CEO of US Federal Reserve bank sees moderate economic growth

31 May 2012 21:51  [Source: ICIS news]

CLEVELAND (ICIS)--The US will likely grow at a moderate pace through 2014 as the economy recovers from its worst downturn since the Great Depression, the chief executive of a Federal Reserve Bank said on Thursday.
The US economy will likely grow slightly faster than 2.5% this year and about 3% in both 2013 and 2014, said Sandra Pianalto, chief executive of the Federal Reserve Bank of Cleveland.
She made her comments during the 2012 NABE Industry Conference, held by the National Association for Business Economics.
Assuming this rate of growth, it could take the US as long as five years for the unemployment rate to fall to 6%, she said.
The rate was 8.1% in April, according to the US Bureau of Labor Statistics.
Also, inflation should run close to the Federal Reserve's target of 2% through 2014, she said.
Pianalto based her outlook on the assumption that many of the trends affecting the US economy are cyclical in nature versus structural.
For example, Pianalto said statistics point to cyclical unemployment.
In structural unemployment, workers could not find jobs because they lacked the skills needed by employers or they were unable to move to get new jobs, she said. Under this scenario, unemployment would persist.
In contrast, cyclical unemployment would fall as the economy works through the business cycle and as the economy recovers, she said.
Employment in manufacturing and construction ­– among the hardest hit sectors during the recession ­– is recovering faster than the overall economy, she said.
Cyclical or structural, the US economy has a long path of recovery, given how far it fell during the recession.
Before the recession in 2007, more than 63% of the American population was working, Pianalto said.
During the recession, the figure dropped by more than 5 percentage points, Pianalto said. To get back to the 63% figure, about 12m more people would have to find jobs, she said.
Capital spending during the recession fell by nearly 25% or $400bn, she said, the biggest drop since World War II, Pianalto said.
Investment spending is still 7% below its pre-recession rate, she said.
The combination led to American output to fall by up to 5% from its peak in 2007, the worst decline since the Great Depression, she said.
During the depth of the recession, capacity utilisation rates fell from 79% to below 64%, a record low, she said.
Utilisation rates have nearly recovered, although this recovery was caused by shutting down plants as well as increasing production, she said.
In fact, the Federal Reserve estimates that the nation's manufacturing capacity is about 6% lower than 2007, she said.
Ultimately, companies will start rebuilding capacity as the economy improves, Pianalto said. However, such rebuilding has been slower than past recoveries.
Some companies have only recently increased utilisation rates to the point where they would consider expanding capacity, she said.
Others are reluctant to invest, given the problems in Europe as well as regulatory and policy uncertainty in the US, Pianalto said.

By: Al Greenwood
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