To grow , an e c o n o m y n e e d s a w e ll-fu n c tio n in g fin a n c ia l sy ste m t h a t c a n h elp m o ve c a p ita l fro m sa v e rs to e n tr e p r e n e u r s an d b u sin e sse s. S tab ility an d c o n fid e n c e h av e to b e r e s to r e d to m a k e t h a t h a p p e n . T h a t is w h y p o lic y m a k ers a r e try in g to b re a k th e re m a in in g lo g jam in th e fin a n c ia l m a rk e ts a n d to g e t th e c r e d it m a rk e ts b a c k in good w o rking o r d e r . C re d it c o n d itio n s h av e c e r ta in ly im p ro v e d s in c e la s t fa ll, an d m o re r e c e n tly , b an k s h av e su c c e ssfu lly ra ise d la rg e a m o u n ts o f p riv a te c a p ita l, w h ich s e e m e d im p o ssib le ju s t a m o n th o r tw o ago. This c a p ita l w ill b e a v a ila b le fo r fu n d in g re n e w e d lo an g ro w th as th e e c o n o m y im p ro v e s. A fin a l f o rc e - o n e t h a t I s e e in th is room to d a y an d t h a t is possibly th e m o st im p o r ta n t in m oving us fro m re c e ssio n to re c o v e ry - is th e e n tr e p r e n e u r ia l s p ir it o f A m erican b u sin e ss. E conom ic re s e a rc h show s t h a t m o st b u sin ess o w n e rs r e a c t to h arsh e c o n o m ic tim e s by c u ttin g la b o r a n d o p e r a tio n a l c o s ts , by n a rro w in g th e ir fo cu s to c o re b u sin ess a c tiv itie s , a n d by sc a lin g b a c k on e x p a n sio n p la n s. T h ey g e t d e fe n s iv e . T h ey d o n ’t s e e k o u t n e w loans o r lin es o f c r e d it. B ut as tim e p a sse s, so m e b o ld -m in d e d b u sin ess o w n e rs b eg in to s e e o p p o r tu n itie s b ro u g h t on by r e tr e n c h m e n t. T h ey m o v e f ir s t a n d th e y m o ve q u ickly, in v e stin g in R&D, la u n ch in g e x p a n sio n p la n s, a n d e v e n s ta rtin g n e w e n te r p r is e s fro m s c ra tc h . R eco v e ries a r e b u ilt on th e o p p o r tu n itie s m a d e a v a ila b le by re c e ssio n s. I h av e b e e n h e a rin g so m e s c a tt e r e d re p o r ts o f p ro g re ss on n ew b u sin ess a c tiv ity in m y discu ssio n s w ith b u sin e ss c o n ta c ts la te ly , b u t I am s u re t h a t w e w o u ld a ll like to h e a r m an y m o re o f th e s e r e p o rts , all a c ro ss th e c o u n try , so t h a t w e c a n f e e l m o re c o n f id e n t t h a t w e a r e on a c le a r tr a c k to re c o v e ry . L et m e sa y t h a t it is alw ay s a http://www.clevelandfed.org/For_the_Public/News_and_Media/Speeches/2009/Pianalto_20090604.cfm[4/29/2014 2:00:17 PM] Economic Recovery and the Expansion Beyond :: June 4, 2009 :: Federal Reserve Bank of Cleveland c h a lle n g e to p in p o in t w h e n th e e c o n o m y w ill tr a n s itio n from re c e ssio n to re c o v e ry a n d to th e e x p a n sio n b e y o n d . It is e s p e c ia lly d iffic u lt to f o r e c a s t in th is c u r r e n t e n v iro n m e n t b e c a u s e o f th e g lo b al n a tu r e o f th is re c e ssio n a n d b e c a u s e o f th e fin a n c ia l tu rm o il w e h av e b e e n fa c in g fo r so long. O ver th e p a s t f e w w e e k s, in co m in g n ew s has b e e n m ix ed , a n d th e d a t a w e r e c e iv e a r e v o la tile a n d s u b je c t to rev isio n . In m y v ie w , th e s te e p d e c lin e in o u r e c o n o m y h as b eg u n to m o d e ra te , a n d I e x p e c t s a le s an d p ro d u c tio n to begin to re c o v e r, a lth o u g h g ra d u a lly , d u rin g th e se c o n d h a lf o f th e y e a r . C u rre n tly , a lo t o f a tte n tio n is fo c u se d on th e d a t e w h e n th is re c e ssio n w ill e n d , b u t n o t e n o u g h a tte n tio n is b ein g p aid to how m uch g ro u n d w e w ill h av e to c o v e r b e f o r e w e re tu r n to o u r p re -re c e s s io n le v e l o f e c o n o m ic a c tiv ity . II. Long-standing Imbalances within the Economy O nce th e re c e ssio n e n d s , w e m ay b e te m p te d to h o p e t h a t th e ec o n o m y w ill ta k e o ff a t a fu ll g allo p , b u t t h a t is n o t likely to h a p p e n b e c a u s e o f so m e lo n g -sta n d in g im b a la n c e s w ith in o u r ec o n o m y . A d d ressin g th e s e im b a la n c e s m ay r e s u lt in a slo w e r, le n g th ie r re c o v e ry p e rio d , b u t d oing so w ill in c re a s e o u r a b ility to a c h ie v e su s ta in a b le e c o n o m ic g ro w th o v e r th e lo n g e r te rm . O ne o f th e m o st im p o r ta n t im b a la n c e s is th e o n e t h a t c o n fro n ts m an y A m erican s w ho now n e e d to re b u ild th e ir p e rso n a l w e a lth . For m o st o f th e p a s t d e c a d e , th e U n ite d S ta te s has b e e n a n a tio n o f s p e n d e rs , n o t sa v e rs. D uring th e e x p a n sio n a ry p e rio d in th e e a rly p a r t o f th e d e c a d e , savings r a te s d ip p e d dow n to w a rd z e ro , b u t h o u se h o ld w e a lth c o n tin u e d to g row fo r m an y p e o p le as a r e s u lt o f th e rising sto c k m a rk e t an d a p p r e c ia tin g h o m e v a lu e s. Of c o u rs e , as is tr u e fo r m o st th in g s t h a t se e m to o good to b e tr u e , t h a t p a tte r n c a m e to an a b r u p t h a lt la s t y e a r . T h e d o u b le w h am m y o f sto c k a n d h o m e p ric e d e c lin e s c a u s e d th e n e t w o rth o f U.S. h o u se h o ld s to d e c lin e by a sta g g e rin g 18 p e r c e n t in 2 0 0 8 . As h o u se h o ld s h a v e b eg u n to r e tr e n c h , th e ir savings r a te h as rise n . T h e p e rs o n a l saving s r a te w a s a m e a g e r 0 . 6 p e r c e n t in 2 0 0 7 an d o nly 1 .8 p e r c e n t la s t y e a r . In th e f ir s t fo u r m o n th s o f th is y e a r , th e r a t e has a v e ra g e d 4 . 7 p e r c e n t. Sim ply p u t, m an y p e o p le to d a y h a v e no c h o ic e b u t to sa v e . T h ey a r e re b u ild in g th e ir p e rso n a l b a la n c e s h e e ts . And as p e o p le c o m e to grips w ith th e f a c t t h a t th e ir fin a n c e s a r e m o re u n c e rta in th a n th e y had e v e r th o u g h t th e y w o u ld b e , th e y a r e n o t likely to re su m e sp e n d in g a t th e p a c e th e y o n c e did. As a re s u lt, w e sh o u ld n o t e x p e c t c o n s u m e r s p e n d in g to re tu r n to th e 7 0 p e r c e n t s h a re o f GDP t h a t it p o s te d j u s t b e fo re th e re c e ssio n b e g a n . T his tr a n s itio n fro m an e n v iro n m e n t o f h e a d y c o n s u m p tio n to o n e o f g r e a te r sav in g s p r e s e n ts c o n s id e ra b le s h o r t- te r m c h a lle n g e s . W e c a n s e e signs o f th o s e c h a lle n g e s all a ro u n d us as c a r d e a le rs h ip s s h u t dow n an d re ta ile rs p o s t d isa p p o in tin g sa le s fig u re s. B ut a h ig h e r sav in g s r a te also has c e r ta in a d v a n ta g e s in th e lo n g e r ru n . T h e e c o n o m y c a n b e n e f it b e c a u s e a h ig h e r savings r a te c r e a te s a po o l o f c a p ita l t h a t co u ld fu n d p ro d u c tiv e in v e s tm e n ts , in c lu d in g th o s e in n e w in d u s trie s . This, in tu rn , w ill b o o st f u tu r e in c o m es. As A m erican s fo cu s on re b u ild in g th e ir w e a lth , c a n w e rely on in te r n a tio n a l m a rk e ts to m a k e up fo r th is slow d o w n in d o m e stic c o n s u m e r sp e n d in g ? U n fo rtu n a te ly , fe w c o u n trie s a r e b ein g s p a re d th e e f f e c ts o f th is d o w n tu rn . T h e In te rn a tio n a l M o n e tary Fund p r e d ic ts t h a t th e g lo b a l e c o n o m y w ill sh rin k by 1 .3 p e r c e n t in 2 0 0 9 m ark in g th e f ir s t tim e it has c o n tr a c te d sin c e W orld W ar II. Even if w e co u ld c o u n t on in te r n a tio n a l m a rk e ts fo r h elp , th is co u ld n o t h a p p e n o v e rn ig h t b e c a u s e o f th e s e c o n d m a jo r im b a la n c e w ith in http://www.clevelandfed.org/For_the_Public/News_and_Media/Speeches/2009/Pianalto_20090604.cfm[4/29/2014 2:00:17 PM] Economic Recovery and the Expansion Beyond :: June 4, 2009 :: Federal Reserve Bank of Cleveland th e U.S. e c o n o m y - o u r m assiv e tr a d e d e f ic it. For d e c a d e s , o u r n atio n has stru g g le d w ith th is p e r s is te n t tr a d e im b a la n c e , w h ich r e a c h e d n e w h e ig h ts as a s h a re o f GDP in la te 2 0 0 5 . G iven th e w e a k e n e d s t a t e o f o u r tr a d in g p a r tn e rs , i t is going to b e a re a l c h a lle n g e to g e t tr a d e flow s - b o th im p o rts an d e x p o rts - to b o u n c e b ac k . D uring th e p rev io u s e x p a n sio n , w e w e r e im p o rtin g m o re a n d m o re goo d s an d s e rv ic e s fro m a b ro a d , a n d o u r e x p o r t g ro w th fa ile d to k e e p p a c e . Im p o rts h av e d e c lin e d as a r e s u lt o f o u r d o m e s tic re c e ss io n , b u t d u e to th e g lo b a l n a tu r e o f th e re c e ssio n , d e m a n d fo r o u r e x p o rts has d e c lin e d as w e ll. Even so, if U.S. in te r n a tio n a l tr a d e m o v es to w a rd a s t a t e o f g r e a te r b a la n c e o v e r th e lo n g e r te r m , w e sh o u ld e v e n tu a lly s e e e x p o rts re b o u n d a n d g e n e r a te n e w jo b s . T h e th ird im b a la n c e w e m u st a d d re s s is o u r loom ing f e d e r a l sp e n d in g o b lig a tio n s . W hile th e fisc a l stim u lu s p a c k a g e w a s an im p o r ta n t re s p o n se to e x tra o rd in a r y c irc u m s ta n c e s , it is n e ith e r p o ssib le n o r d e s ira b le fo r such an e le v a te d le v e l o f f e d e r a l s p e n d in g to c o n tin u e in d e fin ite ly . O ur c o u n try fa c e s a s u b s ta n tia l fisc a l im b a la n c e t h a t w ill re q u ire a n u m b e r o f to u g h fisc a l policy d e c isio n s. T h e C o n g ressio n al B u d g et O ffice e s tim a te s t h a t o u r f e d e r a l b u d g e t d e f ic it w ill re a c h $ 1 .8 trillio n th is fisc a l y e a r . To m a k e m a tte r s w o rs e , M e d ica re an d S ocial S e c u rity a r e p r o je c te d to beg in im posing a d d itio n a l c a sh d ra in s on th e f e d e r a l b u d g e t b eg in n in g as e a r ly as e ig h t y e a rs fro m now u n d e r c u r r e n t p ro g ra m re q u ir e m e n ts . For y e a rs , w e h a v e b e e n a b le to f in a n c e a la rg e s h a re o f o u r b u d g e t d e fic its w ith re la tiv e ly c h e a p c a p ita l fro m a b ro a d , a n d fo r y e a rs th is has w o rk e d to o u r b e n e f it. B ut o u r c o u n try sh o u ld n o t re g a rd in te r n a tio n a l c a p ita l m a rk e ts as a b o tto m le s s w e ll. As a c c e s s to th is w e ll b e c o m e s m o re lim ite d , th e c o s t o f fin a n c in g o u r fisc a l d e fic its co u ld rise. It ta k e s tim e to fo rg e a c o n se n su s a ro u n d n e w fis c a l p rio ritie s , so a lo t o f c a r e f u l th o u g h t m u s t go in to d e c id in g how to b e s t m o v e o u r b u d g e t to w a rd b a la n c e o v e r tim e . In th e s h o r t te rm , th e s e ste p s m ig h t lim it th e f e d e r a l g o v e r n m e n t’s a b ility to c o n tr ib u te d ir e c tly to e c o n o m ic g ro w th . And in th e lo n g e r te r m , th e b u d g e t d e fic its o f to d a y w ill n e e d to b e o f f s e t w ith su rp lu se s in b e t t e r tim e s. III. Labor Markets and Drivers of Long-term Prosperity A n o th e r re a so n to e x p e c t a slo w e r, m o re p ro lo n g e d re c o v e ry is th e siz a b le a d ju s tm e n t o c c u rrin g in o u r la b o r m a rk e ts . As you know , p e o p le a r e c o n tin u in g to lo se jo b s a t a s ig n ific a n t p a c e d u rin g th is re c e ssio n , a n d u n f o rtu n a te ly I b e lie v e t h a t th e jo b le s s r a te is likely to s ta y e le v a te d fo r q u ite so m e tim e . O ur e c o n o m y is c h a n g in g . M any o f th e jo b losses w e a r e e x p e rie n c in g a r e n o t ju s t a c y c lic a l re s p o n s e to w e a k d e m a n d , b u t th e r e s u lt of s tr u c tu r a l s h ifts also u n d e r w a y in o u r ec o n o m y . S om e s e c to r s o f o u r e c o n o m y w ill e m e r g e s m a lle r fro m th is re c e ssio n a n d w ill fa c e lin g e rin g a d ju s tm e n ts . C o n sid er c o n s tru c tio n e m p lo y m e n t, fo r e x a m p le . G iven th e g lu t o f h o using in m an y m a rk e ts , it is h a rd to im a g in e e m p lo y m e n t in th e c o n s tru c tio n in d u stry m ak in g a q uick re tu r n to its p e a k le v e ls o f 2 0 0 6 . Even w h e n th e e c o n o m y re s u m e s a m o re n o rm a l g ro w th r a te , m a n y la id -o ff w o rk e rs w ill n e e d to find jo b s in n e w b u sin ess s e c to r s b e c a u s e th e ir fo rm e r in d u stry has sim ply b e c o m e a s m a lle r p a r t o f o u r ec o n o m y . This p a tte r n is a lre a d y e v id e n t in th e u n e m p lo y m e n t s ta tis tic s . Only 12 p e r c e n t o f c u r r e n tly u n e m p lo y e d w o rk e rs e x p e c t to re tu r n to th e ir f o rm e r e m p lo y e r, a n d a n e w B ureau o f L abor S ta tis tic s su rv ey show s th e lo w e s t n u m b e r o f jo b o p e n in g s s e e n sin c e th e d a t a f ir s t b e c a m e a v a ila b le in D e c e m b e r 2 0 0 0 . http://www.clevelandfed.org/For_the_Public/News_and_Media/Speeches/2009/Pianalto_20090604.cfm[4/29/2014 2:00:17 PM] Economic Recovery and the Expansion Beyond :: June 4, 2009 :: Federal Reserve Bank of Cleveland W e know t h a t th e U.S. e c o n o m y is o n e o f th e b e s t in th e w o rld a t r e in te g r a tin g la id -o ff w o rk e rs , b u t th e re a lity is t h a t it ta k e s a long tim e to m a tc h p e o p le se e k in g e m p lo y m e n t w ith jo b s in ex p a n d in g in d u s trie s . M any u n e m p lo y e d w o rk e rs in s e c to r s like c o n s tru c tio n o r fin a n c e , o r in s p e c ific in d u s trie s like a u to m a n u fa c tu rin g , w ill n e e d to a c q u ire n e w skills an d tra in in g to e n t e r fie ld s t h a t w ill b e e x p a n d in g o n c e th e e c o n o m y s ta r t s to re c o v e r. So it co u ld ta k e a long tim e b e fo re th e u n e m p lo y m e n t r a t e re tu r n s to le v els w e th in k o f as n o rm a l, a n d w e m ig h t e v e n n e e d to re v isit o u r d e fin itio n o f n o rm al. O ver tim e , h o w e v e r, w e a r e likely to s e e so m e lo n g -te rm p ro d u c tiv ity b e n e f its . For e x a m p le , c o n s id e r th e e m p lo y m e n t c h a n g e s w e h a v e s e e n in K en tu c k y ’s m ining in d u stry . D esp ite r e c e n t g ain s, m ining e m p lo y m e n t is less th a n h alf o f w h a t i t w as in 1 9 8 2 , as n ew te c h n o lo g ie s h av e ta k e n o v e r so m e o f th e w o rk t h a t w a s o n c e d o n e by h u m an h a n d s. T h e d o w n sid e , o f c o u rs e , is t h a t so m e w ell-p a y in g m ining jo b s h av e b e e n lo st. B ut e v e n th o u g h th e m in es in K entucky d o n ’t e m p lo y th e n u m b e r o f p e o p le th e y o n c e d id , th e y a r e no w run m o re e ffic ie n tly a n d p ro d u c tiv e ly . At o n e p o in t, th e K entucky co a l m ining in d u stry m ig h t h a v e lo o k e d e n d a n g e r e d , y e t c h a n g e s in te c h n o lo g y a n d b u sin ess p r a c tic e s h a v e e n a b le d it to b e c o m e m o re c o m p e titiv e a n d v ia b le . In th e b ig g e r p ic tu r e , as so m e m ining jo b s d is a p p e a re d , jo b s in o th e r in d u strie s e x p a n d e d . From 1 9 8 2 to 2 0 0 8 , K en tu ck y ’s t o ta l e m p lo y m e n t ro se by 6 0 p e r c e n t. M a rk e t fo rc e s te n d to d ir e c t re s o u rc e s to w h e r e v e r th e y a r e m o st p ro d u c tiv e . C a p ita l an d c r e a tiv e e n e rg y - an d e v e n tu a lly jo b s - flo w to w a rd th e n e w g oods, se rv ic e s , a n d p ro c e sse s t h a t w ill d e liv e r g r e a te r v a lu e th a n th e o ld o n e s . In th e long ru n , th is s h ift w ill in c re a s e o u r e c o n o m ic p ro d u c tiv ity , an d I am e n c o u ra g e d by th e p o te n tia l b e n e f its t h a t w ill b rin g to o u r p a r t o f th e c o u n try . So w h a t c a n w e do in th e n e a r te rm w h ile th e p a in fu l a d ju s tm e n ts a r e ta k in g p la c e ? I th in k w e n e e d to s e t o u r sig h ts on tw o key d riv ers o f lo n g -te rm p ro s p e rity - e d u c a tio n an d in n o v a tio n . E co n o m ists a t th e F e d e ra l R eserv e Bank o f C lev e lan d h av e c o n d u c te d re s e a rc h show ing t h a t th e s e tw o f a c to rs a r e e s s e n tia l d riv e rs o f s t a t e in c o m e g ro w th . W e a r e c o n tin u in g to b e n e f it as a n a tio n fro m s tr o n g e r e d u c a tio n a l a tta in m e n t. T h a t is also tr u e h e r e in K entucky, w h e r e you h a v e b e e n fo c u se d on b o o stin g e d u c a tio n a l a t ta i n m e n t fo r so m e tim e . In th e p a s t 2 0 y e a rs , th e s h a re o f th e p o p u la tio n w ith a t le a s t a b a c h e lo r ’s d e g r e e h as in c re a s e d n o ta b ly . R egarding in n o v a tio n , th e re c e ssio n has n o t p u t a d e n t in o u r n a tio n ’s c re a tiv ity . W hile all s o rts o f c a p ita l sp e n d in g a c tiv itie s w e r e c u t b ack , p a t e n t a p p lic a tio n s th ro u g h o u t th e c o u n try a c tu a lly ro se in 2 0 0 8 . This c o n tin u e s a long u p w a rd tre n d : la s t y e a r , th e U.S. p a t e n t o ffic e re c e iv e d 8 0 p e r c e n t m o re a p p lic a tio n s th a n it d id in 1 9 9 8 . O ur g r e a te s t s tr e n g th fo r th e f u tu r e w ill b e o u r a b ility to c r e a t e n ew te c h n o lo g ie s , to e m b ra c e c h a n g e , a n d to re m a in fle x ib le am id ev o lving e c o n o m ic c o n d itio n s. A s u s ta in a b le g ro w th s tr a te g y m u st b u ild on o u r e x istin g s tr e n g th s - using th e in d u s tria l k n o w led g e an d w o rk p la c e skills fro m o ld e r in d u s trie s an d ap p ly in g th e m to n e w ta sk s an d n e w in d u s trie s . In d e e d , re c o v e rie s a r e b u ilt in no sm a ll p a r t on th e o p p o r tu n itie s c r e a te d by re c e ssio n s. In th e w o rd s o f th e g r e a t A m erican p h ilo s o p h e r Em erson: “ O ur s tr e n g th grow s o u t o f o u r w e a k n e s s .” Conclusion I w o u ld also a d d , in co n c lu sio n , t h a t o u r s tr e n g th s o u tw e ig h o u r w e a k n e s s e s . I h a v e ta lk e d a b o u t th e fo rc e s I firm ly b e lie v e w ill le a d us b a c k to re c o v e ry . T h e se fo u r fo rc e s e x p a n sio n a ry m o n e ta ry an d fisc a l p o lic ie s, th e s ta b iliz a tio n o f th e h o using m a rk e t, th e re tu r n of http://www.clevelandfed.org/For_the_Public/News_and_Media/Speeches/2009/Pianalto_20090604.cfm[4/29/2014 2:00:17 PM] Economic Recovery and the Expansion Beyond :: June 4, 2009 :: Federal Reserve Bank of Cleveland c o n fid e n c e to th e fin a n c ia l s e c to r , an d a b o v e all th e e n tr e p r e n e u r ia l s p ir it o f A m erican b u sin ess - c o lle c tiv e ly bu ild a stro n g fo u n d a tio n fo r g ro w th . Still, o u r e c o n o m y has b e e n c h a r a c te r iz e d fo r y e a rs by stro n g im b a la n c e s t h a t w ill hold b a c k th e p a c e o f o u r re c o v e ry . H ouseholds a r e now sav in g m o re , a n d w e c a n n o t look to th e r e s t o f th e w o rld to f in a n c e so m uch o f o u r s p e n d in g . S im ilarly, w e c a n n o t e x p e c t th e c u r r e n t e le v a te d le v e l o f f e d e r a l b o rro w in g to c o n tin u e in d e fin ite ly . F inally, o u r la b o r m a rk e ts a r e u n d e rg o in g a m a jo r s tr u c tu r a l c h a n g e , w ith m an y reg io n s now fin d in g th e m s e lv e s b u rd e n e d w ith lo n g -te rm u n e m p lo y m e n t issu es t h a t w ill n o t b e c o r r e c te d q uickly. This e c o n o m ic crisis h as h e ig h te n e d o u r a w a re n e s s o f th e s e im b a la n c e s an d c o m p e lle d us to re e x a m in e th e m . I am c o n v in ce d t h a t if w e c a n m a k e p ro g re ss in a d d re ssin g th e s e im b a la n c e s , w e w ill in c re a s e o u r p ro s p e c ts fo r g r e a te r p ro s p e rity o v e r th e lo n g e r te rm . T o d ay, in th is b e a u tif u l s e ttin g , I th in k w e c a n b egin to b e lie v e in b e t t e r d ays a h e a d , n o t j u s t b e c a u s e w e ’re h o p e fu l o r o p tim is tic , b u t b e c a u s e o u r n a tio n h as m a d e it h a p p e n b e f o r e . T his w ill b e a long jo u rn e y . B ut e d u c a tio n a n d in n o v a tio n h av e h e lp e d to p u ll us th ro u g h so m e d iffic u lt tim e s b e f o r e , a n d I know t h a t o u r c o lle c tiv e e n e rg y , im a g in a tio n , an d a b ilitie s w ill le a d us on to a b a la n c e d a n d h e a lth y e c o n o m ic e x p a n sio n . 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