Economy Continues to Show 'Considerable Cyclical Weakness'

May 31, 2012
Cleveland Fed's Pianalto says labor market, capital spending still weak as nation follows 'very slow path to recovery.'

If the same 63% of the American population was working today as it was in 2007, there would be 12 million more people in the workforce. That statistic helps illustrate "how extraordinary the impact of the recession has been on the American economy and the workforce," Sandra Pianalto, president and CEO of the Federal Reserve Bank of the Cleveland, told attendees at the "Manufacturing Matters" conference in Cleveland.

Capital spending also has remained depressed since the recession, Pianalto told the conference sponsored by the National Association for Business Economics. During the recession, capital spending shrank by almost 25%, or $400 billion. U.S. investment spending is 7% below pre-recession levels.

"No other post-World War II recession has seen nearly as large of a pullback," Pianalto told the manufacturing conference attendees.

While the recession ended in June 2009, Pianalto said the nation is producing "just a little more total output today than we were at the end of 2007."

Is the continuing high level of unemployment in the United States cyclical or structural? Pianalto noted that structural issues, such as the need for more specialized skills and the movement of production overseas, are often cited for manufacturing unemployment. However, she said that the number of unemployed manufacturing workers is "now just 300,000 higher than it was in 2007."

Pianalto said high unemployment among 20-34 year olds, fewer job openings than in 2007 and the number of unemployed people compared to the number of job openings (three people looking for every open position) "make a lot of today's unemployment look more cyclical than structural to me." However, she added that this could become more structural if high unemployment persists and worker skills are lost.

Capacity Utilization Rebounds

Manufacturing capacity utilization fell from 79% before the recession to below 64%, a record, but Pianalto noted it has climbed back to nearly pre-recession levels.

"This performance is due not only to increased production, but also to an outright reduction in the amount of manufacturing capacity," she said. "In other words, capital, like labor, was taken out of production and reduced the potential for economic growth in our economy."

Over the past five years, Pianalto said, about 15% of the 100,000 larger U.S. manufacturing plants closed. Current Federal Reserve estimates indicate that U.S. manufacturing capacity is about 6% lower than in 2007.

Pianalto said there is room to rebuild capacity but that many companies have only recently reached a point where they need to invest in additional capacity.

"Unfortunately, I continue to hear anecdotal reports of a reluctance to invest," she told the NABE attendees. "My business contacts cite a variety of reasons for this reluctance, including the economic situation in Europe, uncertainty about U.S. tax policies and regulations, and just general caution."

Pianalto said she expects the economy to grow slightly above 2.5% this year and around 3% in 2013 and 2014. At that rate, she said, it could take as long as four to five years for the unemployment rate to fall to the "6% rate I judge to be consistent with maximum employment." She said inflation should run about 2% through 2014.

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