Tag: Immigration estimates

Fed Governor Michelle Bowman Explains Her Dissenting Vote at the FOMC Meeting

Federal Reserve Governor Michelle Bowman (Photo from federalreserve.gov)

Federal Reserve Chairs place a high value on consensus, particularly with respect to the decisions of the Federal Open Market Committee (FOMC) setting the target for the federal funds rate. (Note that the chair of the Fed’s Board of Governors also serves as the chair of the FOMC.) As we discuss in Macroeconomics, Chapter 14, Section 14.4 (Economics, Chapter 24, Sectio 24.4), the FOMC has 12 voting members: the 7 members of the Board of Governors, the president of the Federal Reserve Bank of New York, and 4 of the other 11 District Bank presidents, who serve rotating one-year terms.

Decisions by the FOMC in setting the target for the federal funds rate are usually unanimous. Prior to the FOMC meeting on September 17-18, each vote of the committee had been unanimous since Esther George, president of the Federal Reserve Bank of Kansas City cast a dissenting vote at the meeting on June 14-15, 2022. At that meeting, the committee voted to raise its target for the federal funds rate by 0.75 percentage point (75 basis points). George voted against the move because she believed a 0.50 percentage point (50 basis points) increase would have been more appropriate.

At the September 17-18 meeting, Fed Governor Michelle Bowman voted against the decision to reduce the target for the federal funds rate by 50 basis points because she believed a cut of 25 basis point would have been more appropriate. She was the first member of the Board of Governors to cast a dissenting vote at an FOMC meeting since 2005.

Perhaps because it’s unusual for a member of the Board of Governors to dissent from an FOMC decision, Bowman issued a statement explaining her vote. In her statement, Bowman argued that although inflation has declined substantially over the past two years, she was concerned that inflation as measured by the 12-month percentage change in the core personal consumption expenditures (PCE) price index was still 2.5 percent—above the Fed’s target inflation rate of 2 percent: “Although it is important to recognize that there has been meaningful progress on lowering inflation, while core inflation remains around or above 2.5 percent, I see the risk that the Committee’s larger policy action could be interpreted as a premature declaration of victory on our price stability mandate.” (Note that the Fed uses the PCE rather than the core PCE to gauge whether it is hitting its inflation target, but core PCE is generally thought to be a better indicator of the underlying inflation rate.)

Bowman also noted the difficulty of interpreting developments in the labor market: “My reading of labor market data has become more uncertain due to increased measurement challenges and the inherent difficulty in assessing the effects of recent immigration flows.” (We discuss the effects on employment measures of differing estimates of the level of immigration in this blog post.)

The Continuing Mystery of the Slow Growth in Gross Domestic Income

A fundamental point in macroeconomics is that the value of income and the value of output or production are the same. The Bureau of Economic Analysis (BEA) measures the value of the U.S. economy’s production with gross domestic product (GDP) and the value of total income with gross domestic income (GDI). The two numbers are designed to be equal but because they are compiled from different data, the numbers can diverge. (We discuss GDP and GDI in the Apply the Connection “Was There a Recession during 2022? Gross Domestic Product versus Gross Domestic Income” in Macroeconomics, Chapter 8, Section 8.4 (Economics Chapter 18, Section 18.4).)

The figure above shows that in the past two years the growth rate of real GDP (the green line in the figure) has been significantly different—significantly higher—than the growth rate of GDI (the blue line). Both growth rates are measured as the percentage change from the same quarter in the previous year. Until the fourth quarter of 2022, the two growth rates were roughly similar over the period shown. But for the four quarters beginning in the fourth quarter of 2022, real GDI was flat with a growth rate of 0.0 percent, while real GDP grew at an average annual rate of 1.9 percent during that period. From the fourth quarter of 2023 through the second quarter of 2024, real GDI grew, but at an average annual rate of 1.8 percent, while real GDP was growing at a rate of 3.1 percent. (Some economists prefer to average the growth rates of GDP and GDI, which we show with the red line in the figure.)

In other words, judging by growth in real GDI, the U.S. economy was experiencing something between stagnation and moderate growth, while judging by growth in real GDP, the U.S. economy experiencing moderate to strong growth. There can be differences between GDP and GDI because (1) the BEA uses data on wages, profits, and other types of income to measure GDI, and (2) the errors in these data can differ from the errors in data on production and spending used to estimate GDP.

Jason Furman, chair of the Council of Economic Advisers under President Barack Obama, has suggested that a surge in immigration may explain why GDI growth has lagged GDP growth. As we discuss in this blog post, the Census Bureau may have been underestimating the number of immigrants who have entered the United States in recent years. The Congressional Budget Office (CBO) estimates that there are actually 6 million more people living in the United States in 2024 than the Census Bureau estimates because the bureau has underestimated the number of immigrants.

Compared to the native-born population, immigrants are disproportionately in the prime working ages of 25 to 54 and are therefore more likely to be in the labor force. It seems plausible—although so far as we know, the point hasn’t been documented—that the value of production resulting from the work of uncounted (in the census estimates) immigrants is more likely to be included in GDP than the income they are paid is to be counted in GDI. The result could explain at least part of the discrepancy between GDP and GDI that we’ve seen in the past two years. But while this factor affects the levels of GDP and GDI, it’s not clear that it affects the growth rates of GDP and GDI. The number of uncounted immigrants would have to be increasing over time for the growth rate of GDI to be reduced relative to the growth rate of GDP.

This episode may demonstrate the need for Congress to provide the BEA staff with resources they would need to do the work required to reconcile GDP estimates with GDI estimates.

How Should the Fed Interpret the Monthly Employment Reports?

Jerome Powell arriving to testify before Congress. (Photo from Bloomberg News via the Wall Street Journal.)

Each month the Bureau of Labor Statistics (BLS) releases its “Employment Situation” report. As we’ve discussed in previous blog posts, discussions of the report in the media, on Wall Street, and among policymakers center on the estimate of the net increase in employment that the BLS calculates from the establishment survey.  

How should the members of the Fed’s policy-making Federal Open Market Committee interpret these data? For instance, the BLS reported that the net increases in employment in June was 206,000. (Always worth bearing in mind that the monthly data are subject to—sometimes substantial—revisions.) Does a net increase of employment of that size indicate that the labor market is still running hot—with the quantity of labor demanded by businesses being greater than the quantity of labor workers are supplying—or that the market is becoming balanced with the quantity of labor demanded roughly equal to the quantity of labor supplied?

On July 9, in testimony before the Senate Banking Committee indicated that his interpretation of labor market data indicate that: “The labor market appears to be fully back in balance.”  One interpretation of the labor market being in balance is that the number of net new jobs the economy creates is enough to keep up with population growth. In recent years, that number has been estimated to be 70,000 to 100,000. The number is difficult to estimate with precision for two main reasons:

  1. There is some uncertainty about the number of older workers who will retire. The more workers who retire, the fewer net new jobs the economy needs to create to accommodate population growth. 
  2. More importantly, estimates of population growth are uncertain, largely because of disagreements among economists and demographers over the number of immigrants who have entered the United States in recent years.

In calculating the unemployment rate and the size of the labor force, the BLS relies on estimates of population from the Census Bureau. In a January report, the Congressional Budget Office (CBO) argued that the Census Bureau’s estimate of the population of the United States is too low by about 6 million people. As the following figure from the CBO report indicates, the CBO believes that the Census Bureau has underestimated how much immigration has occurred and what the level of immigration is likely to be over the next few years. (In the figure, SSA refers to the Social Security Administration, which also makes forecasts of population growth.)

Some economists and policymakers have been surprised that low levels of unemployment and large monthly increases in employment have not resulted in greater upward pressure on wages. If the CBO’s estimates are correct, the supply of labor has been increasing more rapidly than is indicated by census data, which may account for the relative lack of upward pressure on wages. If the CBO’s estimates of population growth are correct, a net increase in employment of 200,000, as occured in June, may be about the number necessary to accommodate growth in the labor force. In other words, Chair Powell would be correct that the labor market was in balance in June.

In a recent publication, economists Nicolas Petrosky-Nadeau and Stephanie A. Stewart of the Federal Reserve Bank of San Francisco look at a related concept: breakeven employment growth—the rate of employment growth required to keep the unemployment rate unchanged. They estimate that high rates of immigration during the past few years have raised the rate of breakeven employment growth from 70,000 to 90,000 jobs per month to 230,000 jobs per month. This analysis would be consistent with the fact that as net employment increases have averaged 177,000 over the past three months—somewhat below their estimate of breakeven employment growth—the unemployment rate has increased from 3.8 percent to 4.1 percent.