![\"Fiorilla_Paul_061917\"](\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2017\/06\/Fiorilla_Paul_061917.jpg\")
<\/a>Economists largely agree that the U.S. economy will continue the moderate growth path it has traveled the last several years. But the consensus among prognosticators obscures a dilemma: The economy is behaving in ways it hasn\u2019t in the past and nobody is entirely sure as to why. Among the issues vexing economists include why\u2014when employment gains are so healthy\u2014workforce participation remains low, while GDP growth and inflation remain subdued.<\/p>\nThe uncertainty about these issues is more than academic. A better understanding would help the Federal Reserve set a course for interest rates and could serve as a springboard to policy solutions on issues such as tax reform, health care and immigration. No such consensus exists, of course, which produces wildly varying policy proposals.<\/p>\n
In a much-scrutinized keynote speech last week at the National Association of Business Economics\u2019 2017 Annual Meeting in Cleveland, Federal Reserve Chair Janet Yellen used the word \u201cuncertain\u201d or \u201cuncertainties,\u201d or phrases that suggest uncertainty, more than a dozen times. Yellen was outlining a vaguely hawkish policy agenda, in which policy rates will continue to increase slowly, while leaving wiggle room to quickly change directions if the situation warrants.<\/p>\n
Inflation Stubbornly Low<\/h2>\n![\"Source:](\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2017\/10\/NABE-story-inflation-chart.png\")
<\/a>Source: Oxford Economics<\/p><\/div>\n
Yellen focused on issues pertaining to inflation and labor in her address. Although it\u2019s been nearly 100 months since the last recession (the average period between recessions since World War II is 58 months), with strong job growth that has brought unemployment to 4.4 percent<\/a>, the inflation rate has been persistently below the Fed\u2019s 2 percent target. In the years following the Great Recession, this wasn\u2019t seen as unusual since it took years for the economy to recover. But the persistence of low inflation eight years into the recovery is a puzzle.<\/p>\nTheories abound on why inflation remains low, including the impact of foreign trade, health care cost containment, energy and food costs, reduced utility costs, pricing transparency brought about by e-commerce and labor market slack. Most of those factors, though, are temporary and don\u2019t fully explain ongoing lower cost increases.<\/p>\n
\u201cEconomists\u2019 understanding of exactly how and why inflation expectations change over time is limited,\u201d<\/em> Yellen said.<\/p>\nLabor Market Slack<\/h2>\n![\"Source:](\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2017\/10\/NABE-report-labor-participation.jpg\")
<\/a>Source: Oxford Economics; Haver Analytics<\/p><\/div>\n
Persistent labor market slack is also becoming harder to explain, with low unemployment and indicators such as the labor turnover rate signifying a strong market. One possibility is that what appears to be full employment (which traditionally would herald above-trend wage increases) is misleading, given the still-high number of workers in part-time jobs and the low workforce participation rate. Only 78 percent of 25- to 54-year-olds are working, still 2 percentage points below the 2007 cycle peak and 400 basis points below the level in 2001, per the Bureau of Labor Statistics.<\/p>\n
\u201cOn balance, the unemployment rate probably is correct in signaling that overall labor market conditions have returned to pre-crisis levels,\u201d<\/em> Yellen said. \u201cBut that return does not necessarily demonstrate that the economy is now at maximum employment because, due to demographic and other structural changes, the unemployment rate that is sustainable today may be lower than the rate that was sustainable in the past.\u201d<\/em><\/p>\nOne policy suggestion that has support from economists on both ends of the political spectrum is the expansion of the Earned Income Tax Credit (EITC), which provides a benefit of up to $6,269 for low-income workers. The idea is to boost incentives to young workers in their 20s, when labor force attachment is developed.<\/p>\n
The Trump administration\u2019s economic policy is centered around getting the underemployed and workforce dropouts back into the fold. Office of Management and Budget Director Mick Muvaney told an audience at NABE that the administration\u2019s tax plan (which had yet to be announced) would gradually increase GDP<\/a> from 2.3 percent in 2017, to 3 percent in 2020, and thereafter. Mulvaney said that lower corporate and personal taxes, repatriation of overseas revenue, reducing regulatory burdens on business, reducing welfare payouts and other policy changes would incentivize workers to take full-time jobs and companies to invest more in the U.S.<\/p>\nGDP growth is a function of the increase in laborers and higher productivity. Asked where the growth in the workforce would come from to produce high projected growth rates, Mulvaney pointed to the low workforce participation rate.<\/p>\n
Whether it is feasible to expect workers that have dropped out of the labor pool to return is an open question. It remains unclear why some workers have not returned, given the tight labor market. A rising number of people are on disability and work part-time or in transitory jobs. To some extent, there is a mismatch between the jobs and the skills of the labor force. Austan Goolsbee, economics professor at the University of Chicago Booth School of Business, said a key element was lagging educational achievement that has coincided with the stagnation of wages in recent decades.<\/p>\n
Another issue is location. Job growth is concentrated in select urban areas. Half of all jobs created in the U.S. are in 75 of the country\u2019s 3,000 counties, per the McKinsey Global Institute. It\u2019s not clear whether workers outside those markets know about open jobs, have the education to fill them or the means or motivation to move.<\/p>\n
Immigration Essential For Growth<\/h2>\n
<\/a>Source: Oxford Economics<\/p><\/div>\n
Yellen focused on issues pertaining to inflation and labor in her address. Although it\u2019s been nearly 100 months since the last recession (the average period between recessions since World War II is 58 months), with strong job growth that has brought unemployment to 4.4 percent<\/a>, the inflation rate has been persistently below the Fed\u2019s 2 percent target. In the years following the Great Recession, this wasn\u2019t seen as unusual since it took years for the economy to recover. But the persistence of low inflation eight years into the recovery is a puzzle.<\/p>\n Theories abound on why inflation remains low, including the impact of foreign trade, health care cost containment, energy and food costs, reduced utility costs, pricing transparency brought about by e-commerce and labor market slack. Most of those factors, though, are temporary and don\u2019t fully explain ongoing lower cost increases.<\/p>\n \u201cEconomists\u2019 understanding of exactly how and why inflation expectations change over time is limited,\u201d<\/em> Yellen said.<\/p>\n Source: Oxford Economics; Haver Analytics<\/p><\/div>\n Persistent labor market slack is also becoming harder to explain, with low unemployment and indicators such as the labor turnover rate signifying a strong market. One possibility is that what appears to be full employment (which traditionally would herald above-trend wage increases) is misleading, given the still-high number of workers in part-time jobs and the low workforce participation rate. Only 78 percent of 25- to 54-year-olds are working, still 2 percentage points below the 2007 cycle peak and 400 basis points below the level in 2001, per the Bureau of Labor Statistics.<\/p>\n \u201cOn balance, the unemployment rate probably is correct in signaling that overall labor market conditions have returned to pre-crisis levels,\u201d<\/em> Yellen said. \u201cBut that return does not necessarily demonstrate that the economy is now at maximum employment because, due to demographic and other structural changes, the unemployment rate that is sustainable today may be lower than the rate that was sustainable in the past.\u201d<\/em><\/p>\n One policy suggestion that has support from economists on both ends of the political spectrum is the expansion of the Earned Income Tax Credit (EITC), which provides a benefit of up to $6,269 for low-income workers. The idea is to boost incentives to young workers in their 20s, when labor force attachment is developed.<\/p>\n The Trump administration\u2019s economic policy is centered around getting the underemployed and workforce dropouts back into the fold. Office of Management and Budget Director Mick Muvaney told an audience at NABE that the administration\u2019s tax plan (which had yet to be announced) would gradually increase GDP<\/a> from 2.3 percent in 2017, to 3 percent in 2020, and thereafter. Mulvaney said that lower corporate and personal taxes, repatriation of overseas revenue, reducing regulatory burdens on business, reducing welfare payouts and other policy changes would incentivize workers to take full-time jobs and companies to invest more in the U.S.<\/p>\n GDP growth is a function of the increase in laborers and higher productivity. Asked where the growth in the workforce would come from to produce high projected growth rates, Mulvaney pointed to the low workforce participation rate.<\/p>\n Whether it is feasible to expect workers that have dropped out of the labor pool to return is an open question. It remains unclear why some workers have not returned, given the tight labor market. A rising number of people are on disability and work part-time or in transitory jobs. To some extent, there is a mismatch between the jobs and the skills of the labor force. Austan Goolsbee, economics professor at the University of Chicago Booth School of Business, said a key element was lagging educational achievement that has coincided with the stagnation of wages in recent decades.<\/p>\n Another issue is location. Job growth is concentrated in select urban areas. Half of all jobs created in the U.S. are in 75 of the country\u2019s 3,000 counties, per the McKinsey Global Institute. It\u2019s not clear whether workers outside those markets know about open jobs, have the education to fill them or the means or motivation to move.<\/p>\nLabor Market Slack<\/h2>\n
<\/a>Immigration Essential For Growth<\/h2>\n