U.S. factories that were idled during the recession are now
humming with activity. Office and apartment buildings have less empty space.
Unemployment is falling, while wages and benefits are growing slowly. All are
signs of an economy still healing from a deep downturn that created lots of
economic slack: the gap between the resources we have and those we are using. By
many measures, such slack has narrowed considerably, but conditions aren't
quite back to what was normal before the 2008 financial crisis.
The degree and speed of this progress matters to the Federal
Reserve as it weighs when to start raising interest rates. If the gap closes
rapidly, inflation pressures could build faster: Companies might need to raise
prices to cover the costs of adding extra shifts and hiring more staff, and a
stronger job market could in turn fuel faster wage gains. But if slack keeps
ebbing slowly, price increases are likely to remain mild, allowing the central
bank to keep rates lower for longer.
Fed officials, particularly Chairwoman Janet Yellen and
allies who share her views, have emphasized their focus on labor-market slack,
the degree to which the nation's workers and would-be workers aren't fully
employed. They cite figures suggesting plenty of room for improvement, such as
the still-high unemployment rate of 6.2%, the large number of people who are
working part time but say they would prefer to work full time, and the weak
wage growth of recent years.
These officials favor keeping their benchmark short-term
rate near zero well into next year to help encourage stronger growth that
should create more jobs and wage gains. Some Fed policy makers, however, say
the economy has made up so much ground that they might have to start raising
rates early next year or maybe even late this year to pre-empt an inflation surge.
Other sectors of the economy paint a more mixed picture,
with some showing significant improvement since the depths of the recession and
some not so much.
According to Reis Inc., office vacancy rates still hover
well above their 1985-2005 average of 15.4%, coming in at 16.8% in the first
quarter of 2014. The vacancy rate for neighborhood and community retail centers
stood at 10.4% in the first quarter, not much lower than a post recession high
of 11.1%. Regional malls fared better, though, with the first-quarter vacancy
rate of 7.9% already below a long-term average for retail vacancies of 8.5%.
Fed officials see the weak inflation of recent years as one
symptom of slack. Their preferred inflation measure has run below their 2%
target for more than two years. But it has picked up recently, moving closer to
that goal, another sign of shrinking slack. The
problem for Fed officials: Slack in the labor market is harder to measure. They
agree the employment picture is improving faster than expected but disagree on
how much further it has to go before inflation becomes a risk.
Fed officials would welcome stronger wage growth for a
while, but if it were to surge too much and if other measures show slack
narrowing rapidly across the economy, the debate on when to raise rates could
shift quickly.
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