Fri 6 Apr 2018


Shows:  watch Nightly Business Report. watch PBS NewsHour. watch Bloomberg Technology.
Special: watch CNBC: White House Press Secretary Sarah Huckabee Sanders
Special: watch CNBC: Director of the National Economic Council Larry Kudlow Blindsided
Special: watch Federal Reserve Chairman Jerome Powell Speech at Economic Club of Chicago Text
Indices: chart Market Today. Market (52 weeks). Portfolio (52 weeks).
FX:        chart USD Today. USD Year. AUD Today. AUD Year.


In Portfolioticker today

read_this Hey Jarvis, how did we go today?

Today at the stock market

bull/bearU.S. stocks dropped about 2% on Friday, with the Dow falling more than 570 points, as U.S. President Donald Trump’s latest tariff threat on Chinese imports fueled increasing concern over a U.S. trade war with China.

  • The S&P 500 index fell 58.37 points, or 2.19%, to 2,604.47
  • The Dow Jones Industrial Average index fell 572.46 points, or 2.34%, to 23,932.76
  • The Nasdaq Composite index dropped 161.44 points, or 2.28%, to 6,915.11
  • For the week, the S&P 500 was down 1.4%, the Dow was down 0.7% and the Nasdaq was down 2.1%.
  • Declining issues outnumbered advancing ones on the NYSE by a 3.77-to-1 ratio; on Nasdaq, a 3.59-to-1 ratio favored decliners.
  • The S&P 500 posted two new 52-week highs and seven new lows; the Nasdaq Composite recorded 40 new highs and 64 new lows.
  • About 7.2 billion shares changed hands on U.S. exchanges. That compares with the 7.3 billion daily average for the past 20 trading days, according to Thomson Reuters data.

Trade Policy

Trump late Thursday threatened to slap $100 billion more in tariffs on Chinese imports, while Beijing said it was fully prepared to respond with a “fierce counter strike”.

Fears of a trade war since Trump announced tariffs on steel and aluminium imports more than a month ago have kept investors on edge over concerns that such protectionist measures would hit global economic growth.

U.S. companies seen as more likely to be hit by trade tensions with China were among the biggest drags on the Dow, including Boeing, down 3.1%. The S&P 500 industrials index, down 2.7%, had the biggest losses among sectors, though selling was broad-based.

Chipmakers, which as a group rely on China for about a quarter of their revenue, also declined. The Philadelphia semiconductor index fell 3.1%.

“It’s a reaction to concerns about the administration’s approach to trade. The market has vacillated between writing it off as just talk and assuming there could be a serious problem … If the market is down it often tends to accelerate on Friday. Investors don’t want to take the risk of coming in Monday after having something happen over the weekend,” said Rick Meckler, president of investment firm LibertyView Capital Management in Jersey City, New Jersey. He and others said investors also appeared to be reducing risk ahead of the weekend.

The trade war worries continued to pressure stocks even as Trump administration officials sought to dampen concerns. Trump’s top economic adviser Larry Kudlow said in various interviews that he learned of the new tariffs on Thursday night, but also said there are ongoing talks on trade between the United States and China.

U.S. Treasury Secretary Steve Mnuchin in an interview on CNBC said he was cautiously hopeful the United States will reach an agreement with China on trade. CNBC

The S&P 500 ended just above its 200-day moving average after trading well below that key support level that is watched by technical analysts.

Monetary Policy

Stocks added to losses and hit session lows in afternoon trading after Federal Reserve Chairman Jerome Powell said the U.S. central bank will likely need to keep hiking interest rates to keep inflation under control and said it was too soon to know if rising trade tensions would hit the U.S. economy.

Powell, who was speaking on the U.S. economic outlook in Chicago, also said the labor market appeared close to full employment. It was his first speech on the economic outlook since taking over as chairman on 5 Feb 2018.

Before the session started, a Labor Department report showed nonfarm payrolls increased by a smaller-than-expected 103,000 last month. While annual growth in average hourly earnings rose to 2.7%, it stayed below the 3% that economists estimate is needed to lift inflation toward the Federal Reserve’s 2% target.

“There was a hope that if he had a more dovish tone that that might be a counterbalance to the trade headwinds out there,” said Michael O’Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut.

Facebook

Facebook shares were down 1.3%. It backed for the first time proposed legislation requiring social media sites to disclose the identities of buyers of online political campaign ads and introduced a new verification process for people buying “issue” ads, which have been used to sow discord online.Reuters

Trump said the market turmoil was short-term “pain,” but insisted the outcome would leave the U.S. in a better position. Treasury Secretary Steve Mnuchin said the U.S. and China are holding “back-channel discussions” to resolve an escalating trade dispute that has unsettled global financial markets. China earlier said no talks were ongoing.

The trade tensions overshadowed the latest U.S. jobs report, which showed hiring cooled by more than forecast in March. The renewed saber rattling provided a bookend to a week that started with equities tumbling amid amplified rhetoric. That gave way to a three-day rally after White House officials signaled the president’s tough talk was part of a negotiating plan.

It’s bad when this happens on a Friday, because then people get freaked out over the weekend. The worst thing you want to see is a bad market late on a Friday,” Donald Selkin, New York-based chief market strategist at Newbridge Securities Corp, said by phone.Bloomberg

Market indices

Market indices
^ S&P500 Index today (mouseover for 12 month view) [Chart: Google Finance]

Index Ticker Today Change 31 Dec 17 YTD
S&P 500 SPX (INX) 2,604.47 -2.20% 2,238.83 -2.59%
DJIA INDU 23,932.76 -2.34% 19,762.60 -3.19%
NASDAQ IXIC 6,915.11 -2.29% 5,383.12 +0.16%

Portfolio Indices

USD and AUD denominated indices over the past 52 weeks (Chart: Bunting)
^ USD and AUD denominated indices over the past 52 weeks Chart: Bunting

Index values

Index Currency Today Change 31 Dec 17 YTD
USD-denominated Index USD 3.097 -2.53% 2.105 +0.97%
Valuation Rate USD/AUD 0.7727 -0.03% 0.72663 -1.61%
AUD-denominated Index AUD 4.010 -2.51% 2.895 +2.59%

Portfolio stock prices

Stock Ticker Today Change 31 Dec 17 YTD
Alphabet A GOOGL $1,009.95 -2.20% $1,053.00 -4.09%
Alphabet C GOOG $1,007.04 -2.03% $1,045.65 -3.70%
Apple AAPL $168.38 -2.56% $169.23 -0.51%
Amazon AMZN $1,405.23 -3.21% $1,169.54 +20.15%
Ebay EBAY $39.09 -2.35% $37.76 +3.52%
Facebook FB $157.20 -1.35% $176.46 -10.92%
PayPal PYPL $73.86 -4.02% $73.61 +0.33%
Twitter TWTR $28.10 -1.89% $24.01 +17.03%
Visa V $117.70 -2.88% $114.02 +3.22%
VMware VMW $118.65 -2.60% $125.32 -5.33%

FX: USD/AUD

USD

DXY movements
^ Bloomberg Dollar Spot Index (DXY) movements today (mouseover for 12 month view) Chart: Bloomberg

The Bloomberg Dollar Spot Index (DXY) fell 0.2%.
The EUR rose 0.4% to USD 1.2286.
Britain’s GBP rose 0.7% to USD 1.4094.
Japan’s JPY rose 0.5% to 106.895 per USD.

The yield on 10-year Treasuries declined 6 basis points to 2.77%, the largest fall in more than a week. The 2-year rate fell 4 basis points to 2.266.
Germany’s 10-year yield dipped 3 basis points to 0.497%.
Bloomberg

AUD

AUD movements
^ AUD movements against the USD today (mouseover for 12 month view) Chart: xe.com

Oil and Gas Futures

Futures prices

Prices are as at 15:48 EDT

  • NYMEX West Texas Intermediate (WTI): $61.93/barrel -2.53% Chart
  • ICE (London) Brent North Sea Crude: $66.99/barrel -1.96% Chart
  • NYMEX Natural gas futures: $2.70/MMBTU +0.90% Chart

flag_europe EU: Business Investment and Profit Share. Q4/2017

Press Release Extract [eu_bizinvest]

In the fourth quarter of 2017, the business investment rate was 22.8% in the euro area, compared with 22.5% in the previous quarter.

eu_bizinvest_20180406

The business profit share in the euro area was 41.1% in the fourth quarter of 2017, compared with 41.3% in the third quarter of 2017.

eu_bizprofit_20180406

These data come from a first release of seasonally adjusted quarterly European sector accounts from Eurostat, the statistical office of the European Union, and the European Central Bank (ECB).

Eurostat, “First release for Q4/2017: Household saving rate up to 12.2% in the euro area, Household investment rate stable at 8.8%. “, 6 Apr 2018 More

flag_europe EU: Household Saving and Investmente. Q4/2017

Press Release Extract [eu_saving]

The household saving rate in the euro area was 12.2% in the fourth quarter of 2017, compared with 12.0% in the third quarter of 2017.

eu_saving_20180406

The household investment rate in the euro area was 8.8% in the fourth quarter of 2017, stable compared with the previous quarter.

eu_investment_20180406

These data come from a first release of seasonally adjusted quarterly European sector accounts from Eurostat, the statistical office of the European Union and the European Central Bank (ECB).

Eurostat, “First release for Q4/2017: Household saving rate up to 12.2% in the euro area, Household investment rate stable at 8.8%. “, 6 Apr 2018 More

flag_usa US: Employment Situation (Jobs Report). Mar 2018

Press Release Extract [us_empsit]

Total nonfarm payroll employment edged up by 103,000 in March, and the unemployment rate was unchanged at 4.1 percent, the U.S. Bureau of Labor Statistics reported today. Employment increased in manufacturing, health care, and mining.

Household Survey Data

In March, the unemployment rate was 4.1 percent for the sixth consecutive month, and the number of unemployed persons, at 6.6 million, changed little.

us_ue_20180406

Among the major worker groups, the unemployment rates for adult men (3.7 percent), adult women (3.7 percent), teenagers (13.5 percent), Whites (3.6 percent), Blacks (6.9 percent), Asians (3.1 percent), and Hispanics (5.1 percent) showed little or no change in March.

At 1.3 million, the number of long-term unemployed (those jobless for 27 weeks or more) was little changed in March and accounted for 20.3 percent of the unemployed. Over the year, the number of long- term unemployed was down by 338,000.

The labor force participation rate, at 62.9 percent, changed little in March, and the employment- population ratio held at 60.4 percent.

The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) was little changed at 5.0 million in March. These individuals, who would have preferred full-time employment, were working part time because their hours had been reduced or because they were unable to find full-time jobs.

In March, 1.5 million persons were marginally attached to the labor force, little different from a year earlier. (The data are not seasonally adjusted.) These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.

Among the marginally attached, there were 450,000 discouraged workers in March, essentially unchanged from a year earlier. (The data are not seasonally adjusted.) Discouraged workers are persons not currently looking for work because they believe no jobs are available for them. The remaining 1.0 million persons marginally attached to the labor force in March had not searched for work for reasons such as school attendance or family responsibilities.

Establishment Survey Data

Total nonfarm payroll employment edged up by 103,000 in March, following a large gain in February (+326,000). In March, employment grew in manufacturing, health care, and mining.

us_jobs_20180406

In March, employment in manufacturing rose by 22,000, with all of the gain in the durable goods component. Employment in fabricated metal products increased over the month (+9,000). Over the year, manufacturing has added 232,000 jobs; the durable goods component accounted for about three-fourths of the jobs added.

In March, health care added 22,000 jobs, about in line with its average monthly gain over the prior 12 months. Employment continued to trend up over the month in ambulatory health care services (+16,000) and hospitals (+10,000).

Employment in mining increased by 9,000 in March, with gains occurring in support activities for mining (+6,000) and in oil and gas extraction (+2,000). Mining employment has risen by 78,000 since a recent low in October 2016.

Employment in professional and business services continued to trend up in March (+33,000) and has risen by 502,000 over the year.

Retail trade employment changed little in March (-4,000), after increasing by 47,000 in February. In March, employment declined by 13,000 in general merchandise stores, offsetting a gain of the same size in February. Over the year, employment in retail trade has shown little net change.

In March, employment in construction also changed little (-15,000), following a large gain in February (+65,000).

Employment changed little over the month in other major industries, including wholesale trade, transportation and warehousing, information, financial activities, leisure and hospitality, and government.

The average workweek for all employees on private nonfarm payrolls was unchanged at 34.5 hours in March. In manufacturing, the workweek edged down by 0.1 hour to 40.9 hours; overtime edged down by 0.1 hour to 3.6 hours. The average workweek for production and nonsupervisory employees on private nonfarm payrolls edged down by 0.1 hour to 33.7 hours.

In March, average hourly earnings for all employees on private nonfarm payrolls rose by 8 cents to $26.82. Over the year, average hourly earnings have increased by 71 cents, or 2.7 percent. Average hourly earnings for private-sector production and nonsupervisory employees increased by 4 cents to $22.42 in March.

The change in total nonfarm payroll employment for January was revised down from +239,000 to +176,000, and the change for February was revised up from +313,000 to +326,000. With these revisions, employment gains in January and February combined were 50,000 less than previously reported. (Monthly revisions result from additional reports received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors.) After revisions, job gains have averaged 202,000 over the last 3 months.

Bureau of Labor Statistics, “Employment Situation. Mar 2018“, 6 Apr 2018 (08:30) More

flag_usa US: Jerome Powell Speech at Economic Club of Chicago

For more than 90 years, the Economic Club of Chicago has provided a valued forum for current and future leaders to discuss issues of vital interest to this city and our nation. I am honored to have the opportunity to speak to you here today.

At the Federal Reserve, we seek to foster a strong economy for the benefit of individuals, families, and businesses throughout our country. In pursuit of that overarching objective, the Congress has assigned us the goals of achieving maximum employment and stable prices, known as the dual mandate. Today I will review recent economic developments, focusing on the labor market and inflation, and then touch briefly on longer-term growth prospects. I will finish with a discussion of monetary policy.

Recent Developments and the State of the Economy

After what at times has been a slow recovery from the financial crisis and the Great Recession, growth has picked up. Unemployment has fallen from 10 percent at its peak in October 2009 to 4.1 percent, the lowest level in nearly two decades. Seventeen million jobs have been created in this expansion, and the monthly pace of job growth remains more than sufficient to employ new entrants to the labor force. The labor market has been strong, and my colleagues and I on the Federal Open Market Committee (FOMC) expect it to remain strong. Inflation has continued to run below the FOMC’s 2 percent objective but we expect it to move up in coming months and to stabilize around 2 percent over the medium term.

Beyond the labor market, there are other signs of economic strength. Steady income gains, rising household wealth, and elevated consumer confidence continue to support consumer spending, which accounts for about two thirds of economic output. Business investment improved markedly last year following two subpar years, and both business surveys and profit expectations point to further gains ahead. Fiscal stimulus and continued accommodative financial conditions are supporting both household spending and business investment, while strong global growth has boosted U.S. exports.

As many of you know, each quarter FOMC participants–the members of the Board of Governors and the presidents of the Reserve Banks–submit their individual projections for growth, unemployment, and inflation, as well as their forecasts of the appropriate path of the federal funds rate, which the Committee uses as the primary tool of monetary policy. These individual projections are compiled and published in the Summary of Economic Projections, or SEP. FOMC participants submitted their most recent forecasts three weeks ago, and those forecasts show a strengthening in the medium-term economic outlook. As you can see, participants generally raised their forecasts for growth in inflation-adjusted gross domestic product (GDP) and lowered their forecasts for unemployment. In addition, many participants expressed increased confidence that inflation would move up toward our 2 percent target. The FOMC sees the risks to the economic outlook as roughly balanced.

The State of the Labor Market

As I mentioned, the headline unemployment rate has declined to levels not seen since 2000. The median projection in the March SEP calls for unemployment to fall well below 4 percent for a sustained period, something that has not happened since the late 1960s. This strong labor market forecast has important implications for the fulfillment of both sides of the dual mandate, and thus for the path of monetary policy. So I will spend a few minutes exploring the state of the job market in some detail.

A good place to begin is with the term “maximum employment,” which the Committee takes to mean the highest utilization of labor resources that is sustainable over time. In the long run, the level of maximum employment is not determined by monetary policy, but rather by factors affecting the structure and dynamics of the labor market. Also, the level of maximum employment is not directly measureable, and it changes over time. Real-time estimates of maximum employment are highly uncertain. Recognizing this uncertainty, the FOMC does not set a fixed goal for maximum employment. Instead, we look at a wide range of indicators to assess how close the economy is to maximum employment.

The headline unemployment rate is arguably the best single indicator of labor market conditions. In addition, it is widely known and updated each month. As I noted, the unemployment rate is currently at 4.1 percent, which is a bit below the FOMC’s median estimate of the longer-run normal rate of unemployment. However, the unemployment rate does not paint a complete picture. For example, to be counted in the official measure as unemployed, a person must have actively looked for a job in the past four weeks. People who have not looked for work as recently are counted not as unemployed, but as out of the labor force, even though some of them actually want a job and are available to work. Others working part time may want a full-time job. And still others who say that they do not want a job right now might be pulled into the job market if the right opportunity came along. So, in judging tightness in the labor market, we also look at a range of other statistics, including alternative measures of unemployment, as well as measures of vacancies and job flows, surveys of households’ and businesses’ perceptions of the job market, and, of course, data on wages and prices.

… The headline unemployment rate and two broader measures of unemployment, known as U-5 and U-6.4 U-5 includes the unemployed plus people who say they want a job and have looked for one in the past year (though not in the past four weeks). U-6 includes all those counted in U-5 plus people who are working part time but would like full-time work. Like the headline unemployment rate, both U-5 and U-6 have declined significantly in recent years. They are now at levels seen before the financial crisis, though not quite as low as they were in 1999 to 2000, a period of very tight job market conditions.

… The job vacancy rate, shown on the right, is close to its all-time high, as is the average number of weeks it takes to fill a job opening. Households also are increasingly reporting that jobs are plentiful, which is consistent with the high level of job postings reported by firms. In addition, the proportion of workers quitting their jobs is high, suggesting that workers are being hired away from their current employers and that others are confident enough about their prospects to leave jobs voluntarily–even before they have landed their next job.

While the data I have discussed thus far do point to a tight labor market, other data are less definitive. The labor force participation rate, which measures the percentage of working age individuals who are either working or actively looking for a job, has remained steady for about four years. This flat performance is actually a sign of improvement, since increased retirements as our population ages have been putting downward pressure on participation and will continue to do so. However, the participation rate of prime-age workers (those between the ages of 25 and 54) has not recovered fully to its pre-recession level, suggesting that there might still be room to pull more people into the labor force. Indeed, the strong job market does appear to be drawing back some people who have been out of the labor force for a significant time. For example, the percentage of adults returning to the labor force after previously reporting that they were not working because of a disability has increased over the past couple of years, and anecdotal reports indicate that employers are increasingly willing to take on and train workers they would not have considered in the past.

Wage growth has also remained moderate, though it has picked up compared with its pace in the early part of this recovery. Weak productivity growth is an important reason why we have not seen larger wage gains in recent years. At the same time, the absence of a sharper acceleration in wages suggests that the labor market is not excessively tight. I will be looking for an additional pickup in wage growth as the labor market strengthens further.

Taking all of these measures of labor utilization on board, what can we say about the state of the labor market relative to our statutory goal of maximum employment? While uncertainty around the long run level of these indicators is substantial, many of them suggest a labor market that is in the neighborhood of maximum employment. A few other measures continue to suggest some remaining slack. Assessments of the maximum level of employment are uncertain, however, and subject to revision. As we seek the highest sustainable utilization of labor resources, the Committee will be guided by incoming data across all of these measures.

Inflation

That brings me to inflation–the other leg of our dual mandate. The substantial improvement in the labor market has been accompanied by low inflation. Indeed, inflation has continued to run below our 2 percent longer-run objective. Consumer prices, as measured by the price index for personal consumption expenditures, increased 1.8 percent over the 12 months ending in February. The core price index, which excludes the prices of energy and food and is typically a better indicator of future inflation, rose 1.6 percent over the same period. In fact, both of these indexes have been below 2 percent consistently for the past half-dozen years. This persistent shortfall in inflation from our target has led some to question the traditional relationship between inflation and the unemployment rate, also known as the Phillips curve. Given how low the unemployment rate is, why aren’t we seeing higher inflation now?

As those of you who carefully read the minutes of each FOMC meeting are aware–and I know there are some of you out there–we had a thorough discussion of inflation dynamics at our January meeting. Almost all of the participants in that discussion thought that the Phillips curve remained a useful basis for understanding inflation. They also acknowledged, however, that the link between labor market tightness and changes in inflation has become weaker and more difficult to estimate, reflecting in part the extended period of low and stable inflation in the United States and in other advanced economies. Participants also noted that other factors, including inflation expectations and transitory changes in energy and import prices, can affect inflation.

My view is that the data continue to show a relationship between the overall state of the labor market and the change in inflation over time. That connection has weakened over the past couple of decades, but it still persists, and I believe it continues to be meaningful for monetary policy. Much of the shortfall in inflation in recent years is well explained by high unemployment during the early years of the recovery and by falling energy prices and the rise in the dollar in 2015 and 2016. But the decline in inflation last year, as labor market conditions improved significantly, was a bit of a surprise. The 2017 shortfall from our 2 percent goal appears to reflect, at least partly, some unusual price declines, such as for mobile phone plans, that occurred nearly a year ago. In fact, monthly inflation readings have been firmer over the past several months, and the 12-month change should move up notably this spring as last spring’s soft readings drop out of the 12-month calculation. Consistent with this view, the median of FOMC participants’ projections in our March survey shows inflation moving up to 1.9 percent this year and to 2 percent in 2019.

Longer-Run Challenges

Although job creation is strong and unemployment is low, the U.S. economy continues to face some important longer-run challenges. GDP growth has averaged just over 2 percent per year in the current economic expansion, much slower than in previous expansions. Even the higher growth seen in recent quarters remains below the trend before the crisis. Nonetheless, the unemployment rate has come down 6 percentage points during the current expansion, suggesting that the trend growth necessary to keep the unemployment rate unchanged has shifted down materially. The median of FOMC participants’ projections of this longer-run trend growth rate is 1.8 percent. The latest estimate from the Blue-Chip consensus of private forecasters is about 2 percent.

To unpack this discussion a little further, we can think of output growth as composed of increases in hours worked and in output per hour, also known as productivity growth. Here, a comparison with the 2001-to-2007 expansion is informative. Output growth in that earlier expansion averaged nearly 3 percent per year, well above the pace in the current expansion. Despite the faster output growth, however, average job growth in the early 2000s was ½ percentage point per year weaker than in the current expansion. The difference, of course, is productivity, which grew at more than twice the pace in the early 2000s than it has in recent years.

Taking a longer view, the average pace of labor productivity growth since 2010 is the slowest since World War II and about one-fourth of the average postwar rate. Moreover, the productivity growth slowdown seems to be global and is evident even in countries that were little affected by the financial crisis. This observation suggests that factors specific to the United States are probably not the main drivers.

… Labor productivity growth can be broken down into the contributions from business investment (or capital deepening), changes in the skills and work experience of the workforce, and a residual component that is attributed to other factors such as technological change and efficiency gains (usually lumped together under the term total factor or multifactor productivity).

In the United States and in many other countries, some of the slowdown in labor productivity growth can be traced to weak investment after the crisis. Investment has picked up recently in the United States, however, which suggests that capital deepening may pick up as well. The other big contributor to the slowdown has been in total factor productivity growth. The outlook for this dimension of productivity is considerably more uncertain. Total factor productivity growth is notoriously difficult to predict, and there are sharply different views on where it might be heading. Some argue that the productivity gains from the information technology revolution are largely behind us, and that more-recent technological innovations have less potential to boost productivity.8 Others argue that a well-documented decline in measures of business dynamism–such as the number of start-ups, the closure of less-productive businesses, and the rates at which workers quit their jobs and move around the country to take a new job–has held back productivity growth, in part by slowing the movement of capital and labor toward their most productive uses.

New technological breakthroughs in many areas–robotics, biotech, and artificial intelligence to name just a few–have led others to take a more optimistic view.They point to substantial productivity gains from innovation in areas such as energy production and e-commerce. In addition, the optimists point out that advances in technology often take decades to work their way into the economy before their ultimate effects on productivity are felt. That delay has been observed even for game-changing innovations like the steam engine and electrification, which ultimately produced broad increases in productivity and living standards. In this view, we just need to be patient for new technologies to diffuse through the economy. Only time will tell who has the better view‑‑the record provides little basis to believe that we can accurately forecast the rate of increase in productivity.

The other principal contributor to output growth is hours worked. Hours growth, in turn, is largely determined by growth in the labor force, which has averaged just 1/2 percent per year since 2010, well below the average in previous decades. One reason for slower growth of the labor force is that baby boomers are aging and retiring, and that trend will continue. But another reason is that labor force participation of people between the ages of 25 and 54–prime-age individuals–declined from 2010 to 2015 and remains low. Indeed, the participation rate for prime-age men has been falling for more than 50 years, while women’s participation in this age group rose through the 1990s but then turned downward, and it has fallen for the past 20 years.

These trends in participation have been more pronounced in the United States than in other advanced economies. In 1990, the United States had relatively high participation rates for prime-age women relative to other countries and was in the midrange of advanced economies for prime-age men. However, we now stand at the low end of participation for both men and women in this age group–just above Italy, but well below Germany, France, and Spain.

There is no consensus about the reasons for the long-term decline in prime-age participation rates, and a variety of factors could have played a role. For example, while automation and globalization have contributed positively to overall domestic production and growth, adjustment to these developments has resulted in dislocations of many workers without college degrees and those employed in manufacturing. In addition, factors such as the increase in disability rolls in recent decades and the opioid crisis may have reduced the supply of prime-age workers. Given that the declines have been larger here than in other countries, it seems likely that factors specific to the United States have played an important role. As I noted earlier, the strong economy may continue to pull some prime-age individuals back into the labor force and encourage others not to drop out. Research suggests that structurally-oriented measures–for example, improving education or fighting the opioid crisis–also will help raise labor force participation in this age group.

To summarize this discussion, some of the factors weighing on longer-term growth are likely to be persistent, particularly the slowing in growth of the workforce. Others are hard to predict, such as productivity. But as a nation, we are not bystanders. We can put policies in place that will support labor force participation and give us the best chance to achieve broad and sustained increases in productivity, and thus in living standards. These policies are mostly outside the toolkit of the Federal Reserve, such as those that support investment in education and workers’ skills, business investment and research and development, and investment in infrastructure.

Monetary Policy

Let me turn now to monetary policy. In the aftermath of the financial crisis, the FOMC went to extraordinary lengths to promote the recovery, support job growth, and prevent inflation from falling too low. As the recovery advanced, it became appropriate to begin reducing monetary policy support. Since monetary policy affects the economy with a lag, waiting until inflation and employment hit our goals before reducing policy support could have led to a rise in inflation to unwelcome levels. In such circumstances, monetary policy might need to tighten abruptly, which could disrupt the economy or even trigger a recession.

As a result, to sustain the expansion, the FOMC adopted a gradual approach to reducing monetary policy support. We began in December 2015 by raising our target for the federal funds rate for the first time in nearly a decade. Since then, with the economy improving but inflation still below target and some slack remaining, the Committee has continued to gradually raise interest rates. This patient approach also reduced the risk that an unforeseen blow to the economy might push the federal funds rate back near zero‑‑its effective lower bound–thus limiting our ability to provide appropriate monetary accommodation.

In addition, after careful planning and public communication, last October the FOMC began to gradually and predictably reduce the size of the Fed’s balance sheet. Reducing our securities holdings is another way to move the stance of monetary policy toward neutral. The balance sheet reduction process is going smoothly and is expected to contribute over time to a gradual tightening of financial conditions. Over the next few years, the size of our balance sheet is expected to shrink significantly.

At our meeting last month, the FOMC raised the target range for the federal funds rate by ¼ percentage point, bringing it to 1½ to 1¾ percent. This decision marked another step in the ongoing process of gradually scaling back monetary policy accommodation. The FOMC’s patient approach has paid dividends and contributed to the strong economy we have today.

Over the next few years, we will continue to aim for 2 percent inflation and for a sustained economic expansion with a strong labor market. As I mentioned, my FOMC colleagues and I believe that, as long as the economy continues broadly on its current path, further gradual increases in the federal funds rate will best promote these goals. It remains the case that raising rates too slowly would make it necessary for monetary policy to tighten abruptly down the road, which could jeopardize the economic expansion. But raising rates too quickly would increase the risk that inflation would remain persistently below our 2 percent objective. Our path of gradual rate increases is intended to balance these two risks.

Of course, our views about appropriate monetary policy in the months and years ahead will be informed by incoming economic data and the evolving outlook. If the outlook changes, so too will monetary policy. Our overarching objective will remain the same: fostering a strong economy for all Americans–one that provides plentiful jobs and low and stable inflation.

Jerome H. Powell, Chairman, Federal Reserve, “Speech: The Outlook for the U.S. Economy, At The Economic Club of Chicago, Chicago, IllinoisFull Speech

flag_japan Japan update

Currency: USD/JPY

JPY movements
^ JPY movements against the USD over the past month (mouseover for inverse) Chart: xe.com

Stockmarket: Nikkei 225

n225 movements
^ Nikkei 225 movements this week [Chart: Google Finance]

flag_china China update

Currency: USD/CNY

CNY movements
^ CNY movements against the USD over the past month (mouseover for inverse) Chart: xe.com

Stockmarket: CSI300

CSI300 movements
^ CSI 300 movements this week [Chart: Google Finance]