Narayana Kocherlakota - President
Published February 14, 2012
Video: Narayana Kocherlakota statement and Q&A with local media
Thank you all for coming today. I look forward to taking your questions, but before I do I want to briefly review the experience of the U.S. and Minnesota economies since the recession started in December 2007 and then provide my thoughts on the economic outlook for the nation. I will not provide a complete forecast for Minnesota, since you recently heard from Toby Madden and Rob Grunewald on that subject. Also, I would add that Toby and Rob will soon reissue their Minnesota job forecast. If you have questions about that, Toby will certainly be happy to talk with you at the end of our session.
The national economy slowed dramatically during 2008 and the first half of 2009. National output adjusted for inflation fell by 5.1 percent through the second quarter of 2009, and the unemployment rate, which was 5 percent in December 2007, reached 10 percent in the second half of 2009 (October).
Since the middle of 2009, the national economy has recovered at a disappointingly moderate rate. After four years, national output has finally returned to its prerecession level, but returning to 2007 output levels is a pretty low bar. If the economy had grown in line with its historical average, output would be roughly 10 percent higher than it currently is.
Given the sluggish recovery in national output, it is not surprising that labor markets are also healing slowly. Employment fell by 8 million jobs, and less than 2.5 million of those jobs have been recovered. On an encouraging note, the unemployment rate has recently fallen to 8.3 percent. But if one looks at the fraction of people employed, known as the employment-population ratio, one sees that the fraction of people working fell by more than 4 percentage points during the recession, and it has recovered very little (June 2009: 59.4; July 2011: 58.2; January 2012: 58.5).
Finally, I should note that while output and employment remain quite low, inflation has remained remarkably close to the Federal Reserve’s 2 percent target. The headline PCE price index has averaged 1.8 percent annually since the start of the recession (2011Q4/2007Q4).
While Minnesota has clearly felt the pain of the recession, the economy here weathered the recession notably better. State GDP numbers for 2011 are not yet available, but by 2010 the state’s GDP was 1.6 percent above 2007 levels, while national GDP was still 0.3 percent below. Personal income data are available through the third quarter of 2011 and tell a similar story—incomes have recovered faster in Minnesota than they have nationwide. (Through 2011, Q3 inflation-adjusted personal income was 0.2 percent lower than 2007Q4 for the United States, but 1.7 percent above 2007Q4 for Minnesota.)
How does that translate to jobs? Minnesota entered the recession with an unemployment rate of 4.7 percent, slightly below the national rate of 5.0 percent. But Minnesota’s unemployment rate peaked at 8.5 percent in mid 2009, well below the 10 percent national peak. Since then the unemployment rate has fallen to 5.7 percent as of December—more than 2.5 percentage points below the national rate.
Minnesota has also outperformed the nation in terms of the fraction of people employed. As you likely know, Minnesota’s employment-population ratio has historically been considerably higher than the nation’s. Entering the recession, the fraction of people working in Minnesota was 68.9 percent—6 percentage points higher than the national figure of 62.7. According to the most recent data, the Minnesota ratio has recovered to 67.4 percent, almost 9 percentage points above the current national rate.
While Minnesota’s economy has certainly not returned to full health, the state economy is further along in its recovery than the national economy.
Looking forward, I expect real GDP to grow at an annual rate between 2.5 and 3 percent in each of the next two years. This estimate is consistent with the long-run growth performance of the U.S. economy and is slightly faster than the 1.6 percent rate during 2011 (Q4/Q4). However, notice that this estimate implies that we’re not going to make up any of the 10 percent output shortfall that I mentioned earlier.
Given my forecast of moderate GDP growth, I expect the unemployment rate to continue to fall slowly, to around 7.7 percent by the fourth quarter of 2012 and to around 7.0 percent by the fourth quarter of 2013.
Finally, I expect annual PCE headline inflation to be around 2 percent in 2012 and rise to 2.3 percent in 2013, as monetary policy remains highly accommodative.
A quick word on Minnesota’s outlook: Forecasting is difficult enough at the national level, so forecasting at the state level is tempting fate indeed. As all of you know, Minnesota has been a little ahead of the national recovery curve. I expect that to continue—but you’ll have to wait for a couple of weeks to get the details from our regional forecast.
And now I would be happy to take your questions.