William Strauss is a senior economist and economic advisor in the Economic Research Department at the Federal Reserve Bank of Chicago, which he joined in 1982. His chief responsibilities include analyzing the current performance of both the Midwest economy and the manufacturing sector for use in monetary policy. Mr. Strauss produces the monthly Chicago Fed Midwest Manufacturing Index and organizes the Bank’s Economic Outlook Symposium and Automotive Outlook Symposium. In addition, he conducts several economic workshops and industrial roundtables throughout the year.
William Strauss describes how the Fed feels the economy will perform over the next three years.
We're here in Chicago at The World MoneyShow, and I'm with William Strauss. William, where are we going to be in 2015?
That's a great question, Gregg, because just a couple of weeks ago, the Federal Open Market Committee, the FOMC, came out with their projections for economic growth, unemployment rates, and inflation rates all the way through the next three years.
What they see for this year, for 2012, is growth that is going to be somewhat below trend, next year a little bit above trend, and improving beyond that by 2014, 2015, growth that should be just somewhat above 3%. Better performance for the economy, but still not the kind of growth that is going to materially bring down the unemployment rate very rapidly.
In fact, the expectation for the unemployment rate is for it to remain above 8% through the end of this year, but with growth just slightly above trend for next year, unemployment rates are expected just to edge lower to remain still just slightly below 8%.
With growth accelerating in 2014 and 2015, unemployment rates are expected to come down, so that by the end of 2015 we'll be just above 6%. That is still above what we think of as the natural rate, the long-term rate, so imbalances even three years from now when the labor market remain, although they will be significantly reduced from where we are today.
Is this something that mature markets are going to go through? Because in most of Europe, to a certain extent, you have unemployment rates that are pretty high. Obviously in the south, they are much higher than they are in the northern European countries, but you know 6% isn't outrageous, in say, developed Europe. You know, if you're growing at 3%...
But we're not Europe, and a lot of the differences among economies are really on how they are structured with regard to their work force. So you can get these differentials across economies, and in the US historically, our natural rate has been something around 5% to 5.25%. It's thought now that the natural rate is closer to 5.5% to 6% because of all the structural shocks and changes that we're going through that will take us time to work out.
We're not Europe. We're not happy with an unemployment rate that is European style, and in fact many countries in Europe have been trying to emulate the labor markets like the United States to try to bring down the unemployment rates. I think our model should be the goal rather than us trying to become more like Europe.
Sure. I had heard that during the Depression and the recovery from there, and you look at our recovery as it goes on and we're talking another three years on top of the four years that we've already had, so that's almost a decade of people that, a large swath of people, that have been out of the work force. It's almost like a lost generation of workers at that point.
And these are certainly some of the risks and reasons why we think structural unemployment has moved higher. You know, during the downturn 8.7 million people lost their jobs.
It's true we have added jobs to the economy, and in the neighborhood of nearly 5 million total jobs have been added. The problem is that metric should not be that we've added a job and we should celebrate that.
Last I checked, we have labor force growth. We have population growth, roughly around 1% in the United States according to our estimates at the Chicago Fed, which is actually a little on the conservative side compared to other individuals who suggest what we need to be creating, it's around 100,000 jobs a month. That's 1.2 to 1.3 million a year that we need to be creating just to absorb all the new entrants into the labor force, into the work force.
We did 1.8 million over the past year, so that's better by about 500,000. At that kind of a pace it will only take us about 16 years to get back all of those people who lost their jobs. You're smiling and laughing because you, like me, agree that's not a satisfactory path to be going down.
What that winds up doing is it causes a lot of imbalances. The unemployment rate among the young is significantly high. The questions and concerns come in: are they going to be disenfranchised from the labor market? Will you be able to bring them back in when conditions begin to improve? I think there are justifiable reasons to be worried about that.