Just a quick note on whether the Fed should raise interest rates later this year. One concern that many observers have with the Fed tightening is that nominal wage growth has yet to show any signs of accelerating. They often point to the employment cost index which only shows modest nominal income growth.
An alternative way to think about this issue is to look at the University of Michigan/Thompson Reuters Survey of Consumers where households are asked how much their dollar (i.e.
nominal) family incomes are expected to change over the next 12 months. I have used this series in the past to talk about the stance of monetary policy. This measure had averaged near 5 percent prior to the crisis, but then crashed and flat lined near 1.5 percent thereafter. The Fed, I argued, should have restored expected household dollar income to its 5 percent trend growth and its failure to do so was a dereliction of duty.
How times have changed. Here is the same series updated to the present. Since late 2013 it has accelerated and is now almost back to 5 percent.
This suggests the economy is heating up and getting closer to full employment. If we plot this series against the employment cost index we get the following figure. Note the expected nominal income growth tends to lead the actual income growth. This suggest that wages are primed to start accelerating.
So the wage growth concerns over the Fed tightening this year may soon become a moot point. This may one reason some folks like James Bullard are calling for a rate hike later in the year.
David, in fact nominal income expectations are belatedly converging to the 4% nominal growth has been since early 2010.
ReplyDeleteAgree, but they only really begin to accelerate late 2013.
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ReplyDeleteDavid, should I be surprised that you are focusing on growth rates and not levels here?
ReplyDeleteGood question. No, I haven't given up my support of NGDP level targeting so let me explain myself here.
DeleteFirst, enough time has passed such that the old pre-crisis expectations of trend NGDP growth shouldn't matter much (if at all). The 2008 shock was large and there were subsequent smaller shocks--Eurozone crisis, fiscal cliff talks, China slowdown concerns--that implied a prolonged working out of excess money demand, but by now it should be mostly cleared out. Put differently, by now there are new, settled expectations of the expected trend path of nominal spending.
Second, this series has been unique in that it showed a sustained decline in its trend growth rate. Other macro variables did not show this persistent decline in their growth rates (though their levels have never fully recovered). It only really began to gain momentum in late 2013. So it says something that the growth rate is finally returning to its pre-crisis average path.
I still say the Fed should print lots of money and for a long time. Let's see some real wage growth first, and moderate inflation...then we will know how much we are leaving on the table in terms of foregone growth so to speak..
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