San Francisco Fed President John C. Williams has no qualms about the quality of the Federal Reserve System's work over the past several years. Speaking to the Sonoma County Economic Development Board last week, Williams gave a clear, concise roundup of the economic recovery so far, and offered up some prognostication of where things are headed. Williams made the point that the recovery has exceeded expectations. And Fed response, Williams argues, was key to that success: During the recession and early in the recovery, the federal government threw a critical lifeline to the economy. Congress and the White House boosted spending substantially and cut taxes for households and businesses, which partly offset the collapse of the private economy. The $800 billion stimulus package passed in 2009 was a huge help.6 But this has turned on its head. That stimulus has wound down. And, at the beginning of 2013, tax rates rose for upper-income households and the Social Security payroll tax cut ended. More recently, the sequestration process has forced major cuts in federal spending. By contrast, fiscal policy at the state and local government level has been a drag on the economy since the beginning of the recession. Unlike Uncle Sam, state and local governments typically must balance their budgets each year. As revenues plunged, they cut spending and employment deeply and, in some cases, raised taxes. Thankfully, that painful process may be drawing to a close. Recent data show state and local government revenue is climbing again, something we’re certainly happy to see in California. Still, expenditures and employment remain well below pre-recession levels. Here is a way to appreciate how big the swing in the role of government has been: In the two years beginning in the fourth quarter of 2007, spending at all levels of government, adjusted for inflation, increased more than 6½ percent, while private-sector spending fell nearly 6 percent. But, since the end of 2009, government spending has fallen nearly 7½ percent and private spending has risen more than 10½ percent. Employment data paint a similar picture. Since the end of 2009, governments have shed more than 600,000 jobs. At the same time, private employers outside the farm sector have added 6.9 million jobs. Clearly, government austerity is one factor holding back economic growth. In the job market, private-sector hiring has actually picked up. Over the past six months, nonfarm private payrolls have grown by just under 200,000 jobs per month compared with an average of about 160,000 in the previous six months. The unemployment rate has fallen six-tenths of a percentage point over the past 12 months. What about the future? San Francisco Fed researchers have identified indicators that provide information about how the labor market is likely to fare over the next six months. These include data you may be familiar with, such as initial unemployment claims, and less well-known data, such as the percentage of people who say in surveys that it’s hard to find a job. These indicators suggest that the labor market will continue to strengthen. Here then is my forecast. I expect the unemployment rate to fall to roughly 7¼ percent at the end of this year and drop to about 6¾ percent by the end of 2014. Economic growth is likely to be sluggish in the current and next quarter, reflecting federal spending and employment cuts related to sequestration. It should pick up later in the year. For 2013 as a whole, I see inflation-adjusted GDP growing about 2¼ percent and picking up to around 3¼ percent in 2014. Read the full speech here .
Filed under: fiscal policy, consumption, housing, housing bubble, San Francisco Fed, stimulus measures, federal reserve bank of san francisco, john c. williams, great recession, household income, marginal propensity, housing recovery, privat spending