Stanley Fischer: Remarks on the US economy
Speech by Mr Stanley Fischer, Vice Chair of the Board of Governors of the Federal Reserve
System, at the "Program on the World Economy", a conference sponsored by The Aspen
Institute, Aspen, Colorado, 21 August 2016.
* * *
I am grateful to Christopher Nekarda, Joseph Gruber, David Lebow, and Stacey Tevlin of the Federal Reserve
Board staff for their assistance. Views expressed are mine and are not necessarily those of the Federal Reserve
Board or the Federal Open Market Committee.
The Fed's dual mandate aims for maximum sustainable employment and an inflation rate of
2 percent, as measured by the price index for personal consumption expenditures (PCE).
Employment has increased impressively over the past six years since its low point in early
2010, and the unemployment rate has hovered near 5 percent since August of last year,
close to most estimates of the full-employment rate of unemployment. The economy has
done less well in reaching the 2 percent inflation rate. Although total PCE inflation was less
than 1 percent over the 12 months ending in June, core PCE inflation, at 1.6 percent, is
within hailing distance of 2 percent - and the core consumer price index inflation rate is
currently above 2 percent.
So we are close to our targets. Not only that, the behavior of employment has been
remarkably resilient. During the past two years we have been concerned at various stages by
the possible negative effects on the U.S. economy of the Greek debt crisis, by the 20 percent
appreciation of the trade-weighted dollar, by the Chinese growth slowdown and
accompanying exchange rate uncertainties, by the financial market turbulence during the first
six weeks of this year, by the dismaying pothole in job growth this May, and by Brexit -
among other shocks. Yet, even amid these shocks, the labor market continued to improve:
Employment has continued to increase, and the unemployment rate is currently close to
most estimates of the natural rate.
During that period, the decline in the price of oil changed from being regarded as a simple
reduction in the cost of living of almost all households - and thus an unmitigated blessing -
to also being a source of concern, as it was understood that the decline in investment in the
production and installation of drilling equipment mitigated the blessing, as did the decline in
U.S. oil production.
And there have been other issues of concern to those particularly interested in monetary and
macroeconomic policy, though probably of less explicit concern to the public: The decline in
estimates of r* - the neutral interest rate that neither boosts nor slows the economy - which
is related to the fear that we are facing a prolonged period of secular stagnation; the
associated concerns that (a) the short-term interest rate will be constrained by its effective
lower bound a greater percentage of time in the future than in the past, and (b) that the U.S.
economy could find itself having to contend at some point with negative interest rates -
something that the Fed has no plans to introduce; the fear that very low interest rates present
a threat to financial stability; and concerns that low rates of real wage growth are increasing
inequality in the distribution of income.
Primarily, I believe it is a remarkable, and perhaps underappreciated, achievement that the
economy has returned to near-full employment in a relatively short time after the Great
Recession, given the historical experience following a financial crisis.1 To be sure, it was a
slow and difficult time for many, in part because growth in real gross domestic product (GDP)
has been slow by historical standards. As can be seen in table 1, part of the slower output
growth was due to smaller increases in aggregate hours worked, primarily reflecting
demographic factors such as the aging of the baby-boom generation. But, as shown in
table 2, there was also a major decline in the rate of productivity growth - to which I will
return shortly.
Turning briefly to recent developments, the pattern of high employment growth and low
productivity growth that we have seen in recent years has continued this year. So far in 2016,
nonfarm payroll gains have averaged about 185,000 per month - down from last year's pace
of 230,000, but still more than enough to represent a continued improvement in labor market
conditions. Estimates of monthly job gains needed to keep the unemployment rate steady
range widely, from around 75,000 per month to 150,000 per month, depending on what
happens to labor force participation among other things.
Output growth has been much less impressive. Over the four quarters ending this spring, real
GDP is now estimated to have increased only 1-1/4 percent. This pace likely understates the
underlying momentum in aggregate demand, in part because of a sizable inventory
correction that began early last year; even so, GDP growth has been mediocre at best.
The combination of strong job gains and mediocre GDP growth has resulted in exceptionally
slow labor productivity growth. Most recently, business-sector productivity is reported to have
declined for the past three quarters, its worst performance since 1979. Granted, productivity
growth is often quite volatile from quarter to quarter, both because of difficulties in measuring
output and hours and because other transitory factors may affect productivity. But looking at
the past decade, productivity growth has been lackluster by post-World War II standards.
Output per hour increased only 1-1/4 percent per year on average from 2006 to 2015,
compared with its long-run average of 2-1/2 percent from 1949 to 2005. A 1-1/4 percentage
point slowdown in productivity growth is a massive change, one that, if it were to persist,
would have wide-ranging consequences for employment, wage growth, and economic policy
more broadly. For example, the frustratingly slow pace of real wage gains seen during the
recent expansion likely partly reflects the slow growth in productivity.2
Let me highlight a few topics from the growing volume of research on this topic. The first is
that the productivity slowdown reflects mismeasurement, because the official statistics have
failed to capture new and better products or properly account for changes in prices over
time.3 Given how often we meet new technologies in our daily activities, even in classes of
products that have been in operation for many years - from driving an automobile, to flying,
to medicines and medical equipment, to our communications, and far more - it is easy to
persuade ourselves that technological advances play a major part in improving our lives.
However, some of these gains are conceptually outside the scope of GDP, and most recent
research suggests that mismeasurement of output cannot account for much of the
productivity slowdown.4
2
An alternative explanation is that productivity growth has been slow because wage growth has been slow; that
is, faced with only tepid rises in labor costs, firms have had less incentive to invest in labor-saving
technologies.
3
See, for example, David Byrne and Carol Corrado (2016), "ICT Prices and ICT Services: What Do They Tell
Us about Productivity and Technology? (PDF)" Economics Program Working Paper Series 16-05 (New York:
Conference Board, May; revised July 2016); and David Byrne and Eugenio Pinto (2015), "The Recent
Slowdown in High-Tech Equipment Price Declines and Some Implications for Business Investment and Labor
Productivity," FEDS Notes (Washington: Board of Governors of the Federal Reserve System, March 26).
4
See, for example, Chad Syverson (2016), "Challenges to Mismeasurement Explanations for the U.S.
Productivity Slowdown," NBER Working Paper Series 21974 (Cambridge, Mass.: National Bureau of
Economic Research, February); and David M. Byrne, John G. Fernald, and Marshall B. Reinsdorf (2016),
"Does the United States Have a Productivity Slowdown or a Measurement Problem? (PDF)" Brookings Papers
on Economic Activity, Spring, pp. 109-82.
Another explanation is that business investment has been relatively modest during the
current expansion, and so increases in capital per worker have been smaller than in previous
decades. Part of the modest pace of investment is likely because the effective labor force
that will use this new capital has been expanding much less rapidly than in previous
decades, but it is also possible that investment has been restrained by the subdued outlook
for growth and profits, thereby generating less demand for expanding productive capacity.5
However the slow growth in capital per worker has been quantitatively less important -
accounting for only one-fourth of the slowdown in productivity compared with its long-run
average - than the decline in the growth rate of total factor productivity (TFP), the portion of
productivity that is not accounted for by measurable inputs to production. Indeed, TFP growth
has averaged less than 1/2 percent per year in the past 10 years, well below its long-run
average of 1-1/4 percent. Pinning down the exact causes of this slowdown is difficult, and
there are many possibilities. For instance, it may reflect a slowdown in technological
innovations, which may be persistent, as some have argued, or may be a temporary
phenomenon, as I am inclined to believe.6
Low-to-middling TFP growth might also reflect the downward trend in business dynamism, as
evidenced by a notable slowdown in gross job creation and destruction. Diminished
dynamism has been linked to a marked slowdown in the reallocation of labor and capital from
low-productivity establishments and firms to high-productivity ones, especially in innovative
sectors like high tech.7 Both phenomena are closely related to the declining trend in new
business creation.8
Are we doomed to slow productivity growth for the foreseeable future? We don't know.9 On
the encouraging side, the technological frontier appears to be advancing rapidly in some
sectors, and there are hints that the firm start-up rate is improving.10 On the more
discouraging side, investment continues to disappoint - and so the current capital stock is
smaller and embodies fewer frontier technologies than might otherwise be the case - and the
productivity slowdown is a global phenomenon, suggesting that it may not be easily or
quickly remedied.
5
Eugenio Pinto and Stacey Tevlin (2014), "Perspectives on the Recent Weakness in Investment," FEDS Notes
(Washington: Board of Governors of the Federal Reserve System, May 21).
6
For example, Robert Gordon (2016) argues forcefully in his recent book, The Rise and Fall of American
Growth: The U.S. Standard of Living since the Civil War (Princeton, N.J.: Princeton University Press), that
slow productivity growth is likely to persist.
7
See Ryan A. Decker, John Haltiwanger, Ron S. Jarmin, and Javier Miranda (2016), "Changing Business
Dynamism: Volatility of Shocks vs. Responsiveness to Shocks? (PDF)" unpublished paper, April.
8
See Ryan A. Decker, John Haltiwanger, Ron S. Jarmin, and Javier Miranda (2016), "Declining Business
Dynamism: Implications for Productivity?" unpublished paper, August; and Francois Gourio, Todd Messer, and
Michael Siemer (2016), "Firm Entry and Macroeconomic Dynamics: A State-Level Analysis (PDF)," Finance
and Economics Discussion Series 2016-043 (Washington: Board of Governors of the Federal Reserve
System, February).
9
There is no shortage of views on this issue among economists, but the views to some extent appear to
depend on whether the economist making the prediction is an optimist or a pessimist. For the record, I note (a)
that looking ahead, I expect GDP growth to pick up in coming quarters, as investment recovers from a
surprisingly weak patch and the drag from past dollar appreciation diminishes, and (b) that I am an optimist.
10
See Dan Andrews, Chiara Criscuolo, and Peter N. Gal (2015), "Frontier Firms, Technology Diffusion and
Public Policy: Micro Evidence from OECD Countries (PDF)," OECD Productivity Working Papers Series
2015-02 (Paris: Organisation for Economic Co-operation and Development, November).
Let me conclude by mentioning briefly one aspect of the low interest rate and low productivity
growth problems - the fact that the Fed has been close to being "the only game in town," as
Mohamed El-Erian and others have described it.11 At least one part of the solution can be
found in the observation that overall macroeconomic policy does not have to be confined
solely to monetary policy. In particular, monetary policy is not well equipped to address
longterm issues like the slowdown in productivity growth. Rather, the key to boosting productivity
growth, and the long-run potential of the economy, is more likely to be found in effective
fiscal and regulatory policies.12 While there is disagreement about what the most effective
policies would be, some combination of improved public infrastructure, better education,
more encouragement for private investment, and more-effective regulation all likely have a
role to play in promoting faster growth of productivity and living standards - and also in
reducing the probability that the economy and particularly the central bank will in the future
have to contend more than is necessary with the zero lower bound.