Economic Letter

Part-time work spiked during the recent recession and has stayed stubbornly high, raising concerns that elevated part-time employment represents a “new normal” in the labor market. However, recent movements and current levels of part-time work are largely within historical norms, despite increases for selected demographic groups, such as prime-age workers with a high-school degree or less. In that respect, the continued high incidence of part-time work likely reflects a slow labor market recovery and does not portend permanent changes in the proportion of part-time jobs.

Investor aversion to risk varies over the course of the economic cycle. In the current recovery, the rebound in risk-taking is near the top of the historical range. The pace of economic growth does not appear to explain the increase in risk appetite. However, statistical research suggests that the severity of the preceding recession explains about 20% of the change in a measure of the long-term stock price-earnings ratio. And corporate profit growth appears to explain about 40% of the decline in the spread between risky and risk-free bonds.

The Federal Reserve’s large-scale purchases of long-term Treasury securities most likely provided a moderate boost to economic growth and inflation. Importantly, the effects appear to depend greatly on the Fed’s guidance that short-term interest rates would remain low for an extended period. Indeed, estimates from a macroeconomic model suggest that such interest rate forward guidance probably has greater effects than signals about the amount of assets purchased.

Since 2009, U.S. job vacancies have increased but unemployment has fallen more slowly than in past recoveries. There is evidence that heightened uncertainty about economic policy has been an important factor behind this change. Increased uncertainty may discourage businesses from filling vacancies, thereby raising unemployment. An estimate indicates that, without policy uncertainty, the unemployment rate in late 2012 would have been close to 6.5%, 1.3 percentage points lower than the actual rate.

Long-term U.S. government bond yields have trended down for more than two decades, but identifying the source of this decline is difficult. A new methodology suggests that reductions in long-run expectations of inflation and inflation-adjusted interest rates have played a significant role in the secular decline in yields. In contrast, standard statistical finance methods appear to overemphasize the effects of lower risk premiums and reduced uncertainty about future inflation.

The U.S. economy is well into a period of sustained expansion, raising questions about when the Federal Reserve will cut back or end its stimulatory asset purchase program. Such moves will be appropriate at some point, but it’s still too early to act. The timing of any program adjustments will depend on incoming economic data. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the Sonoma County Economic Development Board in Rohnert Park, California, on June 28, 2013.

Federal fiscal policy during the recession was abnormally expansionary by historical standards. However, over the past 2½ years it has become unusually contractionary as a result of several deficit reduction measures passed by Congress. During the next three years, we estimate that federal budgetary policy could restrain economic growth by as much as 1 percentage point annually beyond the normal fiscal drag that occurs during recoveries.