Patrick Harker talks economy at Philadelphia Chamber event

Patrick Harker, president of the Philadelphia Fed, said America’s economic fundamentals are sound and he remains upbeat about the economy when he spoke to the Philadelphia Chamber of Commerce today.

He saw two risks — the strong dollar and China’s slower economy.

“Labor markets remain dynamic, income growth is solid, and consumer spending continues to increase at a solid pace,” Harker said.

“If there is anything that I believe would pose any risk to the forecast I will deliver, it would be the strong dollar and weakening growth in China. The effects that these developments may have on the U.S. economy are something that we continue to watch closely. Taken together, slower Chinese growth and the high value of the dollar create some downside risk to my assessment of future economic activity.”

Harker said he thinks it is important to take a long view rather than to react to short-term volatility, and he is relatively optimistic over the longer run.

Although inflation is currently running below the  Federal Open Market Committee’s 2 percent target, Harker said the fall in energy prices and the rise of the dollar have held down inflation. “I believe that once energy prices stabilize and start reversing, inflation will return to our 2 percent target. I see headline inflation accelerating at an annual average pace of 1.5 percent by the second half of this year,” he said. “But, as Fed Chair Janet Yellen has emphasized, inflation expectations are also a crucial ingredient in formulating monetary policy.

There is a good deal of anecdotal evidence that firms are planning to raise wages, especially for jobs that are proving to be hard to fill, Harker said. “ I do expect some faster wage growth going forward, and accelerating wage growth could translate into more robust inflation.

“Additionally, it is unlikely that oil prices will continue to drop, and eventually, they will contribute rather than detract from inflation.Over the medium term, I remain confident that inflation will return to target. Math is in our favor: Energy prices would need to fall again and, by a similar magnitude, to renew their downward pressure on inflation. In other words, even if energy prices remain at very low levels, inflation should naturally rebound as current prices become the base upon which price increases are computed.”

He called residential real estate investment a “bright spot” for the economy. “The demand for housing has picked up, and prices of houses and especially rentals are growing strongly,” he said. “While much of the initial real estate gains were in multifamily units, which remains robust, new single-family homes have also started to accelerate more noticeably over the past year or so.”

Harker said more than 2 million net new jobs has been created each of the past three years, often in highly skilled professions. He said he expects employment growth will slow somewhat, but about 2 million net new jobs will probably be created this year as the monthly job gains have average 209,000 since January.

The rate of workers voluntarily leaving their jobs ― another key indicator of how people view their own employment prospects ― has also recently reached pre-recession levels.  Harker predicted wage growth as a result.

“I believe that the overall strength in job growth could bring the unemployment rate down to 4.7 percent by year-end,” Harker said, and he urged employers to develop the large talent pool among young people who are not in school and not working. Participation of young people in the labor force in the Philadelphia region has declined from 66 percent to 55 percent, he said.