By Steven K. Beckner
(MNI) – New York Federal Reserve Bank President William Dudley said
Thursday that, despite some “encouraging” signs, last Friday’s
disappointing March employment report served as a reminder that the
economy is not yet “out of the woods.”
Dudley said weather-related job gains in earlier months may have
accounted for some of the weakness in March. But he said more data is
needed to see if that was the case.
The March jobs numbers aside, he called the labor market still
“unacceptably weak” and also warned of “headwinds” and “downside risks”
that threaten a recovery, which he said has been too slow to bring down
unemployment significantly.
Meanwhile, he said he is not concerned that rising gasoline prices
will have a lasting effect on inflation in remarks prepared for the
Syracuse Center for Economic Development.
The vice chairman of the Federal Reserve’s policymaking Federal
Open Market Committee did not speak directly about monetary policy, but
the implications of his comments seemed clear enough: a very
accommodative monetary policy stance needs to remain in place, if not
augmented.
Last Friday the Labor Department non-farm payrolls rose by just
120,000 last month — far short of the expected 200,000 and even further
below the 246,000 average of the prior three months. Prior months’
payrolls were revised up, but only by 4,000.
The unemployment rate dipped from 8.3% to 8.2% in March, but that
was in good part due to a reduction in labor force participation after
two months of sizable gains in the size of the labor force. Aggregate
hours worked fell by 0.2%.
In a speech mostly devoted to regional economic conditions, Dudley
said national data “has been a bit more upbeat over the past few months,
suggesting that the recovery may be finally establishing a somewhat
firmer footing.”
He pointed to a quicker pace of vehicle sales, improved housing
starts and other hopeful indicators, but then turned more gloomy, as he
has in other recent addresses.
“While these developments are certainly encouraging, it is still
too soon to conclude that we are out of the woods, as underlined by the
March labor market release,” he said, recalling that the economy also
improved in early 2010 and 2011, “only to fade later in those years.”
Dudley also took note of the “unusually mild weather” in the first
quarter, which “may have pulled forward some economic activity and
hiring.”
“In this regard, the somewhat softer March labor market report that
was released last Friday may reflect the earlier positive influence of
the mild weather on job creation in January and February, although other
less sanguine interpretations are also plausible,” he said.
“We thus will need to see more data to determine the extent to
which the March data represent a transitory weather-related setback,” he
added.
But whatever those data show, Dudley suggested there is little to
cheer about. “Regardless of the importance of the mild winter in
distorting the recent economic data, real economic activity has yet to
be strong enough on a sustained basis to make a big dent in the overall
amount of slack in the U.S. economy.”
He said 3% fourth quarter GDP growth is likely to give way to
growth of about 2.25% in the first quarter as inventory investment
subsides.
“Even with the robust increase of light vehicle sales, overall
consumer spending in the first quarter appears to be rising at a similar
moderate rate,” he said. “At the same time, real disposable income has
been flat over the past three months, and the large increase of gasoline
prices is likely further sapping consumers’ real purchasing power. And
growth of business investment spending, which softened in the fourth
quarter of 2011, may have been even a little softer in the first quarter
of this year.”
The projected 2.25% growth pace is roughly equal to the economy’s
growth potential, and that is not enough, he said.
“We need sustained growth above that rate to absorb the still
substantial amount of unused productive capacity,” said Dudley. “Thus,
our recent growth rates are barely keeping up with our potential.”
“Even though the unemployment rate has declined sharply from 9%
last September to 8.2 percent in March, it is still unacceptably high,”
he continued. “In addition, many other measures of the labor market
remain weak.”
Dudley noted that “the labor force participation rate, the
percentage of people employed, and the total number of hours worked in
the economy all dropped sharply during the recession and remain well
below their pre-recession levels, even taking into account the impact of
demographic shifts.”
He also pointed to a slump in productivity growth.
What’s more, Dudley warned, “we cannot lose sight of the fact that
the economy still faces significant headwinds and that there are some
meaningful downside risks.” He said high gasoline prices “will sap
purchasing power” and also cited “the continued impediments to a strong
recovery from ongoing weakness in the housing sector” and “fiscal drag
at the federal and state and local levels.”
“In terms of downside risks, these include the risk that growth
abroad disappoints and the risk of further disruptions to the supply of
oil and higher oil prices,” he said.
Meanwhile, Dudley suggested that inflation will be the least of the
Fed’s worries for the foreseeable future.
He said “the overall rate of increase of consumer prices, as
measured by the 12-month change of the price index for personal
consumption expenditures slowed to 2.3% in February from a recent peak
of 2.9% last September” and added, “even though the recent rise of
gasoline prices mentioned above could interrupt this pattern, we expect
this moderation of overall inflation to resume later this year.”
“While the underlying core inflation rate, that strips out volatile
food and energy prices, has been somewhat higher than expected a few
months back, it appears that the annual rate of core inflation has
peaked and we expect it to begin to decline later this year,” he said.
Moreover, Dudley said “inflation expectations, which play an
important role in the inflation process, remain well anchored.”
** MNI **
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