William C Dudley: Are recent college graduates finding good jobs?
Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal
Reserve Bank of New York and Chairman of the Committee on the Global Financial System
(CGFS), at the Regional Economic Press Briefing, New York City, 27 June 2013.
* * *
Good morning and welcome once again to the New York Fed's Regional Economic Press
Briefing. I am pleased to have this opportunity to talk with the journalists covering our region
- and through you to the people in our District. This morning I will briefly discuss conditions in
the national economy and then focus on regional economic conditions, with particular
attention to the question of whether recent college graduates are finding good jobs. We will
examine the trends and see how they are playing out in the region.
As always, what I have to say reflects my own views and not necessarily those of the Federal
Open Market Committee (FOMC) or the Federal Reserve System.
National economic conditions
I would like to begin by taking stock of where we are at the moment. Then I will address my
expectations for the performance of the economy over the remainder of 2013 and into 2014.
Since the end of the Great Recession in mid-2009, we have had 15 consecutive quarters of
positive growth of real GDP. However, the average annual growth rate over that period has
been just 2.1 percent. Although the unemployment rate has declined by 2.5 percentage
points from its peak of 10 percent in October of 2009, much of this decline is due to the fact
that the labor force participation rate has fallen by 1.5 percentage points over this period.
Recall that discouraged workers who do not actively look for work are regarded as not
participating in the labor force and so are not counted as unemployed even though they are
without jobs. Using an alternative measure, the employment to population ratio, which is not
influenced by changes in the number of discouraged workers, there has been limited
improvement in labor market conditions. Job loss rates have fallen, but hiring rates remain
depressed at low levels. Taken together, the labor market still cannot be regarded as
healthy. Numerous indicators, including the behavior of labor compensation and household
assessments of labor market conditions, are all consistent with the view that there remains a
great deal of slack in the economy.
That being said, I see persuasive evidence of improved underlying fundamentals for much of
the private sector of the U.S. economy. Key measures of household leverage have declined
and are now at the lowest levels they have been in well over a decade. Household net worth,
expressed as a percent of disposable income, has increased back to its average of the
previous decade, reflecting rising equity and home prices and declining liabilities. Banks are
beginning to ease credit standards somewhat after a prolonged period of tightness. As a
result, we are now experiencing a fairly typical cyclical recovery of consumer spending on
durable goods. For example, light-weight motor vehicles sold at a seasonally-adjusted
annual rate of 15.3 million in May, not far from the 16.1 million sales in 2007.
Similarly, after five years in which housing production was well below what is consistent with
underlying demographic trends, it now appears that we have worked off the excess supply of
housing built up during the boom years of the last decade. Housing starts and sales are now
on a clear upward trend, and a widely followed national home price index is up around
12 percent over the twelve months ending in April.1 Indeed, anecdotal reports suggest that
this higher-than-expected increase in home prices is due to a lack of homes for sale.
Unfortunately, the improvements in consumer spending on durable goods and housing are
not yet showing through in the overall GDP growth rate due to the significant headwinds that
we continue to face. First, federal fiscal policy has recently become quite contractionary.
Estimates from the Congressional Budget Office (CBO) indicate that this fiscal restraint is on
the order of 1.75 percentage points of potential GDP this year. In the period since 1960,
there have been only two previous episodes of fiscal contraction of this order of magnitude -
1969 and 1987 - both of which occurred when the economy was on a more solid footing than
it is today. Second, the euro area is experiencing a protracted recession and growth in many
of the largest emerging economies has slowed. This has resulted in a very sharp slowing of
U.S. exports, with an associated slowing in production and employment growth in the U.S.
manufacturing sector.
Thus, I continue to see the economy as being in a tug-of-war between fiscal drag and
underlying fundamental improvement, with a great deal of uncertainty over which force will
prevail in the near-term. This tug-of-war is clearly seen in the monthly employment data.
Over April and May, the average monthly gain in employment in the private service-providing
sector has been well maintained at 175,000. In contrast, employment in the manufacturing
sector and the federal government declined a combined 20,000 per month. And the resulting
uncertainty is, I believe, an important contributing factor behind the relatively sluggish pace of
business investment spending.
My best guess is that growth for all of 2013, measured on a Q4/Q4 basis, will be about what
it has been since the end of the recession. But I believe a strong case can be made that the
pace of growth will pick up notably in 2014. The private sector of the economy should
continue to heal, while the amount of fiscal drag will begin to subside. I also see some
indications that growth prospects among our major trading partners have begun to improve;
for example, the rise in the June euro area composite Purchasing Managers' Index. And this
combination of events is likely to create an environment in which business investment
spending will gather strength.
Finally, I believe this tug-of-war analogy is useful in explaining the recent inflation dynamics.
As is well known, total inflation, as measured by the personal consumption expenditures
(PCE) deflator, has slowed sharply over the past year and is now running below the FOMC's
expressed goal of 2 percent. Much of the slowing of total inflation is due to declining energy
prices resulting from the weakening of global growth mentioned earlier combined with
increased energy production here in the U.S. However, it is also the case that core inflation,
that is, excluding food and energy, has slowed sharply as well. A decomposition of the
slowing in core inflation reveals that some of it is due to slowing in the rate of increase in
prices of non-food and non-energy goods. This probably is due in large part to the softening
of global demand for goods and the modest appreciation of the dollar that has occurred since
mid-2011.
In the service sector, the rate of increase in prices of medical services and "non-market"
services - the latter includes some financial services - also has slowed notably recently. In
contrast, the rate of increase in prices for other non-energy services has been relatively
stable. Comparing this set of conditions to that in 2010, the recent slowing of inflation has
been less widespread across core goods and core services, and inflation expectations so far
have declined less appreciably than they did in 2010. Thus, my best guess is that core goods
prices will begin to firm in the months ahead as global demand begins to strengthen and
inventories get into better alignment with sales.
As is always the case, there is substantial uncertainty surrounding this forecast. Moreover,
there is always the possibility of some unforeseen shock. Thus, we will be monitoring U.S.
and global economic conditions very carefully and will adjust our views on the likely path for
growth, inflation and the unemployment rate accordingly in response to new information.
At its meeting last week, the FOMC decided to continue its accommodative policy stance. It
reaffirmed its expectation that the current low range for the federal funds rate target will be
appropriate at least as long as the unemployment rate remains above 6.5 percent, so long as
inflation and inflation expectations remain well-behaved. It is important to remember that
these conditions are thresholds, not triggers. The FOMC also maintained its purchases of
$40 billion per month in agency MBS and $45 billion per month in Treasury securities, with a
stated goal of promoting a substantial improvement in the labor market outlook in a context
of price stability.
In its statement, the FOMC said that it may vary the pace of purchases as economic
conditions evolve. As Chairman Bernanke stated in his press conference following the FOMC
meeting, if the economic data over the next year turn out to be broadly consistent with the
outlooks that the FOMC sees as most likely, which are roughly similar to the outlook I have
already laid out, the FOMC anticipates that it would be appropriate to begin to moderate the
pace of purchases later this year. Under such a scenario, subsequent reductions might occur
in measured steps through the first half of next year, and an end to purchases around
mid2014. Under this scenario, at the time that asset purchases came to an end, the
unemployment rate likely would be near 7 percent and the economy's momentum
strengthening, supporting further robust job gains in the future.
Here, a few points deserve emphasis. First, the FOMC's policy depends on the progress we
make towards our objectives. This means that the policy - including the pace of asset
purchases - depends on the outlook rather than the calendar. The scenario I outlined above
is only that - one possible outcome. Economic circumstances could diverge significantly from
the FOMC's expectations. If labor market conditions and the economy's growth momentum
were to be less favorable than in the FOMC's outlook - and this is what has happened in
recent years - I would expect that the asset purchases would continue at a higher pace for
longer.
Second, even if this scenario were to occur and the pace of purchases were reduced, it
would still be the case that as long as the FOMC continues its asset purchases it is adding
monetary policy accommodation, not tightening monetary policy. As the FOMC adds to its
stock of securities, this should continue to put downward pressure on longer-term interest
rates, making monetary policy more accommodative.
Third, the Federal Reserve is likely to keep most of these assets on its balance sheet for a
long time. As Chairman Bernanke noted in his press conference last week, a strong majority
of FOMC participants no longer favor selling agency MBS securities during the monetary
policy normalization process. This implies a bigger balance sheet for longer, which provides
additional accommodation today and continuing support for mortgage markets going forward.
Fourth, even under this scenario, a rise in short-term rates is very likely to be a long way off.
Not only will it likely take considerable time to reach the FOMC's 6.5 percent unemployment
rate threshold, but also the FOMC could wait considerably longer before raising short-term
rates. The fact that inflation is coming in well below the FOMC's 2 percent objective is
relevant here. Most FOMC participants currently do not expect short-term rates to begin to
rise until 2015.
Some commentators have interpreted the recent shift in the market-implied path of
shortterm interest rates as indicating that market participants now expect the first increases in the
federal funds rate target to come much earlier than previously thought. Setting aside whether
this is the correct interpretation of recent price moves, let me emphasize that such an
expectation would be quite out of sync with both FOMC statements and the expectations of
most FOMC participants.
Regional economic conditions
Let me turn now to the regional economy, the focus of our presentations today. Our last
briefing on the regional economy took place at a difficult time - soon after Superstorm
Sandy. While economic life has returned to normal across most of the metro area, some of
the hardest-hit areas are still struggling to recover and rebuild. Just blocks from here, in fact,
the South Street Seaport business district is still far from business-as-usual. And there are
many such neighborhoods across the metropolitan region, from the low-lying and coastal
areas of New Jersey to Brooklyn, Queens and Long Island; from Staten Island to southern
Connecticut. One encouraging sign, though, is that our broader regional economy has shown
remarkable resilience. It has been growing and adding jobs at a reasonably good pace.
Moreover, the rebuilding effort appears to be giving a bit of a boost to the job market in
industries such as construction.
As we've discussed before, the New York Fed produces economic activity indexes to help
monitor the performance of New York State, New York City and New Jersey. Based on these
measures, New York City has continued to grow strongly, and New Jersey's economy has
seen some pickup in growth since the beginning of this year. However, growth in New York
State has slowed, and Puerto Rico's economy is not faring well at all; the activity index
produced by the Government Development Bank for Puerto Rico shows that the Island's
economy has yet to show any signs of bottoming out.
The job situation has varied somewhat across our region. Improvement has generally been
broad-based, with New York City and Long Island doing particularly well, though Puerto Rico
continues to weaken. Both Connecticut and New Jersey have recently been growing roughly
in line with the nation thus far in 2013. Unemployment rates across the region are roughly
matching the national rate, with the exception of the relatively high rate that has
characterized Puerto Rico's labor market for some time. Housing continues to be a focus of
our regional monitoring efforts and home prices in our region appear to have bottomed. Our
economists will elaborate on these points this morning.
Are recent college graduates finding good jobs?
The special topic of today's press briefing is a look at how well recent college graduates are
faring in the job market, both nationally and here in our region. A college education
represents an important investment in one's human capital, meaning the knowledge and
skills people build. Historically, it's been pretty clear that those who've invested in a college
education have tended to earn a sizeable economic return. And the benefits of
collegeeducated citizens go well beyond the individual. Regions with a higher concentration of
college graduates tend to be more innovative, have higher living standards and experience
more rapid economic growth.2 So a college education plays an important role in helping
individuals prosper, as well as in strengthening the broader economy.
More recently, though, rising costs, increasing student debt and widespread reports of recent
college graduates not being able to find good jobs have raised some troubling questions
about whether going to college is still a good investment. In fact, some of our own research,
including material that we discussed at our last press briefing, has shown the dramatic
increase in student debt over the past decade.3 In today's briefing, we're going to take a
close look at the question of just how weak today's labor market is for new college graduates
by putting their recent experience into context using some hard data.
It is important for us to undertake this kind of analysis because, as we'll show, newly minted
graduates always take some time to transition into the labor market and find jobs that utilize
their education. And young people with college degrees still fare far better than those
without. At the same time, with the sluggish jobs recovery from the recession, it's clear that
the transition of recent graduates into the labor market is taking longer, and they've
experienced higher unemployment and higher underemployment than in years past.4 Still,
while times have gotten tougher for recent graduates, we shouldn't be too hasty in
concluding that getting a college education won't help people find good jobs.
I will now ask Jason Bram to present an update of economic conditions in our region.