MONEY Jobs

If Jobs Are Back, Where’s My Raise?

Empty pockets of businessman
Dude, where's my raise? Jeffrey Coolidge—Getty Images

Despite good jobs numbers, wages aren't growing much. The reason why is the biggest debate in economics right now

Today’s strong jobless claims data, which show that applications for unemployment benefits dropped again, is one reason to be cheerful heading into the Labor Day weekend.

Yet despite this, and the fact that the unemployment rate is now down to 6.2%, the economy still has this glaring weak spot: Workers aren’t getting serious raises.

Here’s how two important measures of wage growth have done since the recession. (The Brookings Institution keeps a running tab of these and other key economic indicators in the excellent interactive graphic here.)

fredgraph

Basically, what you are seeing is that pay to workers, whether measured as hourly wages or salaries plus benefits, has been running neck-and-neck with inflation of a bit under 2%. As Fed chair Janet Yellen pointed out in her recent speech at a Fed symposium in Jackson Hole, Wyo., wages are also growing less than workers’ productivity.

Why is this happening? Yellen, for one, likely thinks there’s some remaining “slack” in the economy. Employers are still wary about whether there’s growing demand for their stuff, and so they remain slow to hire. The low unemployment figures leave out a large number of workers who have become discouraged after a long time out of work. But if the slack explanation is right, as companies continue to hire, more of those labor-force dropouts will be drawn back into the employment pool. You won’t see companies under serious pressure to raise wages until that process has played out and companies start competing for a scarcer pool of job-seekers.

Yellen points to (though doesn’t endorse) another possible explanation. Many economists believe wages are downwardly “sticky”—even when companies want to cut costs, they’d rather lay people off than reduce the pay of the people they hang onto. That means that for people who kept working after the recession, wages were higher than they’d otherwise be. And now that the economy is (fitfully) coming back, maybe that means there’s also less room for wages to rise.

Another factor, of course, is that both corporate managers and workers are human, and people can take some time to adjust to new economic signals. Back in July, I sat down with a stock fund manager, who talked about what he was seeing going on at the companies he kept in touch with. More than five years after the financial crisis, he said, the corporate culture among top managers had changed. The people in the C-suite got their positions not by expanding their companies and finding great new hires, but by cutting costs. And they got used to a slack labor market. The manager used the specific example of truckers: You always know you can get a guy to drive a truck from your warehouse to your customer on a moment’s notice. So why worry about hiring more truckers?

As it happens, at the New York Times Upshot blog earlier this month, Neil Irwin wrote that this may be changing. A trucking company called Swift told investors it was having hard time finding enough drivers. The company says the problem is that there aren’t enough skilled people, but Irwin wonders if the problem is really that companies just aren’t paying enough. Trucker pay has fallen, in real terms, over the past decade. Irwin writes:

The most basic of economic theories would suggest that when supply isn’t enough to meet demand, it’s because the price—in this case, truckers’ wages—is too low. Raise wages, and an ample supply of workers should follow…. But corporate America has become so parsimonious about paying workers outside the executive suite that meaningful wage increases may seem an unacceptable affront.

The question now is, how strong does the economy have to get before employers are forced to change their thinking?

Related:
If You’re Looking for Work, the Outlook is Brightening
Why the Fed Won’t Care About Higher Prices Until You Get a Real Raise
What’s the Deal With America’s Declining Workforce?

MONEY

Don’t Worry About Inflation Yet, Say Economists

A group of 257 economists say the Federal Reserve is right to keep interest rates low.

A new study shows economists believe the Federal Reserve is doing the right thing by keeping interest rates low.

According to the August Economic Policy Survey, published semiannually by the National Association for Business Economics, 53% of the association’s 257 members said monetary policy was on the right track, while only 39% felt policy was too stimulative.

There has been concern from some quarters that the Fed’s consistently low rates are flooding the market with cheap credit, pushing up the cost of goods. Inflation already appears to have reached the Federal Reserve’s target of 2%, and some, like Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott, think the central bank must act far in advance to prevent prices from rising too quickly.

The Fed has countered that employment and the real estate market must recover further—neither area is back to pre-recession levels—before upping interest rates becomes a viable option. Raising rates while the economy is still weak has the potential to stall GDP growth if businesses once again become reluctant invest money in jobs and capital. MONEY’s Taylor Tepper previously explained how Sweden’s premature interest rate hike has put the brakes on what was once Europe’s most encouraging economic comeback.

For now, at least, economists at the NABE seem to have taken the Federal Reserve’s side.

“Most panelists do not see inflation being a major concern in the coming years,” said Peter Evans, chair of the NABE Policy Survey Committee. “The majority of NABE panelists believe that inflation will be at or near 2% in 5 years.”

However, that support may not be permanent. Evans says the central bank’s approval rating inside NABE has edged downward since last year. All eyes remain on the Fed as it gradually winds down its quantitative easing program and watches the job market for signs of improvement. If inflation picks up, the bank may have to act—or risk a much less favorable approval rating from experts 12 months from now.

MONEY Federal Reserve

The Big Takeaway From Yellen’s Speech. It’s About Jobs

At Jackson Hole, Yellen is greeted by demonstrators who want the Fed to push for more jobs John Locher—AP

Fed Chairman Janet Yellen says the weak economy has room to improve. But many Americans may never get back to work.

Federal Reserve chairm Janet Yellen gave a much-anticipated speech at the Fed’s annual Jackson Hole, Wyo. symposium Friday. The transcript isn’t exactly beach reading. Fed officials, wary of spooking antsy stock and bond traders, can be almost maddeningly obscure. But anyone who’s following the stock market — or looking for a job — should pay attention.

Five years after the financial crisis, the Federal Reserve is still taking extraordinary measures to prop up the economy, including buying up bonds and holding interest rates near zero. Those measures can spur growth as long as the economy isn’t running at full capacity. But once it is, the fear is that they can spur too much inflation.

Officials at the Fed, including the presidents of the regional banks and members of the committee that sets rates, are split into two broad camps. Inflation “hawks” believe it’s time to start weaning the economy from aid. “Doves” favor continued intervention. Earlier this week the release of the minutes of a Fed meeting in late July showed the hawks pressing their point, emphasizing that the economy was improving and raising questions about whether the much-anticipated return to normal interest rates should begin.

Yellen is widely considered a dove. That means on Friday Fed watchers were looking for signs she might be trying to rebut the argument that the economy is running near full tilt. In the event, she seemed to give ammunition to both hawks and doves.

Here are the speech’s highlights:

Yellen starts off both cheering the recovery and reminding us how far we may still have to go.

The unemployment rate, at 6.2 percent in July, has declined nearly 4 percentage points from its late 2009 peak. Over the past year, the unemployment rate has fallen considerably, and at a surprisingly rapid pace. These developments are encouraging, but it speaks to the depth of the damage that, five years after the end of the recession, the labor market has yet to fully recover.

That’s pretty dovish.

But in the bulk of her speech she explains reasons why it’s hard to get a read on the labor market, starting with the fact so many people have been out of work for so long.

Consider first the behavior of the labor force participation rate, which has declined substantially since the end of the recession even as the unemployment rate has fallen. As a consequence, the employment-to-population ratio has increased far less over the past several years than the unemployment rate alone would indicate, based on past experience. For policymakers, the key question is: What portion of the decline in labor force participation reflects structural shifts and what portion reflects cyclical weakness in the labor market?

That’s subtly hawkish. Here’s why: Usually, when the unemployment rate falls more people start looking for work. This time that hasn’t happened to the extent one might expect. The worry is, if there’s a big group of workers who just aren’t going to come back into the work force—because they are just too discouraged, or they don’t have the skills for the current jobs on offer, or maybe because they’ve been replaced by new technology—then maybe there isn’t as much “slack” in the economy as the low participation numbers suggest. Even with a comparatively high number of people working, employers could start to feel pressure to raise wages (creating inflationary pressures) to attract and retain the workers who’ve stayed in the labor force.

Yellen doesn’t answer whether this “structural” worry is justified, but she does flesh out the problem further.

….the rapid pace of retirements over the past few years might reflect some degree of pull-forward of future retirements in the face of a weak labor market.

Translation: Many baby boomers who lost their jobs may simply have decided to retire, rather than seek to reboot their careers.

But then Yellen goes a bit dovish again. She points out that wage growth has in fact been sluggish. That suggests at least some extra slack.

Over the past several years, wage inflation, as measured by several different indexes, has averaged about 2 percent, and there has been little evidence of any broad-based acceleration in either wages or compensation.

In other words, the Fed is still playing wait-and-see. For investors, that suggests more of the fairly bullish status quo: low rates and a slow unwinding of the “quantitative easing” bond-buying program. For people hoping for the job market to come roaring back, the Yellen’s speech sounds a somewhat discouraging note. It suggests that the economy could have shifted into a permanently slower mode, with fewer jobs. Or, at any rate, that there are many at the Fed who are willing to live with that to ensure inflation stays low.

MONEY The Consumer Economy

The Real Reason You’re Not Shopping at Walmart

Female shopper in Wal-Mart store aisle
Patrick T. Fallon—Bloomberg via Getty Images

Despite the improving job market, workers still don’t have that much walking around cash, which means they have less to spend at retailers.

The summer has not been kind to some of America’s largest retailers.

Traffic at Wal-Mart’s U.S. locations, for instance, was down, while sales at stores that had been open for at least a year failed to grow. Macy’s lowered its full-year sales growth projection, and sales at Kohl’s dropped 1.3% in the last three months. Nordstrom’s earnings per share were basically flat.

If you’re noticing a trend, that’s because there is one: Merchants are struggling.

The Commerce Department recently announced that retail sales decelerated in July for the fourth consecutive month, despite the fact that more workers are finding jobs, and the unemployment rate is hovering around 6%. So what’s going on?

Well, one potential answer is that you, the consumer, just don’t have that money to spend. Yes, employers have added more than 200,000 workers a month to their payrolls since February. And yes, the unemployment rate has dropped to 6.2%—about the same as in September 2008. But workers really haven’t seen the benefits of job growth in their bottom lines.

For instance, take a look at real disposable income for U.S. workers. The year-over-year change in disposable income is only 3.9%, below pre-recession levels. “While stronger job growth has played a role in sustaining consumer spending, the slower income growth has served to keep a lid on real spending activity over the past several quarters,” per a recent Wells Fargo Securities economic report.

disposable income

 

Another way to gauge the plight of workers is a metric called the Employment Cost Index (ECI), which is published by the Bureau of Labor Statistics. The ECI measures what it costs businesses to actually employ their workers—so, wages, salaries and fringe benefits like medical care. Before the Great Recession struck in 2007, the ECI gained nearly 3.5% over the prior 12 months. Since the economic recovery, however, employee costs have not risen above 2%.

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Rising wages are a lagging indicator; people only see raises after the jobs picture improves. Which is happening now. Fewer people are filing unemployment claims, and the number of job openings continues to nudge higher. (And traditionally, job openings have an inverse relationship with wage gains.)

So, hopefully, sometime soon demand will pick up, businesses will start giving their workers substantial raises, and those workers will go out and spend their newfound dollars. (After all, my spending is your income.)

What’s good for the economy is sometimes what’s good for Wal-Mart.

TIME Economy

A Global Financial Guru Who Predicted the Crisis of 2008 Says More Turmoil May Be Coming

Reserve Bank of India Governor Rajan Unveils Interest-Rate Decision And Images Of Market Reactions
Raghuram Rajan, governor of the Reserve Bank of India, speaks during a news conference at the central bank's headquarters in Mumbai on August 5, 2014 Bloomberg/Getty Images

Raghuram Rajan, the governor of India's central bank, fears supereasy money from the world’s central banks is inflating assets and encouraging bad investments

Back in 2005, Raghuram Rajan, then economic counselor at the International Monetary Fund, stood up in front of the annual meeting of prominent economists and bankers at Jackson Hole, Wyo., and gave a presentation that his listeners could never have expected. The U.S. investor community was reveling in the high growth and stable financial conditions then prevalent around the world, but Rajan had examined global financial markets and come to a very different opinion. He argued that increasingly complex markets, which spewed out complicated instruments like credit-default swaps and mortgage-backed securities in ever greater quantities, had made the global financial system a riskier place, not less so as many believed. Such comments were considered near blasphemy at the time, and Rajan’s audience didn’t take him very seriously.

Three years later in 2008, however, his views proved prophetic. Rajan had generally predicted the sources of the worst financial collapse since the Great Depression of the 1930s.

Today, Rajan, now governor of the Reserve Bank of India, the country’s central bank, is worried again. This time, he’s fretting about the impact of the superloose monetary policies pursued by the U.S. Federal Reserve and other central banks to combat the financial crisis and resulting recession. Long-term low interest rates and unorthodox programs to stimulate economies — like quantitative easing, or QE — could be laying the groundwork for more turmoil in financial markets, he argues.

“My sense is that monetary policy can only do so much and beyond a certain point if you try to use monetary policy it does more damage than good,” Rajan tells TIME in his Mumbai office. “A number of years over which we, as central bankers, have convinced markets that we continuously come to their rescue and that we will keep rates really low for long — that we do all kinds of ways of infusing liquidity into the markets — has created markets that tend to push asset prices probably significantly beyond fundamentals, in some cases, and make markets much more vulnerable to adverse news. My worry is that, with inflation not being strong, this can continue for some time until things are so stretched that any signs of inflation, and a rise in interest rates, could precipitate a fairly strong market reaction. Certainly that volatility hurts across the world.”

Rajan, 51, would not pinpoint specifically where the most dangerous spots in global finance may be, but he did say that he believed assets of all sorts have become inflated. “I don’t know what the right level of the market is,” he says. “But I do know that, when I look at my portfolio and try to figure out where to invest, I can’t think of what I think is fairly valued.”

On top of his worries about market volatility, Rajan is also concerned that supereasy money is causing the misallocation of capital in the global economy, with potentially huge consequences down the road. “My greater worry is that by altering the price of capital for a substantial period of time, are we also, in a sense, distorting investment decisions and the nature of the economy we will have,” Rajan says. “Have we artificially kept the real rate of interest somehow below what should be the appropriate natural rate of interest today and created bad investment that is not the most appropriate for the economy?”

Still, Rajan agrees with Federal Reserve chairwoman Janet Yellen in her policy of slowly withdrawing stimulus measures and reintroducing higher interest rates. “We’re in the hole we are in. To reverse it by changing abruptly would create substantial amounts of damage. So I’m with Fed officials in saying that as we get out of this, let’s get out of this in a predictable and careful way, rather than in one go,” Rajan says.

Rajan has had to confront fallout from Fed policy personally. When he took the helm at India’s central bank in 2013, India was suffering as one of the “fragile five” — the emerging markets deemed most vulnerable to the winding down of Fed stimulus. India’s currency, the rupee, tumbled in value as investors fled, fearful that the curtailing of dollars in the world economy would strain the country’s ability to finance its large current-account deficit. In a series of deft and quick steps, Rajan stabilized the currency and wooed back investors, earning him breathless praise in the Indian media. Newspapers dubbed him a rock-star banker and even compared him to James Bond.

Now India, he says, is “absolutely” out of the “fragile five” stage. With narrowing fiscal and current account deficits, falling inflation and rising currency reserves, India’s fundamentals, he argues, are much improved and the country is less vulnerable. However, he sees the turmoil India experienced as part of a larger problem: a lack of coordination between the Federal Reserve and other central banks around the world. The actions the Fed takes are based mainly on U.S. domestic economic factors, but because of the unique position of the U.S. in the world economy, those decisions ripple through dollar-dominated financial markets in ways the Fed leadership does not take into account.

The results, Rajan argues, can ultimately be detrimental to the world economy. He points to a rise in increase in reserves in India and other emerging markets – built up as a cushion against potential fallout from the Fed’s tapering of stimulus – as one of those negatives. By topping up reserves, these emerging markets are in effect decreasing their demand for goods from the U.S. and elsewhere, and that is in the end bad for global growth.

“The U.S. should recognize that the actions we have to take to protect ourselves long run come back to effect the U.S.,” he says. “Therefore there is room for greater dialogue on how these policies should be conducted, not just to be nice, but because in the medium run it is in [America’s] own self-interest. If you are not careful about the volatility you are creating, the others have to respond and everybody is worse off.”

Ironically, Rajan has faced some criticism at home for doing just the opposite of the Fed — keeping interest rates high. Unlike most of the world, where bankers worry about low inflation or even deflation, India has been an outpost where inflation has been running too high, and Rajan took steps to bring the rate down — with some success. Some critics, however, complained that Rajan’s high-rate policy was acting as a drag on growth, and there was much press speculation when newly elected Prime Minister Narendra Modi took office in May that Rajan would come under pressure to cut rates to aid the administration’s promise to get the Indian economy back on track.

Rajan, though, says the central bank and the Modi Administration “are completely on the same page” when it comes to fighting inflation. “I have said repeatedly that the way to sustainable growth is to bring down inflation to much more reasonable levels,” Rajan explains. “That message is something the government is completely on board with. Once we do bring it down then we will have the opportunity to cut interest rates.”

Rajan also seems to be on the same page as Modi on economic reform. He expressed confidence that the new government is taking the initial steps necessary to set the sluggish Indian economy on its way to recovery. Growth rates can be restored to 6% to 7%, from current levels under 5%, Rajan believes, by making the government more efficient in implementing policies — unlocking badly needed but stalled investments in the process.

“Those are the things that are really needed to get the economy back to reasonable growth,” Rajan says. “This government has set about the implementation in a steady way and I am hopeful that we will see the fruits of that in the months to come.” Maybe Rajan will prove prescient this time around too.

MONEY Retirement

Here’s Why More Americans Are Retiring Earlier Than They Expected

More workers have retired early than late since the Great Recession, new Fed Data show. But it's not a happy story.

It seems counter intuitive: Of all Americans who retired since the Great Recession, more retired earlier than expected than later than expected, a new Fed report shows.

This finding appears to be at odds with everything we’ve heard about the growing need to delay retirement and — my all-time favorite oxymoron — work in retirement.

Yet the numbers don’t lie: 15% of those who have retired since 2008 did so earlier than planned; only 4% did so later than planned. This is according to the latest Fed data, which goes to September 2013.

The data clearly show what we all know: In order to make ends meet, workers intend to stay on the job longer, not shorter. Two in five workers 45 or older plan to delay retirement. Among pre-retirees 55 to 64 years old, only 18% expect to retire on time and stop working altogether. A quarter expects to work as long as they can and another quarter expects to work part-time or become self-employed in retirement.

Taken as a whole, this can only mean that we’ve seen a lot of forced retirements. In the lousy job market of the past few years, millions of older workers downsized out of employment couldn’t find suitable work. They retired rather than keep up the search or work for significantly less. That’s not good, and it helps explain other sobering statistics in the report.

Nearly 40% of households say they are just getting by or struggling to make ends meet, underscoring the uneven recovery. The rebound in stocks has mostly benefited the investing class. Home prices have improved, and that has helped a wider swath of the population—but not as much as you might expect. Of those who have owned their home for at least five years, about half say the value is lower than in 2008.

Meanwhile, many households are suffering from tight credit, student loans and poor retirement savings. Some of these pressures have eased in the past 12 months. The economy grew at a healthy 4% pace last quarter and mortgage lending has loosened up.

But a quarter of households have some form of student debt with an average balance of $27,840. One in five has fallen behind in payments on this debt. At the same time, 31% of workers say they have no retirement savings or pension, including 19% of those aged 55 to 64. Almost half of adults aren’t even thinking about planning for retirement. And yet, as the report shows, retirement may be coming sooner than they expect.

 

 

MONEY stocks

Has the Bull Market Come to an End?

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Getty Images

As the economy keeps growing, the market will sour on the sunny, putting a damper on stocks.

A version of this article ran in the August 2014 issue of MONEY magazine.

The Dow Jones Industrial Average lost another 140 points on Tuesday, wiping out Monday’s modest bounce-back from what had been the worst weekly decline in over six months. All told, the index has fallen 4.1% since it hit a record high on July 16.

This happened despite some pretty good (though not really good) economic data, like last week’s Labor Department report that the economy added 209,000 new jobs in July.

So what’s going on? In short, I suspect the bull market has entered its next—and perhaps final—phase.

Why a change of heart is due. While equities should reflect the health of the economy, there comes a time in every business cycle in which earnings growth—the real driver of stock prices—peaks. S&P 500 profit margins are already at all-time highs. A better job market shows the economy is improving now, but it also hints that wages could rise down the road, weighing on future profits.

At the same time, better-than-expected news may lead the Federal Reserve to stop trying to stimulate economic activity. And that’s a big concern in the final throes of a bull when investors are trying to ride that last bit of tailwind provided by cheap credit.

What works during the bull’s final stage. As risk taking and speculation fall out of favor, shares of big, dominant companies tend to grow in popularity. Today, these big blue chips have another advantage: They’re cheap relative to smaller-company stocks, says Jack Ablin, chief investment officer for BMO Private Bank.

Indeed, the price/earnings ratio for stocks in the Vanguard Mega Cap ETF (MGC), which owns only the biggest blue chips in the U.S., is 16.8. By comparison, stocks in the Vanguard Small-Cap ETF sport an average P/E more than 15% higher.

Where to seek shelter. The natural inclination at this stage is to hide in stable but slow-growing sectors like utilities, since these stocks pay dividends and are likely to fall less in a market downturn.

However, economically sensitive sectors such as energy and tech perform surprisingly well in the last 12 months of a bull, according to Ned Davis Research. So take refuge in a fund like Fidelity Large Cap Stock (FLCSX), which has big stakes in both sectors and has beaten at least 90% of its peers over the past three, five, and 10 years.

Related:
Goldilocks Jobs Report Calms Down Wall Street’s Bears—for Now
Don’tBe Fooled by the Everything is Awesome Market

MONEY Jobs

What’s the Deal with America’s Declining Workforce?

140801_INV_Workforce_2
Getty

The dwindling percentage of Americans who are employed or looking for work is partly due to the economy—but mostly not. Here's what that means for the recovery and you.

If you feel like the economy has finally started to gain steam, you’re not alone. U.S. gross domestic product (GDP) grew by 4% last quarter, and today the Labor Department announced that employers added 209,000 jobs in July, after posting 298,000 in June and 229,000 in May.

One theme, though, that has persisted throughout the slow recovery: The share of Americans working or looking for a job is dropping, despite the improving employment picture.

LFPR

While this trend has been used to illustrate how sluggish the rebound has been, it actually predates the Great Recession. Today 62.9% of Americans participate in the labor force, compared to 66.1% six years ago and more than 67% in 2000.

So, what exactly is going on?

The White House’s Council of Economic Advisers set out to answer that very question.

Last month, it issued a report dryly titled: “The Labor Force Participation Rate Since 2007: Causes and Policy Implications” in which economists cite three key developments:

#1) America is just getting older

About half of the decline in worker participation over the last seven years is due to demographics — the workforce is simply aging. About one-sixth of the population was at or above retirement age in 2009, according to the report. By 2029, that number will increase to 25%, per the Social Security Administration.

Older workers generally work less than their younger counterparts.

But, interestingly, this group is working more than it used to. From 2007 to 2014 the only age group that saw labor-force participation rates rise was the 55-and-older crowd.

Old lfp

Why? One reason is this generation of older workers is better educated than its predecessors. In fact, “between 1876 and 1950, the average years of schooling for each birth year cohort increased steadily every year,” per the CEA. More education means higher wages and less physically demanding jobs.

#2) Normal post-recession issues

When the economy is going well, labor participation rates tends to increase. Faster growth means businesses are more apt to hire, which means individuals without jobs feel more confident in their chances of finding work — and hence send out more applications.

When the economy shrinks, this virtuous cycle turns vicious.

“Economic contractions historically result in both greater unemployment and lower labor force participation, as nonparticipants become less likely to enter the labor force and the unemployed (who always exhibit a higher tendency to exit the labor force) become more numerous relative to the unemployed,” per the report.

The CEA estimates that about 16% of the drop in labor force participation rates can be attributed to the fact that fewer people work and look for jobs when the economy is shaky.

#3) Other Stuff

The last third of the decline is traced to two elements — one of which predates the recession, while the other may be a result of it.

The bit related to the Great Recession is long-term unemployment. Right now, more than 3 million workers have been without a job for 27 weeks or longer. While that’s down from almost 7 million in 2010, it’s still 2 million more than before the downturn.

L-TUnemploed
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The other rationale is a combination of long-term trends affecting different groups of workers.

For instance, younger Americans (aged 16-24) — especially those from lower- and middle-income families — have eschewed entering the work force for going to college for years now. As the value of a college education for future earnings increases, more youngsters are hitting the books.

Also, older workers who’ve been hit by the dearth of middle-skilled jobs, according research from Fed economist Christopher Smith, are now taking jobs that would have normally gone to younger workers.

After growing dramatically for the better part of 50 years, the rate of female employment has leveled off and begun to fall since the end of the 20th century, down almost three percentage points.

What’s going on? Well more women are staying home to care for their children, according to the Pew Research Center. In 2012, the percentage of stay-at-home moms increased 6 percentage points to 29% from 13 years earlier.

This is a phenomenon that’s uniquely American.

Since 1991, the participation rate of prime age working females in the Netherlands, Germany, Canada and Japan has all made significant gains, while the U.S.’s has remained flat. “Research has found that family-friendly policies are partially responsible for the rise in participation in other advanced countries, and the lack of these policies explains why the United States has lost ground,” according to the CEA.

women labor force prime

While a higher percentage of women entered the workforce after World War II (until the 2000’s), pretty much the exact opposite is true of males. In 1948 almost 97% of men aged 25-54 worked or were looking for jobs. That number has been declining for over 60 years and is now closer to 88%.

male rate

The causes of this precipitous drop are not exactly clear, although some research shows that the decline is in part due to the fewer jobs based on brawn.

manu

The implications

This picture of the labor market complicates recent reports showing an accelerating economy and increased employment. It also helps explain why the Federal Reserve, led by chair Janet Yellen, isn’t that eager to quickly raise interest rates despite positive economic reports and slightly higher inflation.

And while a certain percentage of the decrease in labor force participation rate can be attributed to the recession, a lot of the decline is bigger than that.

The question now is will Americans return to the labor force in greater numbers without new policies by the Congress and the White House that address long-term headwinds facing American workers?

MONEY The Economy

For the Fed, There’s Only One Excuse Left to Keep Rates Low

Aerial view of housing development
David Zimmerman—Getty Images

The economy and inflation have now risen to levels where the Fed has to start thinking about raising rates. The only excuse left: the weaker-than-expected housing market.

The pressure is mounting on the Federal Reserve to start raising interest rates — and Fed chair Janet Yellen is running out of excuses.

On Wednesday, the Fed announced that it would keep short-term interest rates near zero and would continue to gradually taper its stimulative bond-buying program as the economy improves. No surprise there.

But the chatter for the Fed to stop coddling the economy really heated up Wednesday morning.

That was when a new government report showed that, after hitting a speed bump in the snowy first quarter, the economy really sped up between April and June. Gross domestic product grew at an annual rate of 4.0% in the second quarter.

What’s more, the government went back and revised some of its estimates for prior quarters. Uncle Sam now believes the economy grew well above the normal 3% rate in three out of the past four quarters.

“With this morning’s GDP release,” says James Paulsen, chief investment strategist and economist at Wells Capital Management, the “is-the-Fed-behind-the-curve fears among investors are increasingly evident.”

The GDP report included preliminary measures of inflation that might not sit well with Wall Street’s inflation hawks.

In the second quarter, the so-called personal consumption expenditure index, which is the Fed’s preferred measure of inflation, grew 2.3%. If you strip out volatile food and energy costs, core PCE still rose 2%. UBS economist Maury Harris notes that this represents a big jump from the 1.2% pace of core inflation in the first quarter. Plus, 2% is the target that the Fed has openly set for inflation.

While the actual level of inflation today may not be so worrisome, the ability to fight inflation after the fact is, says Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott. “The challenge with inflation is that there’s a very long lag between policy and price pressures, so a Fed concerned with inflation 12 to 24 months down the road needs to start acting now to protect against the prospect.”

Three years ago, the Fed drew another line in the sand. The Fed back then said that it would not think about raising rates until the national unemployment rate fell to 6.5%. Back then, policy makers thought that this would not transpire until around 2015. However, the unemployment rate fell below this level in April and is threatening to fall below 6%.

US Unemployment Rate Chart

US Unemployment Rate data by YCharts

In recent months, as the Fed has tried to explain why it won’t hike rates soon despite rising inflation and falling unemployment, Yellen introduced a new reason altogether: housing.

In mid July, in a monetary policy report delivered to Congress, Yellen said:

The housing sector has shown little recent progress. While it has recovered notably from its earlier trough, activity in the sector leveled off in the wake of last year’s increase in mortgage rates, and readings this year have, overall, continued to be disappointing.

Later on in the report, Yellen noted that the lack of traction in the housing sector is probably preventing the labor market from reaching its full potential:

Even after rising noticeably in 2012 and the first half of 2013, real residential investment remains 45 percent below its pre-recession peak. The lack of a rapid housing recovery has also affected the labor market: Employment in the construction sector is still more than 1.6 million lower than the average level in 2006.

In announcing its rate decision on Wednesday, the Fed’s Federal Open Market Committee reiterated that while economic growth in general appears to be returning, “the recovery in the housing sector remains slow.”

The irony is that the two things that are likely to get the housing market on track are low mortgage rates and an improving job market.

To achieve the latter, the Fed is keeping rates low. Yet to achieve the former, the Fed needs to show the bond market that it is serious about combatting inflation. And the worst way to do that is keep rates low.

There, in a nutshell, is Janet Yellen’s conundrum.

MONEY

Higher Gas Prices Keep Inflation Just Above 2%

Gas nozzle and hose line graph
TS Photography—Getty Images

Inflation steady as pain at pump is offset by slower growth in food costs.

The Consumer Price Index increased 2.1% for the twelve months that ended in June, reports the Bureau of Labor Statistics. This is the second month in a row that the CPI broke 2%.

The index, which estimates overall inflation by measuring price changes in a “basket” of consumer goods, also showed .3% month-over-month growth from May to June of this year. That number is slightly down from May, which saw a .4% month-over-month increase.

Because food and energy prices tend to be volatile, many analysts and economists also look at the “core” consumer price index, which excludes those items, to get a sense of underlying inflation trends. The core CPI rose 1.9% since last June, says the BLS. This increase is roughly on par with last month’s year-over-year core CPI increase, suggesting inflation remains relatively steady.

According to the BLS, the CPI’s increase this month was primary driven by higher gasoline prices. The cost of gasoline rose 3.3% during the month of June and accounted for two-thirds of the entire index’s increase. The price of food, which had jumped in May, rose more slowly in June, increasing by only 0.1%

Investors watch inflation numbers closely because they may offer a clue about when the Federal Reserve may begin to raise key short-term interest rates, which the Fed has held near zero since the 2008 financial crisis. Chair Janet Yellen has said the central bank intends to hold rates down at least until inflation runs at 2%.

But though the closely watched CPI has notched above 2% for the second month in a row, it’s not the inflation number the Fed uses for its 2% target. Instead, it uses a number from the Bureau of Economic Analysis called the personal consumption expenditure, or PCE, deflator. This index covers a broader selection of goods and is also calculated somewhat differently. It also has been running lower than CPI recently—the latest reading was 1.8% for the twelve months ending in May, or 1.5% for the core number excluding food and energy. The BEA will release updated PCE numbers on August 1st.

The CPI typically runs 0.30 to 0.40 percentage points higher than the PCE index, says Mark Zandi, chief economist at Moody’s Analytics, speaking to Money.com on Monday evening before the release.

“The target CPI is 2.3% or 2.4%, somewhere in that range,” said Zandi. If so, today’s numbers suggest the Fed is getting closer to it’s target, but isn’t there yet.

Update: Due to an editing error, the story originally misstated the amount CPI typically runs above the PCE index. It has been corrected.

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