Full text of United States Economic Update : Outlook Points to Improved Growth in Second Half

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Outlook Points to Improved Growth in Second Half
July 28, 2017
Economic indicators released the past two months point
to stronger growth in second quarter 2017 and the rest
of the year. The economy is close to full employment,
and business and consumer confidence remains strong.
Real personal consumption expenditures (PCE) growth
was positive in April and May, a reversal from the negative growth rates seen earlier in the year.
The first release for real GDP growth in second quarter
2017 came in at 2.6 percent, a rebound from the revised 1.2 percent growth in the first quarter. The increase came largely from PCE and nonresidential fixed
investment. Forecasters expect robust growth of at
least 2 percent for the third and fourth quarters this
year
Headline and core inflation measures have dipped in
recent months, but most forecasters still project both
measures to reach the target rate of 2 percent by
2018.

Percent

10
SPF natural rate
CBO natural rate

9

Actual unemployment rate
8

7

6
2017:Q2

4.8%
4.7%

5

4.4%
4

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

NOTE: Shaded area indicates recession.
SOURCES: Bureau of Labor Statistics; Congressional Budget Office (CBO); Survey of Professional Forecasters (SPF); author's calculations.

Chart 2
Long-Term Unemployment Rate Still Elevated
Percent of unemployed, 27 weeks and over

Job Growth Strengthens; Long-Term
Unemployment Still High

50
45

Nonfarm payrolls grew by 222,000 in June, well above
the consensus forecast and up from 152,000 in May.
The average monthly payroll increase in the first half of
2017 stood at 180,000. That is slightly below the 2016
average of 187,000 but above the average increase of
174,000 in 2006—when unemployment was similar to
the current rate. Payrolls have now grown every month
since October 2010.
The headline unemployment rate rose 0.1 percentage
points to 4.4 percent in June but remained below the
Congressional Budget Office’s (CBO’s) 4.7 percent estimate of the natural rate of unemployment—the rate
that would persist in the absence of business-cycle
fluctuations. Both the CBO’s and Survey of Professional
Forecasters’ natural rate estimates have gradually declined over the past five years (Chart 1). The headline
U-3 rate—the total unemployed as a percent of the civilian labor force—and the broader U-6 unemployment
rate—which includes discouraged workers, other marginally attached workers and those working part time
for economic reasons—have returned to their average
levels before the Great Recession, indicating tightness
in the labor market.
However, one segment of the labor force—the longterm unemployed, defined as those who have been
Federal Reserve Bank of Dallas

Chart 1
Natural Rate of Unemployment Slowly Declining

40
35
May
24.0%
June
24.3%

30
25
20
15
10
Average
Sept '06-Feb '07:
16.8%

5
0

1999

2001

2003

2005

2007

2009

2011

Average
Jan-Jun '00:
11.3%
2013

2015

2017

NOTE: Shaded areas indicate recessions.
SOURCE: Bureau of Labor Statistics.

looking for work for 27 weeks or more—has not returned to
pre-Great-Recession levels (Chart 2). In June, the share of
long-term unemployed was 24.3 percent, about 7.5 percentage points higher than the pre-Great-Recession average of 16.8 percent.
Labor Force Participation Declines Sharply
From 2006 to 2016, the U.S. labor force participation rate
fell from 66.2 percent to 62.8 percent, a decline of over 3
percentage points, the highest percentage-point decline
among advanced economies (Table 1). The participation
rate either dipped less or increased in other countries,

National Economic Update

1

Table 1: Trends in Labor Force Participation Rates Differ in the U.S.
A. Overall (15+ years) Labor Force Participation Rate (percent)
2006

2011

2016

67.0
56.2
59.0
60.5
63.4
62.7
66.2
58.2

66.7
56.3
60.1
59.4
63.7
62.3
64.1
58.5

65.7
55.9
61.0
60.1
65.0
62.9
62.8
59.0

Canada
France
Germany
Japan
Sweden
U.K.
U.S.*
OECD ex U.S.

Change: 2006-16 Change: 2011-16
-1.3
-0.2
2.1
-0.4
1.6
0.3
-3.4
0.8

-1.0
-0.4
0.9
0.8
1.3
0.6
-1.3
0.6

B. Prime-Age (25-54 years) Labor Force Participation Rate (percent)
2006

2011

2016

86.2
87.6
87.1
83.0
89.5
84.5
82.9
80.1

86.4
88.3
87.7
84.3
90.3
85.3
81.6
81.2

86.5
87.5
87.4
86.1
91.0
86.1
81.3
82.1

Canada
France
Germany
Japan
Sweden
U.K.
U.S.
OECD ex U.S.

Change: 2006-16 Change: 2011-16
0.4
-0.1
0.3
3.1
1.5
1.6
-1.6
2.0

0.1
-0.8
-0.3
1.8
0.7
0.8
-0.3
0.9

*16+ years.
SOURCES: Organization for Economic Cooperation and Development (OECD); author's calculations.
including those in the Organization for Economic Cooperation and Development (OECD) aggregate, which excludes the U.S. A major contributor to this decline is the
prime-age (25–54) participation rate. Unlike other advanced countries, which reported increases in the primeage participation rate from 2006 onward, the comparable U.S. rate declined from 82.9 percent in 2006 to 81.3
percent in 2016. As a result, the U.S. now has the lowest prime-age participation rate among these advanced
economies. Potential explanations for this outsized decline include relatively poorer health outcomes in the
U.S., demographic changes, and lower spending on jobsearch-assistance programs.
Chart 3
Inflation Falling Below Recent Averages

Inflation Declines, but Expectations Remain
Anchored
Core PCE inflation, which excludes food and energy,
dropped to 1.4 percent in May on a year-over-year basis. Meanwhile, the Dallas Fed’s Trimmed Mean PCE year
-over-year inflation measure came in at 1.7 percent.
Chart 3 plots these two measures of inflation, along with
the Atlanta Fed’s Sticky Consumer Price Index (CPI)
measure, the Cleveland Fed’s Median CPI, and core CPI
inflation. All five measures began trending down in
March. Even after replacing March’s monthly growth rate
with the average growth rate over the past year
(excluding March), inflation still declined, indicating that
the current trend is not just the result of the sharp fall
that occurred in March.

Percent change, year/year*

Business and Consumer Confidence Is Strong

3.5
Cleveland Fed Median CPI
Atlanta Fed Sticky CPI
CPI excluding food and energy
Trimmed Mean PCE
PCE excluding food and energy

3.0

2.5
June
2.2%
2.0

2.1%
1.7%
May

1.5

1.7%

2003-07 avg.
core PCE:
1.97%

1.4%
2012-17 avg.
core PCE:
1.60%

1.0

0.5

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

The Institute for Supply Management (ISM) manufacturing composite index stood at 57.8 in June—2.9 percentage points higher than in May and the highest reading
since August 2014. The ISM non-manufacturing composite index also rose, from 56.9 in May to 57.4 in June.
The Conference Board’s Consumer Confidence Index
climbed 1.3 points from May’s reading to 118.9 in June,
one of the highest values since June 2001. All of these
releases indicate growing optimism about the U.S.
economy.

2017

*Seasonally adjusted.
NOTES: Shaded area indicates recession. PCE stands for personal consumption expenditures; CPI stands for consumer price index.
SOURCES: Bureau of Economic Analysis; Bureau of Labor Statistics; Atlanta Fed; Cleveland Fed; Dallas Fed; author's calculations.

Federal Reserve Bank of Dallas

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Policy Uncertainty Continues

Chart 4
Policy Uncertainty Heightened

Recently, economists and business leaders have identified policy and other forms of uncertainty as possible
sources of concern for the U.S. economy. Chart 4 plots
five different types of uncertainty and their corresponding indexes (normalized for comparison purposes) from
first quarter 1986 to second quarter 2017.1 As seen in
the chart, all types of uncertainty are low right now, except for policy uncertainty.

Standard deviation

6
Policy uncertainty
5

Financial uncertainty

4

Macro uncertainty
Forecast dispersion

3

Stock market uncertainty
2
1

—Daniel Chapman

0

Note
1. The five different uncertainty indexes are: The inner
quartile range of individual Survey of Professional Forecasters GDP forecasts; the Chicago Board Options Exchange’s VXO, which measures stock market volatility;
the Macro Uncertainty Index from Jurado et al. (2015);
the Financial Uncertainty Index from Ludvigson et al.
(2017); and the Policy Uncertainty Index from Baker et
al. (2015). For more information, see: “Measuring Uncertainty,” by Kyle Jurado, Sydney C. Ludvigson and
Serena Ng, American Economic Review, vol. 105, no. 3,
2015, pp. 1,177–216; “Uncertainty and Business Cycles:
Exogenous Impulse or Endogenous Response?” by Sydney Ludvigson, Sai Ma and Serena Ng, National Bureau
of Economic Research, NBER Working Paper no. 21803,
2017; “Measuring Economic Policy Uncertainty,” by Scott
Baker, Nicholas Bloom and Steven J. Davis, Quarterly
Journal of Economics, vol. 131, no. 4, 2015, pp. 1,593–
636.

-1
-2

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

NOTE: Shaded areas indicate recessions.
SOURCES: Survey of Professional Forecasters; Jurado et al. (2015); Ludvigson et al. (2017); Baker et al. (2015); Chicago Board Options Exchange;
author's calculations.

……………………………………………………………………………………………
About the Author
Chapman is a research assistant in the Research Department at the Federal Reserve Bank of Dallas.

Federal Reserve Bank of Dallas

National Economic Update

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