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Highlights from Pat Harker Talk on Key Macroeconomic Trends

February 28, 2017
The Penn Wharton Public Policy Initiative was proud to welcome Dr. Pat Harker, President and CEO of the Federal Reserve Bank of Philadelphia and former Dean of the Wharton School, for a talk on “Key Macroeconomic Trends for the Coming Year.” The views expressed by President Harker during the talk were his alone and do not reflect the position of the Federal Reserve.

Harker began his talk by asserting a positive outlook for the macroeconomy, citing the strong growth in the labor and job markets in January and the low unemployment rate as reasons for his optimism. Harker says that these changes reflect more people “coming off the sidelines and coming back into the workforce,” referring to the slight net position uptick in U3 unemployment.

As a result of these shifts, finding workers – especially in certain occupations – is getting more and more difficult. If the labor market continues to tighten, however, the US economy will be more or less back to full health. But “good or healthy doesn’t mean perfect,” Harker reminded the audience, recognizing that certain “geographic and demographic parts of the country aren’t feeling the relief.”

He detailed these issues by illustrating how Philadelphia is frequently rated as the poorest of the 10 biggest cities in the United States, and that neighboring Camden, New Jersey had been cited as perhaps the poorest city in the country overall. The national unemployment rate for black men is 8%. “We need to pay attention to the demographic groups that were left behind,” Harker said.

But, monetary policy does not have the tools or scope to address these issues head on, he concluded. There is still room for wage growth and improvement in the labor market right now, despite the uptick in wages. Additionally, the Personal Consumption Expenditure (PCE) – a measure of the personal consumption of GDP – remains below target. Regardless, the state of today’s economy is a world of improvement compared to several years ago. Additionally, the headline Consumer Price Index (CPI) is rising, driven by an increase in gas prices. Inflation as measured by CPI is higher than that measured by PCE, as well, though the economy is predicted to reach the 2% inflation target according to PCE this year or the next.

Undoubtedly, the economy has grown. Harker cites an increase in real GDP, but noted the substantial drag in net exports. Moderate growth overall, averaging 2.5%, has come as a result of strong retail sales, which have rapidly accelerated since the middle of last year. Consumer confidence has been on an upward trend carrying forward into this year, so we should consider ‘about’ or ‘just above’ 2% growth normal.

Given the state of the economy, Harker sees three modest rate hikes of 25 basis points each as appropriate for this year. Due to monetary policy’s limited scope, many of the policies needed to increase growth are out of the purview of the Federal Reserve. Harker emphasized the need to invest in physical and human capital.

Harker went on to address student debt. The average student loan borrower has $31,000 outstanding, and though payment delinquencies have been coming down since 2012, the number of people with debt has risen significantly. Today, 42 million individuals have some type of debt in the United States. Harker said that there were “nuances to these numbers that bear investigating,” however, noting that defaults on smaller student loans are much more common than on bigger loans. Since larger loans tend to be taken on by people attending four-year institutions with higher graduation rates, these students are more likely to find better paying jobs and be better equipped to pay back their loans.

Compare this to students at two-year programs with smaller loans: a significant portion of these individuals are unlikely to complete their programs. Later, it is harder for them to find jobs that cover their cost of living and the cost of their loans. Recent graduates of two-year colleges have unemployment rates of close to 17% (20.6 for for-profit)- to put this in context, Harker stated that “we would have to go back to the Great Depression to see an unemployment rate that high.”

“So,” Harker asked, “what does this tell us, and why does it matter?” Even though students from four-year institutions like Penn have a better chance of finding a job after graduation, it doesn’t lessen the blow of paying for college for decades. New research has shown that student debt is linked to Millennials being unable to establish financial independence.

How can this problem be alleviated? Research has shown that simply offering college students intensive and personalized college options early in their education can help them make better decisions. Programs that protect students are critical, although complex and bureaucratic systems keep many people out of the process who need the help the most. The US might look to the model of other developed countries like Australia, which integrates student loan payments into the paychecks of graduates. This reduces paperwork and alleviates some of the burden of payment.

In addition, the United States to address the mismatch between job vacancies and worker skills. The payment rate for jobs using technical skills is at or above the traditional level, however the gap in employable individuals and available jobs will continue to have profound economic effects. One way to change this trend would be to create more high school programs to further the technical and vocational training of individuals while in school.

Towards the end of his talk, Harker leveled with the audience. “Look: I can’t formulate policy – I can’t even make my own kids study what I want – but awareness of research and facts will help.”

The Penn Wharton Public Policy Initiative is grateful to Pat Harker for his time and insights on the state of the US economy.

About the Speaker:

Patrick T. Harker took office on July 1, 2015, as the 11th President and Chief Executive Officer of the Federal Reserve Bank of Philadelphia. In this role, he participates on the Federal Open Market Committee, which formulates the nation’s monetary policy. Before taking office at the Philadelphia Fed, Harker served as the 26th president of the University of Delaware. He was also a Professor of Business Administration at the university’s Alfred Lerner College of Business and Economics and a Professor of Civil and Environmental Engineering at the College of Engineering.

Before joining the University of Delaware in 2007, Harker was Dean and Reliance Professor of Management and Private Enterprise at the Wharton School of the University of Pennsylvania. Prior to being appointed Dean in 2000, he served as the Wharton School’s Interim Dean and Deputy Dean as well as the Chair of its Operations and Information Management Department. In 1991, he was the youngest faculty member in Wharton’s history to be awarded an endowed professorship as UPS Transportation Professor of the Private Sector. He has published/edited nine books and more than 100 professional articles. From 1996 to 1999, he served as editor-in-chief of the journal Operations Research. In 2012, Harker was named a Fellow of the Institute for Operations Research and the Management Sciences (INFORMS) and a Charter Fellow of the National Academy of Inventors. He was also named a White House Fellow by President George H. W. Bush in 1991 and served as a Special Assistant to FBI Director William S. Sessions from 1991 to 1992.

Harker serves as a member of the Select Operating Committee of Select Greater Philadelphia. He previously served on the boards of Catholic Relief Services, Pepco Holdings, Inc., and Huntsman Corporation, and was a founding member of the board of advisors for Decision Lens, Inc. Harker was also a nonbanking Class B director of the Philadelphia Fed from 2012 to 2015. He has a Ph.D. in Civil and Urban Engineering, an M.A. in Economics, and an M.S.E. and B.S.E. in Civil Engineering, all from the University of Pennsylvania.

PENN WHARTON PPI
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