WOOSTER: Don’t expect the national unemployment rate to drop dramatically as the economy slowly recovers, the head of the Federal Reserve Bank of Cleveland said Tuesday.
If the nation continues to add jobs at December’s rate of 200,000 a month, it will take at least four years —and perhaps five — for the unemployment rate to drop to 6 percent from where it is now, Sandra Pianalto, president of the Cleveland Fed, told an audience at Ohio State University’s Fisher Auditorium.
“The recovery from the recent financial and economic crisis has been frustratingly slow,” she said. “A number of headwinds are holding back growth.”
The national economy will grow perhaps 2.5 percent this year and 3 percent in 2013, Pianalto said in her talk, titled The Long Road Back to Full Employment, before a gathering of chambers of commerce members from the greater Wooster area and others.
And inflation, while close to 4 percent in 2011, will likely be under 2 percent this year, she said. “In fact, the outlook for inflation is pretty good,” she said.
The Federal Reserve’s dual mandates from Congress are maximum employment and stable prices, or low inflation, Pianalto noted.
The current unemployment rate of 8.5 percent is too high while a rate of zero is impossible, she said. Cleveland Fed staff say the “natural rate” of unemployment for the United States is about 6 percent, she said.
Because unemployment is so high now, coupled with slow economic growth and because it is taking longer to match people with jobs, it will take years for unemployment to fall to 6 percent, Pianalto said.
“We lost 9 million jobs during the recession,” she said. “Since employment began to recover, we have regained only 2 million of the lost jobs.”
If people who have stopped looking for work restart their job searches, that means they rejoin the labor force where they again are counted as unemployed. Saying this “is typical when times get better,” the four-year time frame to reach 6 percent unemployment might be a conservative estimate, Pianalto noted.
Economic growth is being hurt by the depressed housing market and reduced government spending and employment, she said.
Business leaders also say that uncertainty over federal, state and local government budgets, taxes and spending, along with regulatory uncertainty are also making businesses more cautious, she said. And if Europe enters a recession, that will hurt U.S. exports, she said.
“But business leaders are also telling me that weak demand for their products and services is the primary reason they are not expanding their businesses and hiring new workers,” Pianalto said. “Consumer spending has been much softer than normal in a recovery period.”
In taking questions from the audience, Pianalto said that the Federal Reserve has the tools and capability to keep inflation under control.
She also said that the Fed’s decision to keep interest rates low, while hurting people who save money and who depend on interest income, has been stimulating the economy.
The benefits of keeping interest rates low have outweighed the costs, she said. “I’m fully aware of the costs.”
Pianalto also said that American — and Ohio — workers need to become better educated.
Cleveland Fed research shows that the two top factors in driving income growth, looking back 75 years, are the skill level of the work force and innovation, she said.
Ohio many years ago ranked among the top states in the nation in both factors and as a result was a top state for income growth, she said. But it now has fallen to 38th out of 50 states in educational attainment, Pianalto said.
“We are the ninth largest state in the country. Ranking 38 in educational attainment is not good news for us,” she said. “A skilled, educated work force is very innovative.”
A big part of the rest of the developed world is moving ahead of the United States in educational attainment, she said.
Education and innovation are critical to prosperity, she said.
“We do have to work on improving our human capital, both here in the state but also in our country,” she said.
Pianalto this year is one of the 12 voting members on the Federal Open Market Committee, which sets national monetary policy through such things as determining interest rates and money supply.
The full text of Pianalto’s speech is available at the Cleveland Fed website, www.clevelandfed.org.
Jim Mackinnon can be reached at 330-996-3544 or jmackinnon@thebeaconjournal.com
