ABA Banking Journal - May 2014 - (Page 8)

the economy BY JOHN SILVIA AND SARAH HOUSE Fed's participation-rate conundrum To judge the state of the labor market, the unem- FALLING LABOR FORCE PARTICIPATION ployment rate is likely the most ubiquitous data point used, and has been a more pronounced 70% input into monetary policy decision making since the 2008 financial crisis. In recent communications, however, the Federal Open Market 65% Committee (FOMC) has backed away from its focus on the unemployment rate as a primary 1978 gauge of the labor market, eliminating the explicit 60% tie of the unemployment rate to a potential rise in the federal funds target rate and stressing the 55% review of other labor market indicators in policy making. The move has come as the unemployment rate has consistently declined faster than 50% the Fed and most other analysts have projected in 1948 1956 1964 1972 1980 1988 1996 2004 2012 this recovery. Source: Bureau of Labor Statistics One key reason for the unexpectedly swift decline in the unemployment rate has been a drop in labor force participation. Since 2007, the labor force participation rate Based on FOMC members' projechas fallen nearly three percentage points, the steepest decline in the post World tions for growth and the unemployWar II era. Multiple factors have played a role in the decline, including cyclical ment rate, the Fed seems to anticweakness in the labor market that has kept some workers from even searching ipate a rebound in participation in for jobs. However, the participation rate began to decline in 2001, well ahead of the coming years. Yet, if this does not the Great Recession, and amid demographic and cultural shifts independent of materialize, the unemployment rate the business cycle. would likely continue to fall faster The degree to which the drop in labor force participation is due to cyclithan expected. With less slack in the cal influences versus structural trends is important in assessing the amount of labor market, inflation may sneak up slack remaining in the labor market. If the decline in labor force participation is on the Fed and necessitate a rate rise due more to cyclical factors than longer-run secular trends, there may be more ahead of the timing currently signaled scope for the Fed to continue its historically accommodative monetary policy. by committee members. Alternatively, if structural trends that have put downward pressure on labor force participation persist, the unemployment rate may be depicting a fairly accurate John E. Silvia is picture of the decline in labor market slack. chief economist, and With Baby Boomers reaching ages where labor force participation tends to Sarah Watt House is decline dramatically, we find that about half the drop in the participation rate economist with Wells Fargo Securities, LLC. since 2007 has been due to demographics. And that looks likely to continue The information and opinions herein are in the coming years. Even under a relatively optimistic scenario for a cyclical for general information use only.Wells Fargo rebound in participation alongside more favorable secular trends, we see the Securities, LLC does not guarantee their aclabor force participation rate rebounding only slightly before beginning to curacy or completeness, nor does Wells Fargo decline again in 2016. If structural trends in place ahead of the recession conSecurities, LLC assume any liability for any tinue and the cyclical recovery remains muted, the participation rate is set to fall loss that may result from the reliance by any at a pace similar to the decline experienced over the past five years. person upon any such information or opinions. 8| ABA BANKING JOURNAL | MAY 2014

Table of Contents for the Digital Edition of ABA Banking Journal - May 2014

Chairman's View
Editor's Column
The Economy
Bank Notes
ABABJ Online
Picture This
Who will fill the chair?
Pass the Aspirin
Midsize Standouts
Doing well by doing good
Tech Topics
Compliance Inbox
ABA At Your Service
First Person

ABA Banking Journal - May 2014

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