What Constitutes Substantial Employment Gains in Today’s Labor Market?
The Federal Open Market Committee (FOMC) has tied its asset purchases to a "substantial improvement" in labor market conditions. While we don't speculate on what the FOMC means by substantial improvement, we do explore the level of monthly job gains that would gradually deliver the underlying trend unemployment rate within a reasonable timeframe, under several plausible scenarios. We find that the path of monthly job gains, which is highly dependent on a few key parameters, is likely to be smaller than the path associated with previous recoveries.
The Ever-Updated Personal Saving Rate
The Bureau of Economic Analysis estimates that the personal saving rate for the first quarter of 2013 was 2.3 percent—a five-year low, and a substantial drop from the fourth quarter of 2012, when it stood at 5.3 percent. Since many economists think a healthy household balance sheet is a necessary condition to fuel a stronger economic recovery, should we be worried about how low this estimate of the saving rate is?
Banks Increase their Holdings of Safe Assets
The banking sector seems to have transitioned to a new state in which a higher percentage of bank assets is held in safe forms. During and after the last recession, the percentage of bank assets held in cash, Treasury securities, and agency securities experienced a steep rise, while loans and leases dropped.