Any week in which the economy takes center stage tends to be a headache to even the most committed reader of news. What happens in DC often stays in DC – if only because many of the economic decisions made there seem so remote and alienated from the rest of the country.

But the decisions made in Washington play a huge part of our daily lives. The Federal Reserve’s giant stimulus program, in the spotlight today, is one example. The president’s proposals in the state of the union were another. These two events, taken together, would tell us we have an improving economy.

It would be a hard sell.

Disagreement about the economy

Here’s the problem: Even the experts don’t agree on where the economy has gone. Some believe it’s improving. Some believe the evidence is thin.

Ian Sheperdson, the founder of Pantheon Macroeconomics, noted a more optimistic tone in the Fed’s description of the economy after its monthly meeting this week:

The statement is a bit more upbeat than in December, suggesting the Fed is (even) more comfortable with its decision to taper. Growth is now said to have picked up in recent quarters, compared to expanding at a moderate pace in December, while consumption and investment advanced more quickly in recent months, compared to merely advanced in December. And fiscal restraint is diminishing, compared to may be diminishing.

For the Fed, a small adjustment like advanced more quickly is as celebratory as putting a lampshade on your head at a party. It’s meaningful because it allows the central bank to reduce the $65 billion of stimulus it’s pouring into the bond market every month. Tapering the stimulus indicates that the Fed

believes the economy, and stock markets, are strong enough to stand on their own without the central bank’s help.

It’s a simple equation: a better economy means less stimulus.

There’s unity in that optimism this week. President Obama’s state of the union has expressed it too, as the president spoke last night about job growth and a housing rebound even as he focused on inequality and growing poverty .

Wall Street investors and economists weren’t surprised by the Federal Reserve’s decision to keep reducing its largest and longest stimulus program – although their views diverge on whether the economy is still improving.

President Obama omitted figures about workers dropping out of the labour force from his 2014 state of the union. Photograph: Jewel Samad/AFP/Getty Images

The Fed and the experts aren’t always right

But here’s something everyone forgets: the Fed is often wrong.

Guy LeBas, of Janney Capital Markets, made that point after the Fed’s meeting: he said that the Fed’s optimism was at odds with the unimpressive economic statistics in January, particularly the jobs numbers. Bad weather hurt several economic measures in late December. LeBas reminded us that the Federal Reserve has a history of overly optimistic pronouncements – only to regret its boisterous proclamations later.

Here’s LeBas:



There have been at least three other occasions (spring 2010, spring 2011, and summer 2012) in which economic optimism and forecasts have grown hopeful, only for reality to quash them with a string of disappointing data readings. To borrow from the late Pete Seeger, ‘Education is when you read the fine print. Experience is what you get if you don’t.’ At this point in the post-global financial crisis cycle, we should all have plenty of experience with economic expectations, yet it seems leaders are focused only on the fine print.

LeBas makes a good point. The happy talk often misleads. Currently, there are some serious problems with the economy that people don’t talk about enough, or don’t talk about in the right way. For instance, it’s common for politicians, including the president, to crow about the falling unemployment rate. They rarely mention that it’s falling because people are dropping out of the workforce.

The jobs picture

Before its happy-talk January decision, the Federal Reserve held a more contentious court in December. At its December meeting, board members of the Federal Reserve nearly came to blows over the employment crisis. (Actually an exchange of views took place, but at the mild-mannered Fed, that phrase has plenty of verbally violent connotations.)

The truth is that even the experts can’t agree what to do about America’s unemployment crisis, or why we’re even having one.

Some members of the Fed believed that fewer Americans are employed mainly because older workers are retiring.

There may be some truth to that. Here’s the thing: if it is true, it goes deeper. It’s not just older workers leaving the workforce; it’s older women, specifically, women between 45 and 54-years-old. Their employment rate has fallen by about 2% this year, more than any other age group and more than twice the rate of women between the ages of 35-44, according to research from Ian Shepherdson, of Pantheon Macroeconomics.

Other members of the Fed argued with a litany of reasons why the economy is still full of warning signs. Some pointed to the employment rate of 62.8%. the lowest since Jimmy Carter was telling Americans to wear sweaters rather than pay for heat. Others talked about the high numbers of people who have been employed for six months or more, currently tallied at 3.9 million people. Still others looked to the stagnant number of people working part-time because they can’t find full-time work. And finally, some argued the importance of the low employment rate for workers between the ages of 25 and 54. as seen in this alarming chart.

A Goldman Sachs economist has said companies are becoming more profitable by paying workers less. Photograph: Brendan Mcdermid/Reuters

The stimulus and you

Those are the kinds of statistics that led the Fed to start the stimulus, or QE.

Quantitative easing is not difficult to understand. The Fed buys bonds from banks and investors: mortgage securities, Treasury bonds, all to the tune of $65bn a month. Initially, it had big ambitions. to put downward pressure on longer-term interest rates, help ease financial conditions, and promote a stronger recovery.

Snorfling up all those bonds fattened the Fed’s balance sheet to $4tn. Even worse, the Fed arguably lost its waistline for nothing. The Fed’s bond-buying has shown lackluster results lately. After four years, QE hasn’t created jobs. It has lowered interest rates to the point where it hurt people who like to save money; with interest rates near zero, your money is earning roughly the same interest by sitting under your mattress as it is in your savings account.

The primary benefit of QE was to your 401k. By buying bonds, the Fed pushed down the returns on bonds and scared investors out of buying as many as they would like. Yet those investors have to buy something. As a result, they bought other assets: stocks, and the bonds of countries like Turkey and South Africa. The record highs in the S&P 500 last year? You can thank the Fed for that.

2014 and inequality’s future

There’s a good chance that these trends in inequality will continue this year. There’s one plan that Obama has for the US, another corporations have for the US, and they are not aligned.

The main problem is that corporations like making money and don’t like paying it to people other than shareholders. Corporate profit margins are the highest they’ve been since 1968, according to Goldman Sachs. A prominent economist there says companies are becoming profitable by paying workers less. That has led to rich corporate profits and a lot of low-wage, temporary jobs flooding the labor market. What about the manufacturing insourcing craze? In fact, says Goldman Sachs, even when US companies bring jobs to the US from overseas, they only do it when they can pay those people less. Yes, those jobs still pay more than flipping burgers – but they will not pay as well as other manufacturing jobs.

One reason why companies are paying workers less: the percentage of Americans in labor unions has fallen to 11%. the lowest since the second world war. Union workers made $943 a week in 2013, compared to only $742 for those not in a union.

Everything else, however, is mostly conjecture.

The saddest part of the December Fed discussion was this: a couple of participants had heard reports of labor shortages, particularly for workers with specialized skills.

That tells you a lot. Yes, our monetary policy is based on rumors sometimes — economists who know a guy who knows a guy. It’s a good reason to take everything you hear about the economy from Washington with a grain of salt.