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U.S. Growth Pace Moderate; Inflation Low, Employment Data Mixed October 30, 2014 Data released since mid-September indicate both downside and upside risks to growth. Downside risks include a strong dollar, weaker global growth and volatile equity prices. Upside risks include lower gasoline prices and low interest rates. On balance, the upside risks outweigh the downside ones, leaving the contour of moderate gross domestic product (GDP) growth in the second half of 2014 unchanged from September. The remaining concerns are downward pressure on inflation and signs of lingering slack in the labor market. However, long-term inflation expectations are anchored at the Federal Reserve target. Chart 1 October Consumer Expectations Trending Higher Index, 1985 = 100* 120 Index, first quarter 1966 = 100 120 110 110 Sep. '14 83.7 100 90 90 80 80 70 70 60 50 60 University of Michigan/ Reuters expectations 40 Oct. '14 78.4 30 20 20 Equity market volatility and downward pressure on net exports pose a downside risk to output; however, these risks are tempered by a number of factors. Generally lower equity prices decrease consumption and investment through a negative wealth effect, but recent recoveries in financial markets indicate that this dip is temporal and therefore only a minor risk. Euro-area deflationary pressures and a strong dollar may pose trade risks to U.S. industries by making exports relatively more expensive and imports cheaper. However, the contribution of net exports to overall U.S. GDP growth is small and does not weigh heavily on the medium-term outlook. 50 40 Conference Board expectations 30 Output Risks Tilt Toward the Upside 100 *Seasonally adjusted. NOTE: Shaded regions indicate recession. SOURCES: University of Michigan;Conference Board. Chart 2 Small Dip in Inflation Expectations Reflects Transient Factors Percent per annum 3 10-year break-even inflation rate 2.5 2 1.9 1 * 1.4 * 1.5 5-year break-even inflation rate 0.5 0 -0.5 The upside risk of falling gasoline prices will likely boost consumption in fourth quarter 2014. Expectations of low interest rates will also likely support the housing sector. These positive factors are evident in the University of Michigan’s October survey results, with the consumer expectations index climbing to 78.4—its highest level in two years (Chart 1). In all, GDP is on a solid growth track in the second half of 2014 at a 3 percent seasonally adjusted, annualized pace. Downward Pressure on Inflation The remaining downside risk is inflation. Price growth remained below 2 percent on a year-overyear basis, according to the Consumer Price Index. The strengthening dollar, stagnant wages and declining oil prices all put downward pressure on prices. Inflation expectations derived from money market indicators suggest a slight drop (Chart 2), but this is small and likely a reaction to temporal factors. Federal Reserve Bank of Dallas -1 -1.5 -2 2003 2004 2005 2006 2007 2008 *As of Oct. 21, 2014. SOURCE: Federal Reserve Bank of Philadelphia. 2009 2010 2011 2012 2013 2014 Hidden Slack in Participation Rate Softness in inflation is attributable in part to a lack of acceleration in wage growth, despite strong gains in the labor market. The U.S. added 248,000 nonfarm jobs in September, far exceeding consensus expectations. However, payroll growth does not appear to be exerting much upward pressure on wages. For sectors with higher average job growth over the past year, the change in wage growth is relatively small and, in some cases, it has slowed. Average hourly wage growth across all industries remained around 2 percent in September, a level it has been at since December 2013 (Chart 3). The Employment Cost Index in Chart 3, which takes into account total compensation, similarly shows relatively stagnant growth on a quarterly basis following the recession. National Economic Update 1 Chart 3 No Signs of Wage Pressure Yet ing at the labor force participation rate. Since the 2007 recession, the participation rate has dropped 3.5 percentage points. Part of this decline is attributable to cyclical factors including discouraged workers, while part is due to structural factors such as baby boomers becoming eligible for retirement. Year/year percent change 5 4.5 4 3.5 Establishment survey** 3 2.5 Employment Cost Index* 2 1.5 1 0.5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 * Total compensation growth of private industry workers. ** Average hourly wage growth of private nonsupervisory employees. NOTE: Shaded areas indicate recession. SOURCES: Bureau of Labor Statistics; National Bureau of Economic Research. Chart 4 Wage Growth Reacts Slowly to Changes in Unemployment The decline in participation rates among prime-age workers since 2002 is likely to recover as the economy improves. This suggests that traditional measures of slack, namely the gap between the current headline unemployment rate and NAIRU, may be insufficient. If considerable slack remains, wage pressure may emerge later than anticipated. Year-end nominal wage growth (percent) 4.5 4 Dec. '08 Dec. '07 The median estimate of research studies attempting to decompose the fall in participation rates into cyclical and structural components is about 1 percentage point for cyclical reasons. This 1 percentage point is equivalent to roughly 1 million workers who would potentially reenter the workforce. Many of these are prime -age workers, ranging from 20 to 54 years old (Chart 5). 3.5 3 —Camden Cornwell 2.5 Sep. '14 Dec. '09 Dec. '13 …………………………………………………………………………………… 2 Dec. '10 Dec. '11 1.5 About the Author Dec. '12 1 1 2 3 4 5 6 7 8 Year-end unemployment rate (percent) 9 10 11 NOTE: Blue points indicate year-end wage growth/unemployment plots for 1985–2006. SOURCE: Bureau of Labor Statistics. . Cornwell is a research analyst in the Research Department at the Federal Reserve Bank of Dallas. Chart 5 Prime-Age Participation Rates Lower than Before Recession Percent change from January 2002 10 65 and over 5 55 to 64 0 25 to 54 -5 20 to 24 -10 16 to 19 -15 -20 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 SOURCE: Bureau of Labor Statistics. Wage growth stagnation makes it difficult to interpret levels of slack in the economy. Wage growth was slow to fall as unemployment rose during the recession (Chart 4). Now, as unemployment nears the long-run natural rate of unemployment (commonly known as NAIRU) of 5.5 percent, it is possible that wage growth will be similarly slow in rising. We can alternatively gauge labor market slack by lookFederal Reserve Bank of Dallas National Economic Update 2
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