December 5, 2022

Soft Jobs Data Not Expected to Deter Fed

The Labor Department’s snapshot of the job market in August had several discouraging details underneath a relatively mundane headline number, which showed the economy added an estimated 169,000 jobs. Perhaps the most striking was a plunge in the share of Americans who are either working or looking for work, which fell to its lowest level since 1978.

“If you had a more optimistic view of the economy, which I think the Fed does, this should give you some pause,” said Joshua Shapiro, chief United States economist at MFR. “It’s been a real struggle here in the labor market.”

At the same time, earlier estimates of job growth in July and June were revised sharply downward, and hiring over the summer months was largely driven by low-wage sectors like retail, food services and health care.

Still, economists said they believed that Fed governors would find enough bright spots in this report to justify scaling back their monthly purchases of long-term Treasury bonds and mortgage-backed securities — measures that help push down long-term interest rates — after their next meeting on Sept. 17 and 18.

“There’s just barely enough in that report and in other forward-looking indicators we’ve seen to give Fed governors the confidence they need on the 18th to taper,” said Ian Shepherdson, the chief economist at Pantheon Macroeconomics.

“For the record, I don’t think they should, given the risks posed by Syria and the impending fiscal chaos in Washington,” he said, noting the expected Congressional battles over the debt limit and spending measures. “The costs of delaying until some of those factors are sorted out is not very great. But the Fed has given no indication it’s thinking that way.”

Investors seemed to agree, with bond yields dipping slightly after the jobs report came out. As for stocks, after a topsy-turvy day, the Standard Poor’s 500-stock index and the Dow Jones industrial average both closed about where they began on Friday. In Friday trading, the Dow closed down 14.98 points, or 0.1 percent, at 14,992. The S. P. 500 edged up 0.09 points, or 0.01 percent, closing at 1,655.17. The Nasdaq climbed a slight 1.23 points, or 0.03 percent, to finish at 3,660.01. The price on a 10-year Treasury note rose 16/32, to
96 9/32, with the yield falling to 2.93 from 3.00 on Thursday. The number of payroll jobs added in August was just shy of the average pace of hiring over the last year, and the unemployment rate edged down to 7.3 percent from 7.4 percent. Unemployment, however, fell for the “wrong reasons,” Mr. Shapiro said: because people dropped out of the labor force and so were no longer counted as unemployed, and not because more unemployed people found jobs.

The jobless rate is now edging close to the 7 percent level that the Federal Reserve chairman, Ben S. Bernanke, had identified as the Fed’s target for ending its asset purchases altogether around the middle of next year. For several months, Fed governors have been saying that the Fed expected to begin reducing the monthly purchases “later this year,” which has been widely interpreted to point toward beginning the shift as early as September.

Charles L. Evans, president of the Federal Reserve Bank of Chicago and one of the more vocal proponents of highly accommodative monetary policy, used this phrasing in a speech on Friday, suggesting he was open-minded about the “exact pattern of the reduction in purchases that we eventually take.”

The Fed’s more hawkish members have been more explicit about their desired policy moves. Esther L. George, president of the Federal Reserve Bank of Kansas City and a leading critic of the asset purchases, said on Friday that the Fed should cut its bond buying to $70 billion a month in September, from the current $85 billion a month, split between Treasuries and mortgage bonds. “It is time to begin a gradual — and predictable — normalization of policy,” she said.

Some economists suggested that Fed governors could react to the latest economic data by tapering their bond purchases slowly over a longer period of time and perhaps in conjunction with other measures that would underscore the central bank’s commitment to helping the economy heal. For example, the Fed could announce that it is extending the period that it holds short-term interest rates near zero.

Binyamin Appelbaum contributed reporting.

This article has been revised to reflect the following correction:

Correction: September 6, 2013

An earlier version of this article referred incorrectly to members of the Federal Open Market Committee. Some members are presidents of regional Federal Reserve banks; they are not all members of the Board of Governors.

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Ronald H. Coase, ‘Accidental’ Economist Who Won a Nobel Prize, Dies at 102

Ronald H. Coase, whose insights about why companies work and when government regulation is unnecessary earned him a Nobel Memorial Prize in Economic Science in 1991, died on Monday in Chicago. He was 102.

His death was announced by the University of Chicago.

By his own description, Professor Coase (rhymes with doze) was an “accidental” economist who spent most of his career teaching at the University of Chicago Law School and not its economics department. Yet he is best known for two papers that are counted among the most influential in the modern history of the science.

In one, “The Nature of the Firm,” which was largely developed while he was still an undergraduate and published in 1937, Professor Coase revolutionized economists’ understanding of why people create companies and what determines their size and scope.

He introduced the concept of transaction costs — the costs each party incurs in the course of buying or selling things — and showed that companies made economic sense when they were able to reduce or eliminate those costs by performing some functions in-house rather than dealing in the marketplace.

The ideas laid out in the paper explain why, in the first half of the 20th century, companies tended to become more vertically integrated (for example, Ford Motor building its own steel mills and buying its own rubber plantations rather than relying on suppliers), and why, more recently, companies have tended to do the opposite, aggressively outsourcing even basic functions like paying their employees.

In the second of his groundbreaking papers, “The Problem of Social Cost,” published in 1960, Professor Coase challenged the idea that the only way to restrain people and companies from behaving in ways that harmed others was through government intervention. He argued that if there were no transaction costs, the affected parties could negotiate and settle conflicts privately to their mutual benefit, and that fostering such settlements might make more economic sense than pre-empting them with regulations.

The paper made the idea of property rights fundamental to understanding the role of regulation in the economy. It grew out of a study by Professor Coase on how the Federal Communications Commission licensed broadcasters.

The practice of issuing the licenses more or less permanently for small fees to whoever applied first and met legal requirements made little economic sense, he argued; better to treat them as property, auction them off and allow them to be freely transferred. Decades later, his ideas were used to raise billions of dollars for the Treasury when radio frequencies were assigned for cellular phone services.

Ronald Harry Coase was born on Dec. 29, 1910, in Willesden, England, the only child of two postal workers. Though he spent more than 50 years living and working in the United States, he retained his English accent and habits all his life.

His father was an amateur athlete of some renown, but Ronald’s interests were more academic, not least because of weakness in his legs that obliged him to wear iron braces for a time.

In his autobiographical essay written for the Nobel committee after being awarded the prize, he recalled being taken by his father at age 11 to a phrenologist to hear what could be discovered from the shape of his head. The phrenologist detected “considerable mental vigor,” Professor Coase wrote, and recommended that he work in banking or accounting and raise poultry as a hobby.

Because of his leg braces, Professor Coase wrote, he attended a special primary school and enrolled in secondary school a year late, missing the chance to pursue a concentration in history or Latin. Science was his third choice, but he found he had little patience for the mathematics involved, so he studied the only other subject available: commerce.

At the University of London, he was on his way to becoming an industrial lawyer when a seminar with Sir Arnold Plant, a well-known economist of the time, changed his focus again, this time for good. After graduating from the London School of Economics, he taught there and at other British universities, and married Marion Ruth Hartung in 1937. The couple immigrated to the United States in 1951, when he joined the faculty of the University of Buffalo. He left for the University of Virginia in 1958.

While teaching at Virginia, Professor Coase submitted his essay about the F.C.C. to The Journal of Law and Economics, a new periodical at the University of Chicago. The astonished faculty there wondered, according to one of their number, George J. Stigler, “how so fine an economist could make such an obvious mistake.” They invited Professor Coase to dine at the home of Aaron Director, the founder of the journal, and explain his views to a group that included Milton Friedman and several other Nobel laureates-to-be.

“In the course of two hours of argument, the vote went from 20 against and one for Coase, to 21 for Coase,” Professor Stigler later wrote. “What an exhilarating event! I lamented afterward that we had not had the clairvoyance to tape it.” Professor Coase was asked to expand on the ideas in that essay for the journal. The result was “The Problem of Social Cost.”

Professor Coase was soon invited to become editor of the journal, and to join the Chicago faculty, where he stayed the rest of his life, disdaining the equation-heavy approach of what he called “blackboard economics” in favor of insights grounded in real markets and human behavior.

By identifying transaction costs and explaining their effects, the Royal Swedish Academy of Sciences wrote in announcing his prize in 1991, “Coase may be said to have identified a new set of ‘elementary particles’ in the economic system.”

Professor Coase’s wife, Marion, died in 2012. No immediate family members survive.

This article has been revised to reflect the following correction:

Correction: September 3, 2013

An earlier version of this obituary misidentified the essay that earned Professor Coase an invitation to meet with the economics faculty of the University of Chicago. It was his essay about the Federal Communications Commission, not “The Problem of Social Cost.” (As a result of that meeting, Professor Coase was asked to write the essay that was subsequently published as “The Problem of Social Cost.”)

This article has been revised to reflect the following correction:

Correction: September 5, 2013

Because of an editing error, an obituary on Wednesday about the economist Ronald H. Coase misidentified the university where he taught from 1951 to 1958. It was the University of Buffalo, not the State University of New York at Buffalo. (It did not become part of the State University system until the early 1960s.)

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Consumer Spending and Income Rose a Faint 0.1% in July

After rising 0.3 percent in June, income was held back in part by steep government spending cuts that reduced federal workers’ salaries. Overall wages and salaries tumbled $21.8 billion from June, with a third of the decline coming from forced furloughs of federal workers.

Consumers cut their spending on long-lasting manufactured goods, like cars and appliances. Overall spending had risen 0.6 percent in June.

The tepid gains suggested economic growth was off to a weak start for the quarter.

A measure of consumer confidence slipped this month from a six-year high in July, as Americans expressed less optimism about the coming months. Americans said they were less confident that the job market would improve, but more confident that their income would rise.

Consumer spending drives roughly 70 percent of economic activity. So the weak spending report led some economists to sound a more pessimistic note on growth in the current quarter.

“This is a disappointing report on a number of levels,” said James Marple, senior economist at TD Economics. “Prospects for a pickup in economic growth in the third quarter hinge on a broad-based acceleration in spending by households and business to offset the ongoing drag from government. The data for the first month of the quarter are not following this script.”

Several analysts said that economic growth was unlikely to match the 2.5 percent annual rate reported Thursday for the April-June quarter. That was more than twice the growth rate in the first quarter and far above an initial estimate of a 1.7 percent rate for April through June.

The Federal Reserve will consider the latest data at its September meeting, when it decides whether to begin pulling back on its stimulus efforts. The most critical factor the Fed will weigh is the August employment report, due out next Friday.

Another concern is that rising interest rates could dampen consumer spending, particularly on homes and cars. Mortgage rates have already risen more than a full percentage point since May.

The small rise in spending was driven by a 0.9 percent gain in purchases of nondurable goods, like clothing. Purchases of durable goods like cars fell 0.2 percent, while money spent on services like utilities and doctor’s visits was unchanged in July.

A price gauge tied to consumer spending was up 0.1 percent in July compared to June. Prices excluding volatile food and energy are up just 1.4 percent compared to a year ago, significantly below the Federal Reserve’s 2 percent target for inflation.

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Number of Jobless People Declines Slightly in Europe

PARIS — While unemployment remained at record levels in percentage terms, the actual number of jobless people in the euro zone fell slightly in July, according to data published on Friday, offering fresh evidence that Europe’s struggling economy was taking tentative steps toward a recovery.

The tiny improvement in employment — which came alongside declining inflation and a survey showing improved confidence among European consumers and business managers — was welcomed as additional evidence that the worst of the region’s downturn was probably over. Still, officials and economists cautioned that the economic health of Europe remained fragile and the pace of recovery highly uneven within the region, underscoring the challenge for policy makers and central bankers.

“The recent improvements are minimal,” said Laszlo Andor, the European Union’s commissioner for employment. “This is no time for celebration or complacency.”

The jobless rate in the 17 countries that share the euro was 12.1 percent in July, adjusting for seasonal effects, according to a report from Eurostat, the European Union statistics agency. That figure has remained unchanged for several months. A year earlier, it was 11.5 percent.

Eurostat estimated that 19.2 million people in the euro area were jobless in July, 15,000 fewer than in from June.

For all 28 countries in the European Union, the number of unemployed fell by 33,000, to 26.7 million, for a rate of 11 percent. The European bloc expanded from 27 members to 28 on July 1, when Croatia joined.

Joblessness in the euro zone has been marching higher almost without interruption for more than five years, declining only briefly at the beginning of 2011. The July data showed the first back-to-back monthly decline in the number of jobless since April 2011.

But while some countries, like Germany, Austria and the Netherlands, have managed to weather the crisis with relatively little human cost, their Southern European neighbors — crippled by the euro zone’s debt crisis — still confront devastating levels of joblessness, particularly among the young.

“Against the background of what we’ve seen over last 18 months, yes, this is good news,” Carsten Brzeski, an economist at ING Bank in Brussels, said of the employment figures. “But tell that to the people who are still unemployed in places like Spain.”

The figures released on Friday again demonstrated the large disparity in growth and unemployment rates.

Unemployment in Germany stood at 5.3 percent in July, while Austria’s rate was 4.8 percent — less than one-fifth the levels recorded in Greece and Spain.

Andrea Broughton, principal research fellow at the Institute for Employment Studies in Brighton, England, emphasized the high levels of youth unemployment in many parts of Europe. In Greece, where the jobless rate is already among Europe’s highest at nearly 28 percent, youth unemployment was 62.9 percent in May, the latest month available for that country. In Spain and Croatia, more than half the young people remain out of work.

Nonetheless, Mr. Brzeski of ING said there were growing signs that Europe’s downturn had bottomed out and that structural reforms introduced in Spain, Portugal and other pockets of Europe’s “periphery” had begun to bear fruit.

He pointed to the European Commission survey of business and consumer confidence for August, which was also released on Friday, showing that optimism among company managers had reached its highest level in two years.

“Unit labor costs in many peripheral countries really have been improving,” he said. There was a nascent sense among businesses in those countries, he added, that “finally, something has been done and it’s showing some effect.”

The confidence survey, conducted by the executive agency of the European Union, showed that sentiment was improving not only in relatively healthy economies like Germany and the Netherlands but also in Italy and Spain, which have been among the hardest hit by the downturn.

The index of sentiment within the euro zone, based on factors including business orders, industrial confidence and hiring plans, rose 2.7 points to 95.2, the European Commission said. Across the European Union, the measure rose 3.1 points to 98.1.

Consumer confidence also improved, thanks mainly to brighter expectations about the economic situation over the next 12 months. Expectations about employment, however, remained unchanged.

Europe’s stagnant economy continued to keep a lid on prices. Eurostat on Friday forecast that annual consumer price inflation would decline to 1.3 percent in August from 1.6 percent a month earlier, largely because of a drop in energy prices.

This low-inflation trend, economists said, provides useful ammunition to the European Central Bank, which remains reluctant to raise its benchmark interest rate from a record low of 0.5 percent.

“As long as inflation remains well behaved and clearly below 2 percent,” Mr. Brzeski said, “I think the E.C.B. can sit very comfortably where it is right now.”

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Bank of England’s Governor to Keep Interest Rates Low

The new governor, Mark Carney, used the speech to talk directly to the backbone of the British economy: the owners of small and medium-size businesses.

“The knowledge that interest rates will stay low until the recovery is well established should give greater confidence to households to spend responsibly and businesses to invest wisely,” Mr. Carney said in Nottingham, a city 110 miles north of the bank’s offices in London.

Mr. Carney’s main mission is to shore up the nation’s economy, which has lagged behind competitors in rebounding from the worst global recession since the 1930s.

The United States economy has grown 5 percent over the last five years, but Britain is producing 3 percent less than it did at the start of the recession, Mr. Carney said.

His main act since taking the helm at the start of July has been to introduce an element of “forward guidance” to the bank’s monetary policy. The idea is that by indicating that borrowing costs will not rise for some time, businesses and households will be encouraged to invest and spend. The Federal Reserve has had such guidance for years.

However, Mr. Carney’s initial guidance this month generated some unwanted uncertainty.

On Aug. 1, he said that Britain’s benchmark rate would remain at a record 0.5 percent until unemployment fell to 7 percent, from the current 7.8 percent, or up to three years. Many economists thought the unemployment threshold meant interest rates might rise far sooner than expected and Britain’s borrowing rates in the markets increased.

In his speech on Wednesday, at the University of Nottingham, Mr. Carney said that the bank would not raise interest rates until “jobs, incomes and spending are recovering at a sustainable pace.” He also said that the 7 percent threshold would not necessarily lead to a rise in the interest rate.

“The Bank of England’s task now is to secure the fledgling recovery, to allow it to develop into a period of sustained and robust growth,” he said. “We aim to get there in part by reducing the uncertainty that has held back growth.”

Mr. Carney also touched on bigger themes. In the international arena, he explained that Britain must detach its monetary policy from that of the United States.

“While much has been made of the special relationship between the U.S. and U.K., it is not so special that the possibility of a reduction in the pace of additional stimulus in the U.S. warrants a current reduction in the degree of monetary stimulus in the U.K,” he said.

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Recovering UK Economy Shows Broader, Faster Growth

Gross domestic product expanded 0.7 percent from the previous quarter, data from the Office for National Statistics showed on Friday, beating its initial estimate and economists’ forecasts and putting Britain’s growth rate on a par with European powerhouse Germany.

“It does look like the recovery is becoming more self-sustaining,” said Philip Shaw, economist at Investec.

Stocks gained after the data, which also showed output rose by a surprisingly strong 1.5 percent from a year ago.

The pound and government bond yields rose, highlighting expectations that the revival could force Britain’s central bank to raise interest rates earlier than it has indicated.

British exports rose at the fastest pace since late 2011 and business investment grew faster than household spending, suggesting a shift towards more balanced growth in an economy that has been driven mainly by domestic consumption and imports.


In an effort to encourage spending and investment, the Bank of England said earlier this month it would not raise borrowing costs while unemployment remained above 7 percent, a level it did not expect to be breached for at least three years.

But the threshold may be crossed sooner if Britain’s recovery maintains momentum, and since the bank gave its forward guidance, the news on the economy has been predominantly upbeat.

Factories’ order books looked in their best shape for two years in August, consumer confidence and retail sales soared in July, and surveys found robust growth across manufacturing, construction and services at the start of the third quarter.

“The Bank of England is therefore facing a growing challenge of how to convince the markets and households that interest rates will not need to rise over the next three years,” said Chris Williamson, economist at financial data company Markit.

In a speech next week, BoE governor Mark Carney is tipped to try to talk down expectations of an earlier rise in the base rate, which have caused conditions to tighten on money markets.

Friday’s data showed that most key output components of GDP expanded more than originally thought.

Britain’s service sector – which makes up more than three quarters of GDP – grew 0.6 percent compared with the first quarter, as estimated earlier.

But manufacturing output growth was heavily revised up to 0.7 percent and the volatile construction sector posted a 1.4 percent rise, also much better than found a month ago.

The increase in building activity is running in parallel with an upturn in the property market, fuelled in part by a state-backed mortgage scheme that critics fear could lead to a new price bubble.

Britain’s economy is still 3.2 percent smaller than at its peak in the first quarter of 2008.

(Editing by John Stonestreet)

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With Energy Costs Lower, Producer Prices Were Flat in July, Evidence of Little Inflation

The Labor Department reported on Wednesday that a drop in natural gas and gasoline costs left its seasonally adjusted producer price index unchanged for the month. Analysts polled by Reuters had expected a 0.3 percent increase.

But the very slight increase in the producer price index outside of the volatile energy and food sector components is likely to attract attention at the Federal Reserve, which has recently noted the risks to the economy from inflation that is too low.

The so-called core producer prices, which are seen as indicators of trends in inflation, rose just 0.1 percent during the month, below the 0.2 percent gain expected by analysts.

Inflation has been trending lower for much of the last year despite signs of growing strength in the economy and the Fed warned last month that low inflation could hurt the economy.

The data on Wednesday showed that the core index was up 1.2 percent in the 12 months through July, the lowest reading since November 2010. Analysts had expected a 1.4 percent annualized increase, down from 1.7 percent in June.

The Fed is concerned about low inflation because it can encourage businesses and consumers to put off purchases in anticipation of lower prices. This undermines the Fed’s efforts to increase consumption by lowering borrowing costs.

Policy makers are also concerned about extremely low inflation because it raises the risk that a major shock to the economy could send prices and wages into a downward spiral known as deflation. Ben S. Bernanke, the Fed chairman, pointed out this risk in July.

But Mr. Bernanke has argued that temporary factors could be behind some of the low inflation and many private sector economists agree.

A steady decline in the unemployment rate appears to have the Fed nearly ready to begin winding down its economic stimulus program, which has kept interest rates historically low. The Fed has been buying $85 billion in Treasury and mortgage-backed securities each month.

A number of economists expect the Fed to begin reducing its monthly bond purchases in September. This has led to an increase in interest rates for home mortgages.

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Business Spending Lifts Orders for Durable Factory Goods

The Commerce Department said on Thursday that orders for durable goods increased 4.2 percent last month. That followed a 5.2 percent gain in May, which was revised higher.

Most of the gain occurred because aircraft orders, which are volatile month to month, jumped 31.4 percent. Boeing said it received orders for 287 planes in June, up from 232 in May. Excluding autos and airplanes, orders were unchanged.

Orders that signal planned business investment, which exclude volatile transportation and military orders, increased in June for the fourth straight month. The 0.7 percent gain last month was buoyed by more machinery demand. And orders in May were much stronger than previously reported.

Even with the gain, business investment is not likely to help economic growth in the April-June quarter, economists said. That is because the government measures shipments, rather than orders, when calculating business investments’ contribution to growth. Shipments fell in June. But the increase in orders this spring suggests shipments will rise in the July-September quarter and add to growth.

Jonathan Basile, an economist at Credit Suisse, said rising orders were a “recipe for a speedup in manufacturing and business investment” in the third quarter.

Durable goods are items meant to last at least three years, like computers, industrial machinery and appliances.

In other economic news on Thursday, government data showed that more people filed new claims for unemployment insurance benefits last week.

Initial jobless claims rose to 343,000 in the week ended July 20, an increase of 7,000 from the previous week’s revised 336,000 claims, the Labor Department reported.

Last week’s increase in claims, an indicator of the pace of layoffs, was larger than the 340,000 reading expected on average by analysts.

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Home Sales Slip

WASHINGTON — U.S. sales of previously occupied homes slipped in June to a seasonally adjusted annual rate of 5.08 million but remain near a 3½-year high.

The National Association of Realtors said Monday that sales fell 1.2 percent last month from an annual rate of 5.14 million in May. The NAR revised down May’s sales, but they were still the highest since November 2009.

Despite last month’s dip, home sales have surged 15.2 percent from a year ago. Sales have recovered since early last year, buoyed by job gains and low mortgage rates.

Still, mortgage rates have surged in recent weeks over concern that the Federal Reserve could slow its bond-buying programs later this year. The Fed’s bond purchases have helped keep long-term mortgage and other rates low.

Higher mortgage rates slowed sales last month of higher-priced homes in states such as California and New York, the Realtors group said.

The average rate on a 30-year fixed mortgage leapt to 4.46 percent by the end of June from 3.81 percent at the end of May. The rate was 4.37 percent last week.

That rate increase could hamper sales in coming months, economists said. But most expect housing to continue to recover, though at a slower pace.

“There’s little doubt the housing market slowed in the summer as mortgage rates rose,” Dan Greenhaus, chief global strategist at BTIG LLC, an institutional brokerage, said in a note to clients. “Housing is still expected to grow and contribute to economic output. It just may not be at the pace we’ve seen of late.”

Sales of previously occupied homes in June reflect contracts that were mostly signed in April and May, when mortgage rates were lower. Rising rates can cause some signed contracts to fall through if buyers no longer qualify for mortgages at higher rates.

The one factor that’s likely most holding back sales is a limited supply of homes available. Though more sellers put their homes on the market in June, the supply remained unusually low — nearly 8 percent less than a year ago.

At the current sales pace, the number of homes for sale would be exhausted in 5.2 months. That’s below the six months’ supply that’s consistent with a healthy housing market.

Another concern is that first-time buyers, who usually drive healthy markets, aren’t participating as much in the current recovery. They made up only 29 percent of buyers in June, below the 40 percent that is typical. Since the housing bubble burst more than six years ago, banks have imposed tighter credit conditions and required larger down payments. That’s made it harder for first-time buyers to qualify for mortgages.

Still, mortgage rates remain relatively low and home prices remain affordable despite rising in the past year. And higher mortgage rates could encourage some potential buyers to come off the sidelines and purchase homes before rates rise further.

The strength in housing this year has offset weaknesses elsewhere in the economy, like manufacturing and business investment. Rising home sales tend to lead to more spending at furniture and home supply stores.

Homebuilders have also stepped up construction in the past year, creating more construction jobs. In June, they applied for permits to build single-family homes at the fastest pace in five years.

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Economix Blog: Labor Force Participation Is Not Coming Back

Don’t worry about labor force participation. It’s not coming back.

That’s the conclusion of a new piece of economic modeling by the respected St. Louis firm Macroeconomic Advisers. And, if true, it has important implications for the Federal Reserve’s conduct of monetary policy over the next few years. Specifically, it means the monthly pace of job creation so far this year is ample to push the unemployment rate below 6.5 percent by mid-2015.

Let’s take a step back. Lots of people lost jobs during the Great Recession. In the aftermath, the great surprise has been how few are looking for new jobs. Labor force participation, the share of adults working or trying to find work, has stagnated at about 63.5 percent, almost three percentage points below the pre-recession level.

The unemployment rate has dropped almost entirely because of this decline in labor force participation. In other words, it has not fallen because people are finding jobs. It has fallen because fewer people are looking for jobs.

The question is whether that’s a permanent condition. Some economists say that people who have stopped looking for jobs will start looking again as economic conditions improve. If that’s true, it probably means that the Fed should be trying harder to stimulate the economy, because the current pace of job growth would not suffice to return unemployment to normal levels any time soon. As people finding jobs poured out of the unemployment pool, others would be pouring into the pool, keeping the level of unemployment unacceptably high.

Macroeconomic Advisers says, however, that participation is unlikely to increase. Yes, some people will start looking for jobs. But it predicts that will be offset by other trends, like the aging of the population into retirement.

It also points to the growing popularity of federal disability benefits, a program many researchers say is functioning as a safety net for people who can’t find jobs – except that it tends to remove them from the workforce on a permanent basis.

In effect, the model suggests that the Fed is right to focus on the unemployment rate as it decides how long to pursue its various stimulus campaigns.

If the model is right, further declines in unemployment will reflect job growth, not declines in participation. It will mean that things are actually getting better.

At the same time, if the model is right, the recovery will only go so far. Participation is in long-term decline, and the Fed can do nothing about it.

If the economy adds an average of 170,000 jobs a month over the next two years – well below the 200,000 per month pace so far this year – the unemployment rate will fall to 6.5 percent by mid-2015. The Fed’s chairman, Ben S. Bernanke, said yesterday that he thought the rate should end up around 5.6 percent.

We’ll have less unemployment, and less employment, and that will be that.

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