While the policymakers at the Fed are basking in glory that expansionary monetary policies are working, the ground reality is different. The headline unemployment rate does show a rosy picture with the unemployment rate at 6.6%, down from a peak of 10% in October 2009. However, the U6 rate still remains relatively high at 12.7%.
Most importantly, this article will focus on the number of people not in labour force and the civilian employment-population ratio.
The chart gives the number of people not in labour force, which is currently at a record high of 91.5 million. What is important to note here is that the number of people not in labour force has increased by nearly 12 million after the financial crisis. If this be included in the unemployment numbers, the headline unemployment would also show a completely different picture.
The next chart gives the civilian employment-population ratio. The ratio has declined from 64% in the year 2000 to 58.8% as of January 2014. Further, the employment-population ratio is at its lowest in nearly three decades. This ratio is important to discuss as the number of dependents in the population is increasing and this implies that the per capita disposable income is on a decline with real incomes stagnating. The impact can be significant for a consumption driven economy. It is therefore not surprising to see the US economy witnessing continued sluggish growth.
Policymakers need to think beyond keeping interest rates artificially low, if the real economy has to recover. What we feel is that the government needs to play a smaller, but effective role in economic growth. This can be achieved by cutting government spending, making the environment more conducive for the corporate sector (services and manufacturing) and facing the reality that leverage growth is not growth but disaster.