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Fed Argues That Despite Popular Fears, Economy on Target

Cleveland Fed analyst says data suggests economic recovery moving at historical norm.

By most measures, economists were handed a string of welcome news in recent days, with new data suggesting a sizeable drop in unemployment insurance claims and a modest narrowing in the July trade deficit, which saw the largest decline in nearly 18 months.

The news helps frame an argument, made on Sept. 9, by a researcher at the Federal Reserve Bank of Cleveland that suggests that the popular belief that the U.S. economy is in midst of an unusually slow recovery is incorrect and, in fact, this economic cycle is consistent with past ones.

Using a forecasting model and data from previous business cycles, Kenneth Beauchemin, a senior research economist from the Cleveland Fed, believes that current real gross domestic product growth, inflation, and the Federal Reserves near-zero federal funds rate policy are in line with what the model predicts a standard recovery from the Great Recession would look like.

I have looked at the recovery from 30,000 feet, says Beauchemin. From that height, with some inevitable slippage and nuance, the recovery looks consistent with past recoveriesat least so far. Closer to the ground, recoveries will all look very different, with harder-hit sectors taking longer to recover or becoming permanently smaller. Credit will be tighter for longer in some sectors than in others.

Real GDP, he says, has weakened in the past two quarters, but continues to stay within the boundaries of historical norms. Beauchemin notes, however, that the behavior of the unemployment rate during the recovery looks truly anomalous. This could come as a result, he says, from the tremendous productivity growth recorded during the past year, which has allowed businesses to stretch existing labor, finding efficiencies where they could, while maximizing a thinner workforce.

Beauchemin points out that real GDP growth has not been so different than what economists might have reasonably expected as recently as a year ago.

The relationship between output growth and the unemployment rate looks somewhat anomalous, with an unemployment rate remaining higher than history alone would suggest, but not resoundingly so, he concludes.

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