Coverage: The recession isn’t over

According to Federal Reserve Board Vice Chairman Stanley Fischer, the recession is still weighing on the U.S. economy, particularly the labor market.

Gina Chon of the Financial Times had this story:

The Federal Reserve’s vice-chairman has pointed to weak labour force participation and a soft US housing recovery as two reasons for disappointing global growth, saying this could be a long-term phenomenon.

Stanley Fischer’s comments reflected continuing concern about the economy that has fuelled debate over whether the Fed should move sooner than expected to raise interest rates, despite solid job growth and strong gross domestic product expansion in the US.

“This pattern of disappointment and downward revision [in growth] sets up the first, and the basic, challenge on the list of issues policy makers face in moving ahead: restoring growth, if that is possible,” Mr Fischer said on Monday in a speech in Stockholm. “It is also possible that the underperformance reflects a more structural longer-term shift in the global economy, with less growth in underlying supply factors.”

The US economy has for six straight months added more than 200,000 jobs per month. But the labour force participation rate has remained disappointing, coming in at 62.9 per cent last month.

Mr Fischer said although the reduction in the labour supply reflected demographic changes, such as the ageing population, the “surprising weakness” may also be due to discouraged workers who have stopped looking for a job.

Nelson D. Schwartz wrote for The New York Times that Fischer felt housing, cuts in spending and slowing growth would have a lasting drag on the economy:

Mr. Fischer said it was difficult to determine how much of the slackness was because of cyclical factors and how much represented a more fundamental, structural change in advanced economies.

But he warned of three pronounced headwinds that have held back growth in the United States: a still anemic housing market, cuts in federal government spending and weaker global growth that reduced demand for American exports.

A report on Monday by the Organization for Economic Cooperation and Development warned that German economic growth might be slowing. Germany has been one of Europe’s rare bright spots, continuing to prosper even as countries on the periphery like Greece, Portugal and Spain struggle after the debt crisis of 2010-12.

After a very weak start to the year amid harsh wintry weather, economic growth in the United States has been increasing. Economists estimate that the American economy expanded at an annual rate of 4 percent in the second quarter, and are looking for the growth rate to remain at around 3 percent for the rest of 2014.

The Reuter’s story by Howard Schneider said that the rest of the world mirrored the U.S. economy:

The same thing may be happening for different reasons in Europe, major emerging economies like China, and elsewhere, he said, forcing central bankers to recast their understanding of inflation, employment and growth in general.

“The global recovery has been disappointing,” Fischer said in prepared remarks for a speech to an economic conference in Sweden. Long-run annual growth in the United States may now be perhaps as low as 2 percent, a full percentage point below the estimate of Fed policymakers as recently as 2009, he said.

Some of that may represent temporary factors that will change if, for example, the U.S. housing market improves.

“But it is also possible that the underperformance reflects a more structural, longer-term shift in the global economy,” Fischer said.

Fischer, the influential new No. 2 official at the U.S. central bank, outlined the challenges facing monetary policymakers as they try to navigate the end of the unconventional methods used to support the economy in recent years.

It remains uncertain, he said, whether lower productivity growth and lower labor force participation rates are now permanent features of the U.S. economy – complicating estimates of growth, inflation, and the amount of slack in labor and product markets.

Bloomberg’s Jeff Kearns also detailed Fischer’s comments about regulation:

Fischer also spoke on financial regulation, and the tools the central bank may use when it begins to raise the main rate. Fed officials are weighing the timing of their first interest-rate increase in eight years, which the majority of policy makers project will be appropriate sometime next year.

The policy-setting Federal Open Market Committee, which has held the main rate near zero since December 2008, said at its July 30 meeting it still sees “significant underutilization of labor resources.” The FOMC also repeated it’s likely to cut the size of a bond-buying program in “further measured steps” and to keep rates low for a “considerable time” after purchases end.

Policy makers continued to trim purchases that pumped up the Fed’s balance sheet to $4.41 trillion, tapering monthly bond buying to $25 billion in a sixth consecutive $10-billion cut and staying on pace to end the purchase program in October.

Fischer’s comments are slightly contradictory to the Fed’s recent positive guidance. While the central body has been talking about the strength of the economy and scaling back on its bond purchases, apparently some of its members are less than thrilled with the pace of the global economy.