This Week in Review: Job Gains Counter IMF, Fed Pessimism

Equity markets faced declines globally as the IMF downgraded growth expectations and the Federal Reserve said a fragile U.S. economy required more accommodative monetary policies in the short term.

Equity markets faced declines globally as the IMF downgraded growth expectations and the Federal Reserve said a fragile U.S. economy required more accommodative monetary policies in the short term.

At the same time, both the European Union and the United States are seeing improvements to unemployment rates, although both regions are seeing historically high levels of joblessness. Economists also point to declining labor participation in the U.S. and the real threat of a jobless generation in the European Union as headwinds that could cause global economic growth to stagnate for years, even decades.

U.S. Job Gains, Eurozone Unemployment

The United States is seeing a steady improvement to its unemployment rate, thanks mostly to a decline in labor participation. As a result, weekly unemployment claims fell to 287,000 this week, causing the four-week average to fall to its lowest point since 2006. 

Pre-crisis levels of unemployment claims are seen as a weak indicator of economic improvements, with the labor participation rate becoming a greater focal point for economists. Last week the Bureau of Labor Statistics announced that unemployment had fallen to 5.9%, as the labor participation rate fell to 62.7% in September.

While youth unemployment remains stubbornly high, the eurozone has seen some marginal improvement to overall unemployment rates in recent months. However, in July, the eurozone had an unemployment rate of 11.5%, slightly higher than its rate in 1997 when the European Union first met to discuss combating joblessness in the economic region. 

A growing number of economists are calling on the ECB to instigate a more accommodative monetary policy to spur job creation. Economists say European youth are likely to grow into a jobless generation, living most or all of their adult lives without gainful employment, which can cause a permanent slowdown to global economic growth.

IMF: Growth Slowdown

While the Federal Reserve warns that acting too soon could erase weak gains the U.S. has seen since 2009, the IMF warns that the lingering effects of the crisis are causing global growth to slow. “In advanced economies, the legacies of the pre-crisis boom and the subsequent crisis … still cast a shadow on the recovery,” the IMF said in a statement.

The IMF said it expects 2015 global growth to come in at 3.8%, a downgrade from its July forecast. Speaking on the report, IMF Managing Director Christine Lagarde called the trend the “New Mediocre,” emphasizing the likelihood of an asset bubble in equities that could send shockwaves throughout the global economy. “Downside risks related to an equity price correction in 2014 have also risen, consistent with the notion that some valuations could be frothy,” she said.

Federal Reserve: Risks of Downside Shocks

Echoing the global worries of the IMF, the Federal Reserve has said the United States recovery remains fragile, bolstering the case for more accommodative monetary policies in the short term. The Fed remains bearish on inflation, which is expected to stay below 2% and to decelerate at the end of 2014 on weak growth prospects. 

“Most [FOMC members] viewed the risk that inflation would run persistently below 2 percent as having diminished somewhat since earlier in the year, a couple noted the possibility that longer-term inflation expectations might be slightly lower than the Committee’s 2 percent objective or that domestic inflation might be held down by persistent disinflation among U.S. trading partners and further appreciation of the dollar,” the Committee said.

As a result, the central bank said on Wednesday that it will maintain its accommodative monetary policy for the foreseeable future, raising rates when data points suggest it’s wise to do so. The Fed concluded that it is too risky to target inflation until the economy has fully recovered. “The costs of downside shocks to the economy would be larger than those of upside shocks because, in current circumstances, it would be less problematic to remove accommodation quickly, if doing so becomes necessary, than to add accommodation.”