For release on delivery
8:15 p.m. EST
February 28, 2019
Recent Economic Developments and Longer-Term Challenges
Remarks by
Jerome H. Powell
Chair
Board of Governors of the Federal Reserve System
at the
Citizens Budget Commission 87th Annual Awards Dinner
New York, New York
February 28, 2019
It is a pleasure to speak here this evening at the 87th Awards Dinner. Tonight I
will start with the near-term outlook for the U.S. economy. Then I will turn to a topic
that is inspired by the Citizens Budget Commission's mission statement, which focuses
on the "well-being of future New Yorkers." I imagine that future New Yorkers attending
this dinner in 50 years may not look back on the near-term outlook in February 2018 as
very interesting or important. So, tonight, after a brief review of the here and now, I will
focus on an issue that is likely to be of more lasting importance: the need for policies that
will support and encourage participation in the labor force, promote longer-term growth
in our rapidly evolving economy, and spread the benefits of prosperity as widely as
possible.
The State of the Economy and Near-Term Prospects
Beginning with the here and now, Congress has charged the Federal Reserve with
achieving maximum employment and stable prices, two objectives that together are
called the dual mandate. I am pleased to say that, judged against these goals, the
economy is in a good place. The current economic expansion has been under way for
almost 10 years. This long period of growth has pushed the unemployment rate down
near historic lows (figure 1). The employment gains have been broad based across all
racial and ethnic groups and all levels of educational attainment as well as among the
disabled (figure 2).1 And while the unemployment rate for African Americans and
Hispanics remains above the rates for whites and Asians, the disparities have narrowed
appreciably as the economic expansion has continued.
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Nearly all job market indicators are better than a few years ago, and many are at
their most favorable levels in decades. After lagging earlier in the expansion, wages and
overall compensation--pay plus benefits--are now growing faster than a few years ago
(figure 3). It is especially encouraging that the labor force participation rate of people in
their prime working years, ages 25 to 54, has been rising for the past three years. More
plentiful jobs and rising wages are drawing more people into the workforce and
encouraging others who might have left to stay.
In addition, business-sector productivity growth, which had been disappointing
during the expansion, moved up in the first three quarters of 2018. Rising productivity
allows wages to increase without adding to inflation pressures. Sustained productivity
growth is a necessary ingredient for longer-run improvements in living standards.
The price stability side of our mandate is also in a good place. After remaining
below our target for several years, inflation by our preferred measure averaged roughly
2 percent last year (figure 4). Inflation has softened a bit since then, largely reflecting the
recent drop in oil prices. Futures markets and other indicators suggest that oil prices are
unlikely to fall further, and if this proves correct, oil's drag on overall inflation will
subside. Consistent with that view, core inflation, which excludes volatile food and
energy prices and often provides a better signal of where inflation is heading, is currently
running just a touch below our 2 percent objective. Signs of upward pressure on inflation
appear muted despite the strong labor market.
While the data I have discussed so far give a favorable picture of the economy, it
is also important to acknowledge that not everyone has shared in the benefits of the
expansion to the same extent, and that too many households still struggle to make ends
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meet.2 In addition, over the past few months we have seen some crosscurrents and
conflicting signals about the near-term outlook. For instance, growth has slowed in some
major economies, particularly China and Europe. Uncertainty is elevated around some
unresolved government policy issues, including Brexit and ongoing trade negotiations.
And financial conditions have tightened since last fall. While most of the incoming
domestic economic data have been solid, some surveys of business and consumer
sentiment have moved lower. Unexpectedly weak retail sales data for December also
give reason for caution.
Given the positive outlook but also muted inflation pressures and the
crosscurrents I just mentioned, the Federal Open Market Committee (FOMC) will be
patient as we determine what future adjustments to the target range for the federal funds
rate may be appropriate to support our dual-mandate objectives. This common-sense
risk-management approach has served the Committee well in the past.
I will turn now from the near-term outlook to the question of how the economy
will perform over the long haul.
Longer-Term Challenges and Opportunities
From 1991 through 2007, the economy expanded annually at about 3 percent,
similar to the pace for much of second half of the 20th century. Since 2007, however,
growth has averaged just 1.6 percent. If the earlier 3 percent growth had persisted over
the past 12 years, incomes today would be almost 20 percent higher than they now are.
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From the standpoint of future Americans, if the slower growth persists for a half-century,
incomes will end up roughly half of what they would have been.
Why has growth slowed, and what can we do about it? To understand the causes
of the slowdown, it is useful to divide growth into two components: (1) growth in the
cumulative number of hours of worked by all workers and (2) growth in the amount of
output derived, on average, from each hour of work. We refer to output per hour of work
as "labor productivity." From 1991 through 2007, when the economy expanded at a
3 percent average rate, hours worked increased about 1 percent a year and economy-wide
productivity grew about 2 percent (figure 5).3 Since 2007, both of these growth factors
have slowed by about half, with hours worked annually increasing only 0.5 percent from
2008 to 2018 and productivity rising just 1 percent on average.4
Growth in hours worked has slowed, in part, because of slower U.S. population
growth. Birth rates have edged down, and immigration has slowed. Not only is the total
population growing more slowly, but the share of the population in their prime working
years is falling steadily as the very large baby-boom generation is moving into retirement.
Demographic factors are generally slow moving and predictable, and there is no surprise
in the fact that slower population growth and the retirement of the baby boomers are now
contributing to slower growth in the total amount of work performed in the economy.
There is another factor contributing to the slower growth in hours, however, and
this factor is more surprising and more troubling. To be counted as "in the labor force," a
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person must either be employed or have looked for work within the past four weeks. The
share of people of working age who are actually in the labor force has fallen significantly
since the late 1990s. This decline raises the important question of why have people of
working age increasingly chosen not to work.
The data suggest that there are both positive and more problematic forces at work.
For example, among those aged 16 to 24, participation in the labor market has fallen from
about 65 percent in the 1990s to 55 percent now (figure 6). But this drop in participation
appears to reflect young people getting more education. The fraction of this age group
who are neither in school nor in the labor force has held fairly constant at around
11 percent, and measures of school enrollment are up.5 Higher educational attainment is
much more important in today's job market than in the past, and investing in education
today has long-term benefits for both the student and for society.6 Statistics confirm that
higher educational attainment is associated with higher labor force participation, lower
unemployment, and higher wages.
Turning to those aged 25 to 54, the participation picture is more troubling.
Among prime-age men, participation has been falling for more than 60 years, with the
decline averaging about 1.5 percentage points per decade (figure 7). For women,
participation rose over the second half of the 20th century until peaking in the late 1990s.
Since then, women's participation has dropped just a bit.
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To put these numbers in context, let's look at data from other advanced
economies. Prime-age male participation has fallen some across most of these economies
since 1995 (figure 8). But the decline in the United States has been much larger than
most, and U.S. participation was below the middle of the pack at the outset. As a result,
the United States now has the fourth lowest participation rate among 34 advanced
economies. For women's participation, the details are different, but the bottom line is
similar. In the mid-1990s, the United States ranked in the upper tier for prime-age
women's participation, but since then participation by women has advanced rapidly in
many countries while it has declined slightly in the United States. Now the United States
is sixth lowest among these 34 countries.
Researchers have investigated numerous possible reasons for the decline in prime-
age participation. Among men, the drop in participation is much sharper for those with
only a high school education or less. The drop for women is also sharper for those who
are high school educated. This pattern is consistent with the idea that a modern economy
demands ever-higher skills, and that workers without those skills are being left behind
(figure 9). But the international experience suggests that this outcome is not inevitable:
The drop in participation among those with less education is much smaller in some
comparable countries than in the United States.7
The research into labor force participation in the United States and across the
world does not find a magic fix, but it does suggest a variety of policies that might better
prepare people for the modern workforce as well as support and reward labor force
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participation.8 I should note that the Fed has neither the tools nor the mandate to directly
address the forces that are holding back labor force participation. We can contribute by
fostering a strong labor market, in accordance with our mandate. While it is not the Fed's
role to advocate particular labor force policies, I do want to put a spotlight on this
important issue. I strongly believe policies that bring prime-age workers into productive
employment, particularly those who may have been left behind because of low skills or
educational attainment, could bring great benefits both to those workers and to our
economy.
The second factor accounting for the slowdown in GDP growth is the slower pace
of labor productivity growth, or output per hour worked. When measured annually, labor
productivity growth is volatile, but focusing on five-year averages, we can see that from
1975 through 2007, productivity growth averaged about 2 percent while fluctuating
between about 1 and 4 percent (figure 10). Since then, growth seems to have settled at
the low end of that historical range. Unlike the situation with labor force participation,
the slowdown in productivity growth is also evident in most advanced economies, and the
U.S. experience is roughly comparable to that of other countries.
There is an ongoing debate over the causes and implications of this global
slowdown in productivity growth. Some argue that the rapid growth seen over much of
the 20th century was historically anomalous, and that we are destined to return to the
slower growth of centuries past. Others are more optimistic that strong growth can
return.
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Many have noted that during the current expansion, investment and capital
accumulation have been lower than in previous expansions, so perhaps we just need to
invest more. Unfortunately, it does not seem to be that simple. Standard reasoning holds
that capital-per-worker drives productivity. While we have had slower capital
accumulation of late, we have also had slower growth in labor supply--hours worked.
Thus, capital per worker, according to some analysis, has continued to increase roughly at
its pre-recession trend. In this view, the productivity problem is not simply one of
inadequate investment.9
Researchers have proposed several reasons why, even if the quantity of
investment has kept up, recent investment may be leading to smaller productivity
advances than in the past. The more optimistic analysts argue that we may be in a
productivity lull while businesses work to realize the full benefit of advances that are
embedded in recent investment.10 Others suggest that productivity-advancing ideas are
inherently harder to find and exploit than in the past, implying that slower productivity
growth may be with us for the long haul.11 This debate is unlikely to be resolved anytime
soon. In the meantime, we should look for policies that will create an environment in
which productivity can flourish.
9
See Fernald and others, "Disappointing Recovery," in note 4.
10
For example, Brynjolfsson, Mitchell, and Rock (2018) highlight the need to make complimentary
investments in intangibles to take advantage of artificial intelligence and other emerging technologies (see
Erik Brynjolfsson, Tom Mitchell, and Daniel Rock (2018), "What Can Machines Learn and What Does It
Mean for Occupations and the Economy?" AEA Papers and Proceedings, vol. 108 (May), pp. 43-47). And
Mokyr (2014) argues that the vast array of computers and other relatively new tools will usher in a new
wave of progress just like the invention of barometers and microscopes and other tools propelled the
City Journal,
technology in the 1700s (see Joel Mokyr (2014), "The Next Age of Invention," Winter).
11
Bloom and others (2017) as well as Thompson and Spanuth (2018) discuss how it has become more
costly to make technological advances. See Nicholas Bloom, Charles I. Jones, John Van Reenen, and
Michael Webb (2017), "Are Ideas Getting Harder to Find?" available at
https://web.stanford.edu/~chadj/papers.html; and Neil Thompson and Svenja Spanuth (2018), "The Decline
of Computers As a General Purpose Technology: Why Deep Learning and the End of Moore's Law Are
Fragmenting Computing," available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3287769.
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We need policies that support innovation and create a favorable environment for
investment in both the skills of workers and the tools they have. Indeed, the recent tax
reforms were designed in part to boost capital investment and thus productivity. Once
again, my goal tonight is to highlight the importance of growth-enhancing policies.
Because these policies are not the province of the Fed, I will not advocate for particular
approaches. Instead, I will just observe that researchers and policy analysts have
proposed many promising ideas that may be capable of attracting wide support. Policies
that succeed in enhancing productivity growth would greatly benefit future generations of
Americans.
Conclusion
To conclude, the United States is currently in the midst of one of the longest
economic expansions in our history. Unemployment is low and inflation is close to our
2 percent objective. My colleagues and I on the FOMC are focused on using our
monetary policy tools to sustain those favorable conditions.
Tonight I have also highlighted some longer-term challenges we face, including
low labor force participation by prime-age workers and low productivity growth. By
promoting macroeconomic stability, the Fed helps create a healthy environment for
growth. But these longer-term issues require policies that are more in the province of
elected representatives. The nation would benefit greatly from a search for policies with
broad appeal that could promote labor force participation and higher productivity, with
benefits shared broadly across the nation.
Recent Economic Developments and Longer-Term Challenges
Jerome H. Powell
Chair
Board of Governors of the Federal Reserve System
at the
Citizens Budget Commission 87th Annual Awards Dinner
New York, New York
February 28, 2019
Figure 1. Unemployment is near historic lows
Percent
Unemployment rate
12
10
8
6
Jan.
4
2
Figure 2. Improvement in unemployment is broadly shared
Unemployment by race and ethnicity
Unemployment by education,
age 25 and over
Percent Percent
18 18
Bachelor's degree
White
16 16
Hispanic
Some college
14
14
Asian
High school degree
12
12 Black
Less than HS degree
10
8
Jan.
Jan.
6
4
2
1086420
Figure 3. Wage growth has picked up, but it is still moderate
Nominal compensation
Real compensation
Percent change Percent change
from year earlier from year earlier
Avg. hourly earnings, prod.
3.5
7.0
workers
ECI less core PCE inflation
Employment cost index (ECI)
3.0
6.0
Avg. hourly earnings, all
2.5
workers
5.0
2018:Q4
2.0
4.0
1.5
2018:Q4
3.0
1.0
2.0
0.5
1.0 0.0
-0.5
0.0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Figure 4. Inflation is running near target
Percent change
PCE inflation
from year earlier
6.0
5.0
Total Core
4.0
3.0
Nov.
2.0
1.0
0.0
-1.0
-2.0
Figure 5. Both labor supply and productivity growth have slowed
Components of GDP growth
Average annual
percent change
3.5
3.0
Productivity
2.5
Labor
2.0
1.5
1.0
0.5
0.0
1974-81 1982-90 1991-2000 2001-07 2008-18
Business cycle
Figure 6. Youth labor force participation has declined as more go to school
School and work by youth
Labor force participation, ages 16 to 25
Percent Percent
60
75
50
Working
Male
70
Total
40
65
Enrolled, not working
30
Enrolled, working
60
20
Female
55
10
2018:Q4 Not enrolled, not working
50
0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Note: Work includes both working and looking for work.
Figure 7. Male labor force participation has declined for decades
Female labor force participation, ages 25 to 54
Male labor force participation, ages 25 to 54
Percent
Percent
80
100
75
98
70
96
Trend: -1.5 ppt per decade
94
65
92
60
90
55
88
86
50
84
45
82
40
80
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2018
Figure 8. U.S. prime age labor force participation is relatively low
Male Female
Percent
Percent
100
100
2017 1995
98 2017 1995
90
96
94
80
↓ ↓
92
90
70
88
60
86
84
50
82
80
40
Italy
Chile
Israel Italy
Spain
Japan Latvia Korea Chile
States
Spain Israel
France Turkey Poland Latvia Japan Korea
Iceland Greece Austria Ireland States
Mexico Estonia Canada Finland
Norway France Turkey
Sweden Zealand Belgium Austria Poland Greece Ireland
Slovenia Hungary Portugal Iceland Finland Estonia Canada Mexico
Republic Republic
Kingdom Australia Sweden Norway Zealand
Germany countries Denmark Slovenia Belgium
Portugal Republic Hungary Republic
Kingdom Australia
Denmark Germany
countries
Switzerland
Netherlands
Luxembourg Switzerland
New
Netherlands
United Luxembourg
New
United
Czech
Slovak OECD
Czech
United
Slovak OECD
United
Source: Organisation for Economic Co-operation and Development, Labour force statistics by sex and age 25 to 54 (indicators).
https://stats.oecd.org/Index.aspx?DataSetCode=LFS_SEXAGE_I_R (Accessed on 25 February 2019).
Figure 9. Decline in LFPR most notable at lower levels of education attainment
Female labor force participation by
Male labor force participation by
educational attainment, ages 25 to 54
educational attainment, ages 25 to 54
Percent
Percent
100 90
Bachelor's degree
Bachelor's degree
85
95 80
Some college
Some college
75
90 70
High school degree
65
High school degree
85 60
55
50
80
Less than high school degree Less than high school degree
45
75 40
1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018
Figure 10. Productivity growth has slowed
Business-sector productivity growth
Percent change
7.0
6.0
4-quarter
5.0
5-yr average*
4.0
3.0
1961-2018 avg.
2.0
2018:Q3
1.0
0.0
-1.0
1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018
-2.0
-3.0