Federal Reserve Chair, Janet Yellen, shared the current outlook on the U.S. economy on Sept. 17, 2014. During her speech, Chairwoman Yellen commented that one cause of Federal Reserve System holdbacks is consumer spending. The Federal Reserve believes that American households are not fully confident they will have enough income for the future.
The labor market is experiencing a “significant underutilization of labor resources” and slow wage increases. As interest rates eventually return to maximum efficiency, and closer “to its longer-run normal level by the end of 2017,” consumer confidence and spending should return to normal and help revive confidence in the American economy.
The Houston Chronicle explained that when an economy operates at or near full employment, which according to the Federal Reserve System averages between 5.2 and 5.5 percent, people have money to spend and the demand for goods and services increases. To meet this demand, “companies expand their businesses and hire more workers.”
During the press conference, a reporter asked the Chairwoman to explain why positive economic growth has not, concurrently, created more inflation in wages and personal consumption expenditure (PCE).
Yellen pointed out that slow wage-price inflationary growth was not because of lack of job creation or lack of Federal Reserve attempts to improve the economy, but because qualified workers are no longer looking for work, many are working part-time, or cannot find work. As Yellen confirmed, the work force is understaffed.
According to Yellen’s personal opinion, “the job market is flat.” American people have “low expectations” about future incomes.
She also goes on to explain additional cause. The Federal Reserve System is seeing slow productivity from suppliers and a “slow pace of potential output.” Yellen adds, investors are not spending and businesses are not currently increasing wages to attract more skilled labor – which will ultimately alleviate holdbacks in consumer spending.
To get a better glimpse of the labor markets, the Dallas Federal Reserve posted results called the “Beveridge Curve” on their website. Results are based on BLS data and shows the relationship in unemployment rate and job vacancy. Data shows that job vacancies in the market are due to “underutlization” of the workforce, or a lack of qualified labor. To many Americans, it seems that less skilled workers are getting shut out of the workforce.
According to Yellen, once more jobs are created and businesses increase wages, workers should return back into the workforce. The Dallas Federal Reserve System adds that repositioning workers will, inadvertently, produce a high number of unskilled workers unable to find work, this is expected, but the skilled workers can re-enter the work force at anytime and change the projects of the Federal Reserve System.
For more than 75 years, Gallup Economics, a leading consulting firm, had this to say about the relationship of price increases and spending. On their website it states if there is “an increase in personal consumption,” this a clear sign of an “improving economy.” But if the cause of spending more “is occurring because of necessity, not desire, the picture may not be quite as rosy.”
Based on the Bureau of Labor Statistics’ (BLS) August 2013-2014 industries report, the industries with the greatest losses were airfare and motor fuel. Industries that experienced highest increases were medical, dairy (particularly eggs and butter), meats and household energy. Rental and tenant insurance has also gone up. Americans are traveling less and are at home more, cooking more meals and they are driving their cars less often.
Although not conclusive, results from the BLS and Gallup Economics show that people are spending more money on necessities. For many Americans this can be concerning.
With positive GDP growth, the Federal Reserve says price inflation along with a growing labor market will maximize economic growth. The Federal Reserve did clarify that price will likely not increase immediately, but will occur in coming weeks. If one of the holdbacks of the Federal Reserve System is consumer spending, the Federal Open Market Committee (FOMC) is “not too concerned.”
According to Yellen, American spending is currently filled with “uncertainty.” The uncertainty is rooted in low expectations of future household incomes that “will gradually dissipate further over time.” Federal Reserve System holdbacks could be shedding light on how consumer spending habits are changing – at least for right now.
By Carolette Wright