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WASHINGTON - Thank you for inviting me to join you this morning to comment on the state of the U.S. economy. I had the pleasure of meeting your Board at the White House a few days ago, and appreciated their substantive and constructive engagement on issues of mutual interest. Chief among these, from my point of view, is our shared interest in meaningful measurement and transparency. As a user of economic data, I have a keen interest in the interpretation and quality of the economic data that the government and private entities provide to the public.
The financial crisis made even more abundantly clear the importance of timely and accurate information to assess the state of the economy, financial markets, firms, and the global economy more generally. But we only know what we measure, and the conceptual and practical decisions that we make about what and how to measure are crucial. The more I work in policy and even more in the intense environment here in Washington, the importance of measuring “the number” becomes paramount. Especially in that setting, respect for measurement and a nuanced understanding of what we know and what we don’t is especially important, and it’s a fact that I try to reinforce every day.
Turning to what the recent data are telling us about the U.S. economy today –
In the last few months we’ve seen a general improvement in the tone of the incoming economic measures. On average, employment grew by 176,000 jobs per month in the three months through April, somewhat less than at the start of the year, but similar to the pace seen in the fourth quarter of last year, and a substantial pickup from the average monthly gains of about 130,000 during the second and third quarters of 2011.
The unemployment rate has fallen a full percentage point since last August, from 9.1 percent to 8.1 percent and, while this is still too high, it represents a broad-based improvement across a wide variety of industries and demographic groups. This decline is largely a result of people leaving unemployment for employment, and is not a quirk of measurement nor driven by declining participation in the labor market. Overall, 4.2 million people have found jobs and rejoined the active labor force since the trough of the labor market in February 2010.
Growth in the recovery has come largely from the private sector, whereas public sector employment, especially in state and local governments, has not contributed to growth in the way we typically see in the wake of a recession.
The business sector has been a source of relative strength in the recovery to date, with over 30 percent growth in investment in equipment and software since the trough of the recession, a 17 percent increase in business fixed investment more broadly, an increase of 26 percent in exports, and an increase in corporate profits to a six-decade-high level of profitability.
The initial improvements we are seeing in the labor market are a natural next step, as hopefully hiring will continue to follow the growth we have been seeing in both profits and investment.
The household sector has yet to exhibit the kind of resilience we have started to see in businesses, in part because of the stubborn problems that still remain in residential real estate.
On average, house prices have fallen by more than 30 percent from their 2006 peak; housing wealth has fallen by over $7 trillion. This has led to 11 million homeowners who owe more on their mortgages than their homes are worth, an amount totaling about $700 billion. However, some data in recent months suggest that the housing market is firming; for example, existing home sales have risen almost 5 percent over the last six months, and the recent report on the FHFA home price index and the CoreLogic price index for non-distressed sales showed the first year-over-year increases we have seen in home price measures in almost five years.
Residential investment is usually an important contributor to economic recovery, but that has not been the case until very recently. In the fourth quarter of 2011, residential investment rose by 11.6 percent and contributed a quarter of a percentage point to GDP growth.
Looking at the most recent quarter, real GDP continued to grow at a moderate pace in the first quarter of 2012, supported by a pickup in consumer spending, residential investment, and exports.
Real GDP increased at a 2.2 percent annual rate in Q1, following a 3.0 percent gain in Q4.
Real consumer spending accelerated, growing at its fastest pace in over a year. Growth of residential investment was the strongest since 2010Q2 (when the home buyer tax credit was a factor), contributing four tenths of a percentage point to GDP growth. Export growth also picked up smartly, growing at a 5.4 percent annual rate.
The slowdown in GDP growth between Q4 and Q1 was due primarily to easing business investment. Outlays for equipment and software moderated, and nonresidential structures spending declined. In addition, the pace of private inventory accumulation slowed sharply, and its contribution to growth fell to six tenths of a percentage point from 1.8 percentage points in Q4.
As a measure of what is happening in the private U.S. economy, I find it helpful to look at private domestic final purchases (the sum of consumer spending, residential investment, and business fixed investment) – which takes out global sales, inventories, and government purchases, so that it just focuses on private demand in the U.S. This measure continued to grow at a solid 2¾ percent pace in Q1. The persistent strength of underlying private demand is a sign of continued improvement in economic fundamentals.
However, continued cuts in public-sector spending remain a drag on economic activity. In Q4, government subtracted six tenths of a percentage point from real GDP growth (five tenths of a percentage point from federal, mainly due to a drop in defense outlays, and one tenth of a percentage point from state and local).
Measures of both business and consumer confidence have improved notably over the past several months, and the Michigan Survey of consumer sentiment is now at its highest level since January 2008. The NFIB small business optimism index has increased in 7 of the past 8 months through April, to its highest level since February 2011.
Even the housing sector is showing signs of improvement. Housing starts and home sales have trended higher in recent months. Record low mortgage rates, a historically high level of housing affordability, improving consumer and builder confidence, and a declining inventory of homes for sale are all positive signs, though still in an overall very challenging market.
Although the economy is clearly in a better position now than a year ago, we still face many challenges.
Household debt outstanding as a share of personal income currently stands at 113 percent (2011Q4). That is down from a peak of 130 percent in 2007Q3 and is back to roughly the level of 2004, but there is still far to go in balance sheet adjustment.
The U.S. economy also remains vulnerable to global economic conditions, particularly the situation in Europe.
A slowdown in global growth is already underway. Economic growth in the world excluding the U.S. slowed to below 4 percent during 2011 from 5½ percent during 2010. Asia’s performance was generally better at 5¼ percent but that was down from growth of about 7½ percent over the four quarters of 2010. This slowdown has negative implications for U.S. exports, which have been a source of strength for the U.S. economy over the past two years.
In addition, uncertainty about sovereign debt strains in Europe has already contributed to volatility in U.S. and global financial markets, and the risk of recession in the eurozone has increased, though this week the eurozone reported a flat growth rate for the first quarter, with relatively stronger growth in Europe compared to other weakened economies.
The EU is an important trading partner, accounting for just over 20 percent of all U.S. exports. The euro area itself absorbs 15 percent of all U.S. exports – nearly as much as Canada, our largest trading partner.
Most forecasters are anticipating moderate economic growth over the next several quarters.
The May Blue Chip consensus of private forecasters expects real GDP to grow 2.3 percent over the four quarters of 2012, and 2.7 percent during 2013.
Blue Chip forecasters are currently calling for the unemployment rate to average 8.0 percent by 2012Q4, and decline gradually in 2013.
We tend to focus on the high frequency data, looking to read the latest information and updates for hints of the future, but especially in a highly charged environment, the longer-run trend is an important balance and perspective.
Looking back only a dozen years or so and comparing the last decade to recent experience, real GDP increased 19 percent between 1996 and 2000, an annual growth rate of 4.4 percent. Median family income, adjusted for inflation, gained 10 percent during this period. This was the fastest sustained growth in real median family income since the mid-1980s. Unemployment fell below 4 percent, while productivity growth was 2.8 percent per year between 1996 and 2000.
When real income rises at the growth rate that prevailed in the late 1990s – 2.4 percent – median income doubles every 30 years, roughly each generation, and each generation has a materially improved standard of living compared to the previous one.
When real income rises at the growth rate that prevailed in the mid 2000s, rising at 0.3 percent – even before the financial crisis and recession – it takes 230 years for income to double, which is almost 8 generations, or roughly the time from the birth of this country to where we are today.
So in our focus on today’s issues and performance, we need to think about not only this month’s and this quarter’s growth rate, but also the long-run growth that will likely result from today’s decisions. An economy that can support measurable improvements in standards of living is one with productivity growth, driven by investments in human capital and education, research and innovation, and the infrastructure to support growth.
Over our history we have faced immediate challenges and still built up human, innovative, and physical infrastructure.
In the wake of wars, we initiated the high school movement and land-grant universities, polio vaccinations, food safety regulation built across many administrations – begun by Harry Truman’s 1947 signing of the Federal Insecticide, Fungicide, and Rodenticide Act of 1947, and continuing to the Safe Drinking Water Act of 1974 (Ford) and the Food Quality Protection Act of 1996 (Clinton) – the National Park System, and the Eisenhower interstate highway system. These were all investments made knowing that they had potential long-run benefits, but without knowing how large or how lasting their legacy would be.
As you know, we’ve been through a terrible crisis, and while the economy continues to improve, the legacy of the crisis is still wrenching for many families. We work on our numbers knowing that behind them are faces, and families, and stories that are summarized in our statistics but are not really distilled into those simple facts. We know how important it is to respect the data, and to measure and model the best that we can. The data tell compelling stories about what is happening today, but of course, even more compelling is our responsibility to the future generations whose own reading of the data will depend on the investments that we make now.
Thank you.
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