The Federal Reserve will probably begin to “taper” its securities purchases this week while redoubling its efforts to convince markets that official rates will remain at a rock-bottom level for a prolonged period. The latter strategy reflects a judgement that spare capacity is still substantial, implying that the economy can grow strongly without generating inflationary pressure.

This view, however, is questioned by two items of evidence. First, in the labour market, the vacancy rate – i.e. unfilled job openings as a percentage of employment – is now slightly above its average since 2001* (2.9% versus 2.7%). If effective labour supply were much higher than demand, as the Fed believes, employers would find it easy to fill job openings and the vacancy rate would be low and stable.

The first chart compares the unemployment and vacancy rates, the latter plotted inverted, with the scales adjusted to align the averages of the two series (horizontal lines). The unemployment rate remains 0.4 percentage points above its average since 2001 (7.0% versus 6.6%). The divergence with the vacancy rate suggests that the “natural” rate of unemployment has risen significantly.

Secondly, business surveys indicate that capacity utilisation within firms is normal. The second chart shows the OECD’s estimate of the “output gap” (i.e. deviation of GDP from potential) together with a weighted average of manufacturing and non-manufacturing utilisation rates from the Institute for Supply Management (ISM) semi-annual survey – the latest such survey was released last week. The ISM utilisation measure has recovered all of its recession-induced fall and is above average, casting doubt on the gap estimates of the OECD and others.

Limited slack suggests that price and wage pressures will revive sooner than the Fed and the consensus expect if the economy continues to expand at its recent pace.

*Series starts in December 2000.