Job Seekers’ Optimism Seen Prolonging Low Fed Rates: Economy

Photographer: Andrew Harrer/Bloomberg

With the U.S. economy entering its fifth year of expansion, more people see improved chances of finding work. Close

With the U.S. economy entering its fifth year of expansion, more people see improved... Read More

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Photographer: Andrew Harrer/Bloomberg

With the U.S. economy entering its fifth year of expansion, more people see improved chances of finding work.

A strengthening economy that encourages more Americans to seek work would have a paradoxical effect: making it harder to lower the unemployment rate to the level Federal Reserve policy makers want to reach before considering an interest-rate increase.

Fed officials in June forecast the jobless rate will fall to 6.5 percent to 6.8 percent in the fourth quarter of 2014, down from last month’s 7.6 percent. Policy makers have pledged to keep their target interest rate near zero “at least as long” as unemployment is above 6.5 percent, and with more people looking for jobs, it may take until 2015 to reach that threshold.

Currently, “there are a fair number of discouraged workers that don’t want to look because the chances of finding something are so low,” said Jesse Rothstein, a former chief economist at the Labor Department who now teaches economics and public policy at the University of California, Berkeley. As the outlook improves, the result could be that “unemployment will fall slowly as people start flooding back in” seeking work.

The worst recession since the Great Depression arrested the growth of the workforce, as thousands gave up searching for jobs, filed for disability, went back to school or retired early. That brought the labor force participation rate -- the proportion of the working-age population either holding a job or looking for one -- below its long-run trend. Participation dropped to 63.3 percent in March, the lowest since May 1979, when Jimmy Carter was president.

Outside Workforce

In June, there were 2.6 million Americans interested in working who remained outside of the labor force because of discouragement, illness, or school, according to Bureau of Labor Statistics data. That’s up from 2.2 million in June 2009, when the recession ended.

Now, with the economy entering its fifth year of expansion, more people see improved chances of finding work. As they re-enter the workforce, not everyone will find a job right away. The result: A stable or rising participation rate and a slower decline in the unemployment rate.

The jobless numbers are calculated as a percentage of the total labor force, which includes people with jobs and those seeking work.

Joel Prakken, senior managing director of Macroeconomic Advisers LLC, the St. Louis forecasting firm, estimates that a “cyclical rebound in participation” will roughly offset structural forces, such as an aging population and rising disability rolls, that are drawing people permanently out of the labor force.

Stable Participation

The participation rate will stop falling and stabilize around 63.4 percent, Macroeconomic Advisers estimates, slowing the decline in unemployment. The jobless rate won’t reach the Fed’s 6.5 percent threshold until the second quarter of 2015, assuming monthly payroll gains of 190,000, according to the Macroeconomic Advisers forecast. That’s roughly the pace of job growth over the last 12 months.

If the participation rate rises by just half a percentage point to 64 percent, it would take average monthly payroll gains of 258,426 to drive the unemployment rate down to the 6.5 percent range over the next 18 months, according to a jobs calculation formula developed by economists at the Atlanta Fed.

“You definitely could not rule out that participation is going to rise some,” especially in a scenario of 3 percent to 3.5 percent economic growth Fed officials forecast for next year, said Stephen Oliner, resident scholar at the American Enterprise Institute, a Washington-based organization that promotes free-market policies. “That would put some upward pressure on the unemployment rate for a while.”

Examining Reasons

Even when the jobless rate does decline to 6.5 percent, that wouldn’t necessarily lead to higher borrowing costs. Federal Reserve Chairman Ben S. Bernanke told the House Financial Services Committee last week that policy makers would examine the reasons for a drop in unemployment.

“If a substantial part of the reductions in measured unemployment were judged to reflect cyclical declines in labor force participation rather than gains in employment, the committee would be unlikely to view a decline in unemployment to 6.5 percent as a sufficient reason to raise its target for the federal funds rate,” he told Representative Spencer Bachus, an Alabama Republican.

Next Meeting

Bernanke and fellow policy makers on the Federal Open Market Committee hold their next meeting July 30-31.

The Standard & Poor’s 500 Index rose for four days in a row after Bernanke said July 17 that there is no fixed schedule for ending the Fed’s program of bond purchases known as quantitative easing. In today’s trading, the S&P 500 fell 0.2 percent after reaching an all-time high yesterday, trading at 1692.17 as of 10:40 a.m. in New York.

European stocks advanced as a measure of French business confidence rose to the highest in 15 months in July. Sentiment (INSESYNT) among industrial executives increased to 95 from 93 in June, national statistics office Insee in Paris said today.

In the U.S., nobody knows how many workers are staying out of the labor force until higher-wage jobs appear, or would accept work now at a wage lower than their last job.

So long as unemployment remains high, “it is hard to see any wage pressures for a time” with a large pool of available labor keeping compensation low, said Julia Coronado, chief economist for North America at BNP Paribas in New York and a former member of the Fed’s Division of Research and Statistics.

Inflation Threshold

That’s helping keep a lid on inflation, the other threshold the Fed is watching before it will consider raising the benchmark interest rate.

The FOMC said the benchmark rate will remain around zero at least as long as inflation is forecast to rise over one to two years no more than 2.5 percent.

The Fed’s preferred inflation gauge, the personal consumption expenditures price index, rose 1 percent for the 12 months ended in May, a point below the central bank’s 2 percent goal. Fed officials in June forecast that prices will rise 1.4 percent to 2 percent next year, according to their central tendency estimates.

BNP Paribas estimates the labor force participation rate will rise gradually to 63.7 percent at the end of 2014, keeping the unemployment rate at 6.8 percent in December.

“I do think there are a lot of young people or prime age people that will come back” into the labor force, Coronado said. “There are plenty of people who want or need to work, particularly if the labor market continues to improve and decent paying jobs become more readily available.”

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net.

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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