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The Regional Economist - January 2013

The Regional Economist - January 2013

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The Regional Economist is a quarterly publication that addresses national and regional economic issues and their impact on the Eighth District.
The Regional Economist is a quarterly publication that addresses national and regional economic issues and their impact on the Eighth District.

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Published by: Federal Reserve Bank of St. Louis on Jan 24, 2013
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 A Quarterly Reviewo Business and Economic Conditions
V. 21, N. 1
 January 2013
The Federal reserve Bank oF sT. louis
CeNtral to ameriCa’s eCoNomy
Stuck in the Middleby Job Polarization
Negative Interest Rates:How Low Can You Go?
Why Are CrpratinsHlding S Much Cash?
3 president’s message9
Stuck in the Middleby Jb Plarizatin 
By Maria Canonand Elise Marifan
Te economy has increased itsdemand or high-skilled (high-wage) workers and low-skilled(low-wage) workers, whileopportunities or middle-skilled (middle-wage) jobs havedeclined. Tis “job polarization”may require a shi in the sort o training that is encouraged orAmerican workers.
Negative Interest Ratesas a Mnetary Plicy Tl
By Richard Andersonand Yang Liu
Negative interest rates ascinateeconomists and the public. It isnot uncommon to observe negativeinterest rates during uncertaintimes, when investors ee to saety.But the existence o negative mar-ket yields provides no support orpolicies in which central banks setnegative interest rates on depositsheld at a central bank.
Husehld FinancialStress and Hme Prices
By Yang Liuand Rajdeep Sengupta
Te rapid deterioration o nancial conditions aced by U.S.households since the crisis o 2007-2008 continued unabatedwell into 2010, aer which a grad-ual recovery began. Moreover,home price changes in a regionappear to have a strong associa-tion with the average nancialcondition o the households inthat region.
16 economy at a glance17 community proile
Seymur, Ind.
By Susan C. Tomson
Even though this town has ewerthan 20,000 people, it added about500 jobs in 2012, many o themin manuacturing. Much o thecredit can be given to the interestin workorce training, not only onthe part o individual employersbut the community at large.
20 district overview
“Yesterday’s Buyer Is Tday’s Tenant”
By Silvio Contessi and Li Li
As homeownership in the EighthFederal Reserve District declines,multiamily rental housing isbooming. “Asking rents” are up,and vacancy rates are down.
22 national overview
Mdest ExpansinCuld Pick Up the Pace
By Kevin L. Kliesen
Uncertainty regarding thenation’s near-term economicoutlook is higher than normal.But i the impediments that arerestraining exports and businesscapital spending wane, then theeconomy could grow by morethan expected in 2013.
23 reader exchange
Why Are CrpratinsHlding S Much Cash?
By Juan M. Sánchez and Emircan Yurdagul 
U.S. corporations are holding record-high amounts o cash. Onereason has to do with taxes—both the uncertainty about uturetaxes and the reality o today’s tax rules. Te second reason has todo with the rise o research and development; because o its uncer-tain nature, this sort o work requires access to high levels o cash.
The Regional
vol. 21, no. 1
The Regional Economist 
 bq b  r  pb a    r Bk s. l. i   , -       ,        e  r d. v      s. l      r s.
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dpty dt  r
d c. wk
dt  Pb a
K B
sb B
M et 
a sbk
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T et F r dtt
  ak,  m, i  i,  Kk t,   m. te d    l rk,l, m  s. l.
P t y mmtt sby Bypyyt 314-444-7425  by -m tby.bypyy@t.b..Y   wt t m t t bw. sbm  tt t t t   t tt pt t t  wb t / pb t 
The Regional Economist 
  t wt tt tw.W  t t t t tt ty  t.s-py bpt  bt b y t t wtu.s. . T bb, -mw..@t.b.   p www.t./pbtY   wt t
The Regional Economist 
, Pb a of,F r Bk  st. l,Bx 442, st. l, Mo 63166.
cover © getty images/ Jon Boyes
Mortgage Borrowing:The Boom and Bust
By William Emmonsand Bryan Noeth
Te buildup o mortgagedebt beore the crisis andthe subsequent deleverag-ing have had prooundly dierent eects on dierentage groups. Younger amiliesgenerally experienced themost volatility, while olderamilies have emerged withthe largest net increasesin mortgage debt. Get thedetails in this online-only article at www.stlouised.org/publications/re
th rgn ecn
 January 2013
 James Bullard,
p  ceo r Bk  s. l
onetary policy should be dependent onthe state o the economy, or “state-con-tingent,” rather than based on xed dates. AsI have argued since 2009, the Federal OpenMarket Committee (FOMC) should take thisapproach to balance-sheet policy, such aslarge-scale asset purchases or “quantitativeeasing,” just as it did with interest-rate policy prior to the nancial crisis.
Te Committee moved in this directionin the statement ollowing its September2012 meeting. At that time, the FOMCbegan a third round o large-scale assetpurchases, which is commonly reerred toas “QE3,” and stated that this policy willcontinue until the outlook or the labormarket improves substantially. In contrast,the FOMC’s announcement o the starto the previous round o asset purchases(“QE2”) was accompanied by an end dateo the second quarter o 2011.While the Committee’s move toward amore state-contingent balance-sheet policy was appropriate, the language in its Septem-ber statement leads to the question: Whatwould constitute substantial improvementin the labor market? Tere is no simpleanswer to this question. Te FOMC looksat many dierent indicators to assess thehealth o the labor market.Although some ocus on the unem-ployment rate, it is only one aspect o thelabor market. By itsel, this indicator is anincomplete measure o overall labor-markethealth. Te Fed’s dual mandate to promotemaximum sustainable employment andprice stability reers to employment ratherthan unemployment. o ollow the man-date literally, then, would mean ocusing onsome measure o employment. Nonarmpayroll employment, a key metric eachmonth, is one o the FOMC’s and nancialmarkets’ preerred measures o labor-marketperormance. Tus, when it comes to tyingmonetary policy closer to labor-market per-ormance, nonarm payrolls may serve as abetter measure than the unemployment rate.Along with payroll employment and theunemployment rate, the FOMC monitorsthe labor orce participation rate, which hasbeen a very important actor in recent years.Since 2000, this indicator has experienced adeclining trend, which was accentuated by the Great Recession. Currently, the labororce participation rate is at roughly thesame level as it was during the early 1980s.Given that this rate has uctuated so muchover the past ew decades, a good questionto consider is where the labor orce partici-pation rate should be in the long run. Noteveryone will participate in the labor mar-ket; many people (e.g., students and retirees)choose not to work or are unable to work or various reasons.Other labor-market indicators that theFOMC examines include measures o hoursworked, which address part-time vs. ull-time employment. Changing practices inlabor markets could bring more people intopart-time and temporary work; rom thatpoint o view, hours might be a better indi-cator o the state o the labor market thansimply counting the number o jobs. Tequality o jobs is also an important aspect o the health o the labor market. For instance,measures o hours worked and the numbero jobs could be good, but policymakers may not like the mix o jobs because many o them are low-wage. In addition, the FOMCconsiders data rom the Job Openings andLabor urnover Survey (JOLS) in assessingthe labor market. Te list goes on.Measuring the overall health o the labormarket involves many dimensions and is acomplicated matter.
Te state o the labormarket cannot be adequately summarizedin one number, whether it’s the unemploy-ment rate, payroll employment growth, thelabor orce participation rate or some othermeasure. Tereore, evaluating the overalllabor market by simply looking at a singleindicator would not be appropriate or mon-etary policy.A possible alternative is to build an indexo labor-market health that gives weightto all o these dierent dimensions andprovides some idea o the health o the labormarket in an overall sense. Even in thiscase, however, the Committee would likely weight the dimensions dierently; so, agree-ment on a specic index would be problem-atic. What is clear is that, evaluating in acomprehensive way whether the outlook orthe labor market has improved substantially and, thus, when to bring the latest balance-sheet policy to an end, will require theFOMC to consider numerous actors.
The Fed’s Latest Balance-Sheet Plicy:What Cnstitutes Substantial Labr-MarketImprvement?
PresidenT’s Message
For example, see my speech on Dec. 4, 2009, “TreeLessons or Monetary Policy rom the Panic o 2008.” http://research.stlouised.org/econ/bullard/BullardPhiladelphiaDec2009PolicyForum_FINAL.pd 
For additional inormation, see Andolatto, David;and Williams, Marcela M. “Many Moving Parts:Te Latest Look Inside the U.S. Labor Market.”Federal Reserve Bank o St. Louis
, March/April 2012, Vol. 94, No. 2, pp. 135-52. http://research.stlouised.org/publications/review/article/9163
th rgn ecn

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