Janet Yellen and the US economy

Last December, the Federal Reserve decided to raise its policy interest rate for the first time since the Great Recession.  At the time, the Fed thought that the US economy was starting to expand at a sufficiently fast rate that it would suck up all the unemployed and create conditions for increased demand and rising prices.  Janet Yellen, the Federal Reserve chief explained that the US economy “is on a path of sustainable improvement.” and “we are confident in the US economy”.   It was expected the Fed would proceed to raise interest rates by up to 1% point in 2016 in order to control inflation and avoid sharp wage rises.

Well, over six months later, the Fed has not raised interest rates again.  And the reason is clear: US economic growth, far from being on a ‘path of sustainable improvement’, has been slowing.  In the first quarter of 2016, real GDP growth rose only at an annual rate of 0.8%.  And today, Yellen told the World Affairs Council in Philadelphia that the latest jobs growth figures had been disappointing, and while she remained optimistic, there was little ground for raising interest rates yet.  Indeed, new jobs rose just 38,000 in May, half the consensus forecast of 160,000.


The US labour market, far from ‘tightening’, is beginning to weaken.  The Fed’s labour conditions index  was revised down to -3.4 from -0.8 in April while the May reading came in at -4.8, confirming an accelerating decline in conditions. This rate of decline has in the past presaged a new economic recession.

Fed labour conditions

And according to a survey of mainstream economists by the National Association of Business Economics, US economic growth will slacken in 2016 to its slowest pace in four years, or just 1.9%, compared to a previous forecast of 2.5%.  But even that could be optimistic.


Sure, the unemployment rate in May fell to 4.7%, the lowest since November 2007, but it did so for the wrong reasons as household employment barely rose. It’s just that the labour force shrank 458,000 as people are giving up looking for a job.  The labour participation rate (the number of people working compared to those of working age), which had been picking up slightly, pulled back again.

There are currently 7.4 million American adults officially unemployed, but add in the ‘underemployment’ (part-time, temporary etc) and that number is much closer to 20 million. Full-time employment declined 59,000 on top of a 316,000 plunge in April. Those working part-time for economic reasons — actually preferring full-time employment but no such luck — jumped 468,000 in the sharpest increase for any month since September 2012.

Janet Yellen may think the US economy is getting better but the experience for Americans is different.  Student loan debt has never been higher. Food stamp applications are at a record high. Healthcare costs continue to mount, and inequality increases while average family incomes fall.


The percentage of men aged 25 to 54 (prime working years) not working is at an all-time high.  Real median household income is still 1.3% lower today than it was in 2007.

Growth in the productivity of labour is the benchmark for US economic growth.  It declined at a 1.7% annual rate in Q4 of last year and followed that up with a 1.0% drop in Q1.  Productivity is in decline because business investment growth has been weak.  As I have argued before, business investment growth ultimately depends on the profitability of capital and profitability has remained low.  And now total profits are falling.  The NABE economists reckon corporate profits will fall this year for the first time since 2011, when they declined 2.9 percent.

I have argued in previous posts that the US economy will head into a new recession within the next year or two.  According to JP Morgan, the US investment bank, the probability of a recession occurring within the next 12 months has never been higher during the current economic recovery. “Our preferred macroeconomic indicator of the probability that a recession begins within 12 months has moved up from 30% on May 5 to 34% last week to 36% today,”.

US recession Prob recession

Nevertheless, Yellen continues to hope.  “I see good reasons to expect that the positive forces supporting employment growth and higher inflation will continue to outweigh the negative ones,” Yellen said. “As a result, I expect the economic expansion to continue, with the labour market improving further and GDP growing moderately.”  Watch this space.

3 thoughts on “Janet Yellen and the US economy

  1. Nevertheless, Yellen continues to hope. “I see good reasons to expect that the positive forces supporting employment growth and higher inflation will continue to outweigh the negative ones,” Yellen said. “As a result, I expect the economic expansion to continue, with the labour market improving further and GDP growing moderately.” Watch this space.

    http://www.capitalismnofuture.co.uk incl: ‘Marx: Capitalism No Future’

    The following offers an explanation of our society, capitalist society. Capitalist society is a class society. When we’re at work we labour. Capitalist society is a mass producing mass consuming of commodities society. Commodities, things, include all machines and technology.
    In order that we gain understanding of capitalist society that goes beyond appearance, we have to investigate the following categories:

    The Commodity.
    Useful labour.
    Exchange value.
    Abstract labour. (*)
    Labour power (*)

    It must first be stated that ‘Capital Volume 1’ by Karl Marx, is where the essence of capitalist society is scientifically laid bare. It would be impossible to reduce Capital to these few pages. Within these pages reference is made to Marxist categories. The categories are used to offer the reader some understanding that goes beyond appearance in our society, capitalist society. The main purpose of the following pages is to offer some understanding of what profit is and how profit is created. When a Marxist category is referred to, it will be designated on first usage thus. (*)

    Marx continues to terrify the global ruling capitalist class precisely because his scientific analysis of the Capital moves thought beyond appearance only understanding.

    ‘Marx: Capitalism No Future’ restates, in an easy to read manner, the basic argument of Capital. The text makes use of Marxist categories, their use effortlessly bringing the reader to awareness of the essence of change in capitalist society. Daily, we are offered statistics to explain change. Never are we told the source, the nature, of change in society. Marx scientifically (dialectically) reveals that it is the movement of the categories that bring change, change that ensures that capital, capitalism, capitalist society are not eternal. That is, the very activity of capital’s own laws of motion are the source of the decline of capital. And, as daily existence is rapidly revealing to all, capitalist society continues to move from crisis to ever deepening crisis.

    The bourgeoisie will continue to talk up capitalist economy. They get away with it because the vast majority, including those who ‘think’ that they have some idea…have absolutely no idea.

    Read ‘Marx: Capitalism No Future’.
    At the very least, you will want to pass on the information.

  2. Michael, As always, thank you for the post — and for taking the time to provide this excellent blog. A quick question: the grid of graphs above (time series, from student loans to home ownership) is very powerful, but I can’t make out the actual dates. Is there a link to the original graphs? Thank you.

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