Perceived overall weakness in the economy goes to the heart of a debate pitting economists at such banks as UBS Securities L.L.C. and Barclays P.L.C. who say the economy has fundamentally changed against central bankers, including chairman Ben S. Bernanke, who say the distortions are transitory. A permanent shift would mean that policy makers applying additional stimulus risk spurring inflation by driving unemployment down too far too quickly, while a temporary dislocation would indicate that more can be done.
"There is a structural unemployment problem in the U.S.," said UBS economist Drew Matus. "The best the economy can do, even if it is performing well, is an unemployment rate that is probably significantly higher than it was pre-crisis."
Matus puts the new equilibrium level of U.S. joblessness in the range of 7 percent to 8 percent. Fed research, on the other hand, suggests that this so-called natural rate of unemployment may be as low as 6 percent. Even that level could come down more as the economy heals, work by economists at the New York and San Francisco Fed banks shows.
The gap between the current jobless rate of 8.3 percent and what Matus and the Fed have estimated as the natural rate is central to gauging the amount of labor-market slack. There is always some joblessness - the natural rate of unemployment - because geography and a lack of skills can limit the ability of those out of work to fill new openings instantly.
The Congressional Budget Office pegged the natural rate at 5 percent before the recession began in 2007, and its most recent analysis put the rate at 6 percent in 2011. Still, the Fed's definition of what constitutes a temporary shift in labor-market dynamics may prove disheartening, said UBS's Matus.
"For all we know, a temporary move could be three to five years, and for market participants and the average American, that might as well be permanent," Matus said.