A top Federal Reserve official warned Tuesday that one consequence of the Great Recession will be a "new normal" in which Americans have lower expectations for a better life.
In a speech, Federal Reserve Bank of Cleveland President and CEO Sandra Pianalto said that she expects "our journey out of this deep recession [to] be a slow one" because of the loss of skills jobless Americans have experienced as a result of prolonged unemployment, and the "heightened sense of caution" consumers and businesses are operating under as they navigate the worst economic downturn since the Great Depression.
Citing the fact that the average unemployed worker is out of a job for more than 30 weeks -- a new record -- Pianalto told the Economic Club of Pittsburgh that "the longer someone is out of work, the harder it is to find a job." About half of those currently unemployed have been out of work for at least six months.
"Research...tells us that workers lose valuable skills during long spells of unemployment, and that some jobs simply don't return," she said in her prepared remarks. "So workers who are lucky enough to find jobs may be going to jobs that aren't familiar to them, which means they and the companies they join may suffer some loss of productivity.
"Multiply this effect millions of times over, and it has the potential to dampen overall economic productivity for years," she warned.
The second effect of the Great Recession is "deep uncertainty about where the 'new normal' or baseline might be."
"A whole generation of Americans who began their working careers in the mid-1980s had experienced only long periods of prosperity punctuated by just two very brief downturns," said Pianalto, a voting member of the Fed's main policy-making body, the Federal Open Market Committee. "Those experiences encouraged an expectation for relatively smooth growth.
"Now everyone's expectations have shifted as a result of this long and deep recession," she added.
"People's attitudes about their own prospects have fundamentally changed. In a recent survey by Ohio's Xavier University, 60 percent of those polled believe attaining the American dream is harder for this generation than ones before. And nearly 70 percent think it will be even more difficult for their children. Many people are now just aiming for 'financial security' as their American dream."
This "new normal" has forced consumers to delay major purchases, she said. Consumer spending accounts for about 70 percent of the economy. A slowdown in consumer spending stunts economic growth.
Businesses also are cautious, Pianalto said. "Most business leaders say that they're not planning on significant hiring until there's more clarity about how the recovery is going to progress," she said, adding that uncertainty over policies debated in Washington, like on health care and taxes, also is playing a role.
"This caution translates into fewer job opportunities, fewer equipment purchases, fewer building projects -- and on and on," said Pianalto, an economist who's led the Cleveland Fed since 2003.
Switching to monetary policy, Pianalto, who as a voting member of the Federal Open Market Committee helps set interest rates, said that her researchers at the Cleveland Fed have noticed a drop in prices over the past three months for about half of the consumer goods they track.
That's led to companies "really holding the line on prices to boost sales" -- something they can do profitably "in part because labor costs are so restrained."
Referencing the high growth in productivity that's occurred during the recent downturn -- the effect of employers squeezing more out of their remaining employees despite the loss of millions of workers -- Pianalto said that "[h]igher rates of productivity growth reduce the amount of labor needed to produce a given amount of goods and services. In today's labor market, wages are likely to be restrained by the unemployment situation -- labor supply far exceeds labor demand.
"Combining rising productivity with restrained wages causes the cost of producing goods and services to fall," she said. Labor costs have fallen by nearly five percent since the fourth quarter of 2008, she added. In other words, workers aren't getting paid like they used to.
And it's not likely to get any better for the nation's workers.
"[M]any of my business contacts continue to talk about wage and price reductions, not increases," Pianalto said.Read Pinalto's full remarks here