What are the forces moving the Minnesota economy? Adam Belz tries to identify the trends and show the connections between Minnesota and the larger U.S. and global economies. You can connect with him on Twitter: @adambelz
The president of the Minneapolis Fed on Tuesday repeated his call for the Federal Reserve to keep up efforts to stimulate the sluggish economy, rather than scale back its massive bond-buying program.
With fresh ammunition from a new study suggesting that the Fed could drive down unemployment faster if it promised to keep interest rates low for longer, Narayana Kocherlakota called “puzzling” the public conversation about when the Fed will taper its bond-buying program, known as quantitative easing.
Unemployment is too high and understates the weakness of the job market, he said, and inflation is not in danger of rising.
“Inflation rates are very low by historical standards, relative to the goal of 2 percent a year, so there’s no reason to be afraid of monetary stimulus,” said Narayana Kocherlakota at a St. Paul Chamber of Commerce lunch, when asked what the takeaway should be from his half-hour speech.
Kocherlakota, who took over the Minneapolis Fed in 2009, has not been a voting member of the Fed’s monetary policy-setting Federal Open Market Committee (FOMC) this year, but he will be able to vote in 2014. He has become one of the most vocal proponents of the Federal Reserve’s doing more to stimulate the economy, after being considered an interest rate hawk in 2011.
At 7.3 percent, the U.S. jobless rate is still too high and doesn’t account for workers who’ve given up the job search, he said. The nation’s employment-to-population ratio, which helps to capture this shrinkage of the labor force, is historically low. While it’s true that the ratio is falling in part because of the retirement of baby boomers, that demographic force is too small to account for the historic decline, Kocherlakota said. For people ages 25 to 54, the ratio is 75.4 percent, a little higher than it was during the recession, but before that the lowest it’s been since 1984.
“The weak labor market represents considerable hardship for a large number of Americans, both in economic terms and in psychological terms,” Kocherlakota said.
Meanwhile, inflation has been dropping since the beginning of 2012 and is well below the Fed’s target inflation rate of 2 percent.
Kocherlakota has called for the Fed to keep interest rates extraordinarily low at least until the U.S. unemployment rate falls below 5.5 percent, so long as the two-year outlook for inflation stays below 2.5 percent. He repeated that call Tuesday, which differs from the FOMC’s consensus that interest rates should stay low until unemployment falls below 6.5 percent.
While he has been among the most dovish voices at the Fed for more than a year, Kocherlakota’s position was bolstered by a study published by William English, director of monetary affairs for the Federal Reserve Board of Governors, earlier this month. (The study was covered in the Wall Street Journal here.)
The study’s models show that “reducing the unemployment threshold improves measured economic performance until the unemployment threshold reaches 5.5 percent.”
Kocherlakota said that considering the Fed’s outlook for a gradual reduction in unemployment and for inflation to stay below 2 percent over the medium term, the central bank should tell Wall Street and the public that it will keep interest rates low at least until the 5.5 percent unemployment rate threshold is met.
It could also, he said, lower the interest rate being paid to banks on their excess reserves, which would incentivize them to lend that money to businesses and consumers instead of holding onto it.
The Minneapolis Fed has published a condensed transcript of Narayana Kocherlakota’s town hall meeting in La Crosse in September. I’ve boiled down most of the questions and answers:
Just over a quarter of the way through the decade, Minnesota’s economy is creating jobs faster – and in different industries -- than state economists projected in 2010.
For some reason, the ranks of management in Minnesota have swollen in the past three years by 11 percent. That's much faster than projected, with companies and enterprises adding more managers since January 2010 than was predicted for the whole decade.
Food service, hotels, custodial and administrative support have all added jobs four times faster than expected, basically meeting their predicted gains for the decade after only two and a half years.
Not always, but generally, those industries offer lower-paying jobs.
Manufacturing, mining and logging, wholesale and retail trade, professional services and finance and insurance have all added jobs at least twice as fast as projected. Those industries generally provide better-paying jobs.
Overall the state was projected to add 368,000 jobs this decade. So far, Minnesota has added 158,000 positions, about 43 percent progress toward the projection for 2020.
A few industries are growing slower than projected. New jobs in health care are abundant, just as economists predicted. Nearly one in five jobs created in the state between January 2010 and August 2013 was in the health care industry.
But hiring in the health care industry is not keeping pace with projections. Between 2010 and 2020, the state predicted health care would account for 35 percent of all new employment. Almost three years into the decade, and health care has accounted for 18.5 percent of new jobs in the state.
Another sector growing slower than projected has been construction, but only slightly. The only industry to shed jobs between January 2010 and August 2013 was information, which includes newspapers, publishing and broadcasting.
I used two different state data tools (the Employment Outlook and Current Employment Statistics) to create this spreadsheet, in which I sort the industries by comparing actual gains through August with projected gains for the decade. A 25 percent in progress toward the 2020 goal would be right on pace. Most industries are doing better than that, as you can see.
(Data note: I deleted the government categories because it was easier to organize the data that way, which is why if you add up the numbers you won't get a sum that matches the total nonfarm number at bottom. The percentages are still accurate.)
If anyone wants a copy of the spreadsheet to play with or wants to know where to get the data, shoot me an email: firstname.lastname@example.org