Rocky Mountain Summit: July 2012
by John E. Silvia, Chief Economist, Wells Fargo Securities
If you keep getting the wrong answer, then maybe you are asking the wrong question.
For several years now, policymakers have been pursuing expansionary policy with the goal of significantly lower unemployment. Yet the wrong answer keeps popping up – high, persistent unemployment about eight percent. Perhaps the correct question might be why has the unemployment rate been so persistently high and what can be done about it? Our view is that the focus on macro stimulus is misplaced. The answer lies in addressing the structural challenges of the 21st century labor market and not the pursuit of more stimulus with the wrong 20th century framework for the labor market.
Consistent with output over the past two years, the pace of economic growth appears to be headed for 1.0 percent to 1.3 percent in the next few quarters. What you see is what you get; there is currently no sign of the economy accelerating to the pace of growth we have seen in past economic recoveries. A clear shift in policy, particularly labor market policy, is needed. This shift should focus on the microeconomics of the supply and demand in the labor market as opposed to the macroeconomics of stimulus.
Our baseline expectations for growth, illustrated in Figure 1, are for growth at 2.1 percent in 2012 and 1.5 percent in 2013, after a gain of 1.8 percent in 2011. Hence, the sense that the economy has settled in at a 2 percent growth pace — and that is the reality of the present at the macroeconomic level. Consumer spending and business equipment spending continue to add to growth, but the pace of contribution has slowed in recent years. Residential construction, particularly remodeling, has added to growth; this component was a large negative in the early years of the expansion. Federal and local government spending as well as net exports detract from growth, as budget issues affect government spending and slower foreign growth in Asia and an outright European recession hit exports.
Finally, as we stated in our 2009 and again in 2012 presentation at the Federal Reserve of Atlanta outlook conferences, the U.S. recovery was not a repeat of the 1930s Great Depression, but rather it follows the the model of the deep 1973-1975 recession, a period that also dealt with an oil price shock, a housing collapse and a banking crisis (Figure 2). This has indeed been the correct approach, as the economic expansion appears on track but at a pace clearly below that of the earlier 1973-1981 expansion.Download