Federal Reserve to Discuss Slack in the Economy
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- By Stacey Bumpus
- September 21, 2009
Sometime this week, the Federal Reserve is planning to discuss the effects of slack and issues of our economy. Slack is defined as the unused portion of the economy’s productive capacity (including underutilized industrial space, housing and labor), and in the case of the U.S. economy, is too high for comfort.
Where does the evidence lie? Here are a few facts:
- According to Credit Suisse, 2,535 Boeing and Airbus worldwide aircraft were in storage as of July.
- The Association of American Railroads reported that there are 501,472 freight cars with stuck in storage at the beginning of September.
- According to Smith Travel Research, that hotel occupancy rates in the service industry are at 56% – the lowest since it started keeping records in 1987.
- 18.7 million homes were vacant in the second quarter, according to the Census Bureau.
- The Labor Department reported that as of August, 14. 9 million Americans were unemployed and a total of 26.3 million were underutilized.
With all this being said, slack may not be a bad thing because in theory, it helps to suppress prices going up, essentially keeping inflation down. In this circumstance, keeping inflation under control is a big deal because it allows the Federal Reserve to better manage interest rates, and restore growth at a steady pace. Yet with too many unused airplanes, trains, hotel rooms, and labor – this represents a lack for demand; which also represents challenged industries.
Hence, the Federal Reserve’s problem. If it pumps money into these industries to save them and help the economy, it could cause inflation, something it’s trying to avoid. However, taking this action would reduce slack because it could create more jobs and essentially help to get airplanes and trains moving, and hotels and homes filled.
While keeping inflation low in a suffering economy is a big deal because it helps keep prices affordable, many industries and workers might want to make that trade so that everyone can get up and going again.
How do you feel about the issue? Should the Federal Reserve focus more on keeping inflation low, or instead focus on reducing slack by pumping money into the U.S. economy?