Economic Outlook, June 2013

Low growth in real gross domestic product, which has averaged 2 percent since the end of 2009, is likely to continue beyond 2013. This outlook for GDP differs from the view of many forecasters who expect the current period of sluggish growth to be followed in the near future by a significant acceleration. Despite bright spots in housing and business investment, other factors counsel against a more optimistic outlook. These factors include lower productivity growth, lower employment growth, uncertainty about U.S. fiscal and regulatory policy, and caution on the part of consumers. An unusual feature of the current period is the extent of the shrinkage of labor force participation — people who are either working or actively looking for work. This decline has been strongest for the young. In December 2007, the participation rate for those 16 to 24 was over 59 percent; it’s now under 55 percent. Rates for workers aged 25 to 54 have declined as well. The difficult labor market is not the whole story. Demographics play a role, as do the higher-education choices of the young. Such structural causes are unlikely to be reversed rapidly. While inflation has recently been below the Federal Open Market Committee objective of 2 percent, averaging only 1 percent over the past 12 months, inflation is likely to edge back toward the FOMC’s 2 percent target by next year. A highly expansive monetary policy was an appropriate response to a severe recession. Today, however, the benefit-cost trade-off associated with further monetary stimulus does not look promising. The Fed seems unable to improve real growth, despite historic levels of stimulus, perhaps due to a decline in productivity growth and other factors outside the control of monetary policy. During the FOMC press conference last week, Chairman Ben Bernanke sought to add clarity to the likely future path of the Federal Reserve’s bond purchases. The subsequent declines in the bond and stock markets in response are a normal part of the process of incorporating new information into asset prices and should not interfere with the likely scenario of moderate growth in real GDP. Further asset price volatility is likely as market participants gain additional insight from the Fed’s policy actions and communications.