–US Economic Growth Still ‘Frustratingly Slow’
–Recent Labor Data Example of Uneven Pattern of Economic Activity

By Brai Odion-Esene

WASHINGTON (MNI) – Cleveland Federal Reserve Bank President Sandra
Pianalto Monday voiced her dissatisfaction with the slow progress of the
U.S. economic recovery, warning that economic activity must expand at a
faster rate to repair damage from the recession and boost job creation.

In prepared remarks at an event in Lexington, Kentucky hosted by
the Kentucky Department of Financial Institutions, Pianalto declared the
banking sector is the healthiest it has been for a number of years,
cautioned that European financial markets continue to pose a downside
risk to the U.S., and that a continued rise in gasoline prices could
“complicate” the outlook for inflation.

Pianalto is a voter on the Fed’s policymaking Federal Open Market
Committee this year, and while her speech contained no comments on
current monetary policy, she did note that “the pace of growth is still
frustratingly slow, and in a slow-growth economy, it is all the more
difficult to generate the confidence that encourages people to expand
their businesses, buy homes, and invest in activities that lead to more
jobs, rising incomes, and reinvigorated communities.”

Noting that the economy grew 3% in 2010 before slowing to 1.7% last
year, Pianalto said a 2% rise in GDP would be needed “just to absorb new
entrants in the labor force.”

“To repair the damage from the last few years and speed the pace of
employment growth, the economy needs to grow at a faster rate,” she
added.

Pianalto said she currently expects “moderate” growth of 2.5% this
year, followed by a slight pickup to around 3% in 2013. Based on this
forecast, she reiterated that it could take as long as four or five
years for the unemployment rate to fall to the 6% rate that she sees as
consistent with the Fed’s maximum employment mandate.

She pointed to recent labor market data as an example of the
“uneven pattern of economic activity,” with 275,000 and 240,000 non-farm
payroll gains in January and February, respectively, following by just
120,000 jobs added in March.

“The unusually warm weather of the past few months might have
pulled forward some hiring that would eventually have taken place in
March and April,” Pianalto said, adding that “monthly ups and downs like
these make it hard to confirm the underlying pace of job creation.”
buy
Still, “it seems as though the labor market is still improving,
albeit at a modest pace,” Pianalto said.

But despite some evidence of progress in the labor markets,
household finances, and banking conditions, Pianalto said the U.S.
economy still faces a number of headwinds.

“Housing markets are still in distress throughout much of the
country; state and local governments are still in the process of
adjusting to budget pressures; and rising gasoline prices are likely to
restrain household spending,” she said.

“Furthermore, strains in European financial markets continue to
pose downside risks. For all of these reasons, businesses and households
remain cautious about the future.”

The Fed also has a mandate to maintain price stability, and
Pianalto sought to calm fears over the potential threat of high gasoline
prices.

“Sharp movements in the prices of items such as gasoline and food
products can either temporarily boost or depress the overall inflation
rate,” she said. However, “while sharp movements in particular
components of the index can help or hurt consumers’ budgets in the short
term, these temporary movements can be misleading signals of where
inflation is heading over an extended period of time.”

And with labor costs subdued, Pianalto said her expectation is for
inflation to remain close to 2% on average for the next few years.

But, she added, “if gasoline prices continue to climb, that could
complicate the inflation picture.”

For now, the good news is that the economy is displaying “forward
momentum,” she said, with the banking industry “healthier than it has
been in several years,” and much of the harm caused by the recession
being repaired.

“If our economy were a Kentucky thoroughbred, I’d say we have moved
from a walk to a trot, but we’re far from a gallop,” Pianalto concluded.

** MNI Washington Bureau: 202-371-2121 **

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