CHICAGO (MNI) – The following is the second part of the full text
of remarks by Chicago Federal Reserve President Charles Evans Tuesday
morning, giving his outlook for the economy, inflation and the ongoing
sovereign debt crisis in Europe:
More recently, there has been a modest improvement in the jobs
picture. Over the first five months of the year, excluding temporary
hiring for the U.S. Census, on average about 86,000 jobs per month were
added to the economy. Last Friday’s data were disappointing, but they
are only one month’s numbers.
Businesses are being cautious about adding permanent staffing. They
continue to strive to produce more with fewer people. But they can
increase output for only so long without adding to payrolls. As the
recovery progresses and businesses become more confident in the future,
employment will increase on a more consistently solid basis.
Indeed, there are signals that we currently are near such a turning
point. There is the modest pickup in the jobs numbers I just noted.
Underlying those recent employment numbers, layoffs are down
substantially. Some of those businesses that cut employment most
aggressively at the beginning of the recession have begun to rehire. And
others that are taking a more wait-and-see attitude are hiring temporary
workers to fill their staffing needs. In fact, temporary worker
employment has increased solidly in each of the past eight months.
Nonetheless, even after more solid employment gains materialize,
unemployment may remain stubbornly high. Discouraged workers will resume
searching for jobs, adding to the number of those already looking for
work. In addition, the number of long-term unemployed is extremely high,
and such workers typically have a more difficult time finding a job.
Consequently, the outlook for these workers is challenged. So I
anticipate that the rate and length of unemployment will improve
relatively slowly.
With consumer spending accounting for roughly two-thirds of GDP,
the economic forces at work here are key factors underlying the moderate
projections for overall growth. Households entered this recession with
high net worth but also with low levels of savings and high levels of
debt. When faced with a temporary loss of income, households can
maintain spending only by drawing down assets, borrowing more, or
reducing savings. But as the recession took hold, households faced
mounting job losses, stark reductions in the value of their housing and
equity assets, and little in the way of liquid savings. So it is little
wonder that consumers sharply retrenched on spending.
The need for households to repair their balance sheets will
moderate growth in consumer spending going forward. In addition, we are
seeing reduced availability of household credit. And, importantly, muted
gains in employment will hold back growth in wages and salaries. All of
these factors contribute to an outlook for relatively modest growth in
consumer spending, which, in turn, restrains the forecast for overall
GDP growth.
In addition to consumer lending, the availability of bank credit
remains a significant headwind for many small- and medium-sized
companies. Both supply and demand considerations are at work here. Some
of the decline in bank lending last year reflects weak demand for loans
by businesses wary of taking on new debt burdens in an uncertain
economic environment. But at least some of the reduced lending arises
from banks’ tighter lending standards. These tighter standards appear to
reflect concerns of banks about their own capital levels and also the
credit quality of borrowers. More generally, credit flows are being
reduced because both borrowers and lenders are still dealing with losses
from the recession, especially the busts in residential and commercial
real estate. I expect banking conditions to improve and better support
growth, but this is likely to take some time.
While I’ve mentioned a number of factors that we think will dampen
growth, we could be surprised on the upside. Increases in confidence
could turn into higher spending sooner than we now think. And
productivity growth has remained strong. Technology continues to
advance, and firms continue to create new products and find new ways to
produce more efficiently. These factors will lead to higher incomes in
the longer term. And even over the shorter term, the higher profits and
incomes generated by productivity can help restructure balance sheets
and support spending.
Well, that was a long answer to a short question. The second
question I’m often asked is a two-parter concerning inflation. The first
part is: Isn’t inflation about to explode? The second part is: Are you
concerned about deflation? The answer is no in both cases: I think
inflation will remain relatively stable.
Both camps have clear arguments. The current low rates of resource
utilization strongly point to lower inflation. At 9.7 percent, the
unemployment rate is quite high. Similarly, manufacturing capacity
utilization is quite low. Such resource slack reduces cost pressures and
makes firms less able to push through price increases. These factors
have contributed significantly to lower inflation. The Fed’s preferred
measure of core inflation-the deflator for Personal Consumption
Expenditures, or PCE, excluding food and energy-has fallen from 2.7
percent in August 2008 to 1.2 percent in April 2010. That is a large
decline for a relatively stable data series.
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** Market News International Chicago Bureau: 708-784-1849 **
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