November Employment and Revised 3rd Qtr 2011 GDP

I’m a few days late but I wanted to note the latest employment (jobs) report and the first revision to 3rd quarter GDP.  There’s really not much news here – it’s the same old story. The economy continues to move along somewhat like  a zombie.  Not really dead, but definitely not anything you could call “living”.  That’s particularly true if you’re one of millions of unemployed who need a job to “make a living” but can’t get one.

CalculatedRisk Blog tells us:

From MarketWatch: U.S. economy adds 120,000 jobs in November

The U.S. gained 120,000 jobs in November and the unemployment rate fell to 8.6% from 9.0%, the Labor Department said Friday. The government also revised jobs data for October and September to show that 72,000 additional jobs were created. … Hiring in October was revised up to 100,000 from 80,000 and the job gains in September were revised up to 210,00 from 158,000. In November, companies in the private sector hired 140,000 workers … Government cut 20,000 jobs

Employment Pop Ratio, participation and unemployment ratesClick on graph for larger image.

The following graph shows the unemployment rate. The unemployment rate declined to 8.6%.

Some of the decline in the unemployment rate was related to a decline in the number of workers in the labor force.

Percent Job Losses During RecessionsThe second graph shows the job losses from the start of the employment recession, in percentage terms. The dotted line is ex-Census hiring.

This was still a weak report, and slightly below consensus.

The headline unemployment rate declining from 9.0% in October to  8.6% in November is deceptive.  It is NOT because economic growth created enough new jobs to start making a significant dent in the millions of unemployed.  Instead it was almost entirely due to the labor force shrinking.  In other words, approximately 300,000 would-be workers abandoned their search in frustration and discouragement.  If the economy starts to grow briskly (not much chance of that happening) then these discouraged and “marginally attached” workers will likely renew their searches and rejoin the work force.

Calculated Risk also tells us how just before Thanksgiving the estimate for 3rd quarter real GDP growth was revised downward.

From the BEA: Gross Domestic Product, Second Quarter 2011 (second estimate

Real gross domestic product — the output of goods and services produced by labor and propertylocated in the United States — increased at an annual rate of 2.0 percent in the third quarter of 2011 (that is, from the second quarter to the third quarter) according to the “second” estimate released by the Bureau of Economic Analysis.

This was revised down from 2.5% and below the consensus of 2.4%.

The downward revisions was mostly due to a large decline in the “change in real private inventories ” – this subtracted 1.55 percentage points from the third-quarter change in real GDP (second estimate) as opposed to 1.08 percentage points in the advance estimate. Final domestic demand was mostly unchanged (the inventories will probably reverse in Q4). Still sluggish growth …

The relatively large revision came from having better data about the change in business inventories.  In GDP accounting, when a business produces goods it counts as “production” and part of GDP, even if the goods haven’t been sold yet to a final customer.  Additions to inventory then are considered to be a form of “business Investment”.  A decline in inventories tells us that businesses (in aggregate) sold more from their inventories (previous production) than they produced.  A large decline in inventories can be either a good or bad sign.  It’s good if it happens because sales were unexpectedly higher than managements expected.  That would suggest that production would be increased in the next quarter.  On the other hand, a decline in inventories can also be a sign that businesses expect future sales to be weak and so they didn’t produce as much in advance.  We’ll have to see which it is.  Regardless of why the inventory adjustment was so large, a 2.0% real growth rate is unacceptable.  It wouldn’t even be acceptable at full employment, but with 8.6% unemployment it’s totally unacceptable.

GDP 1st Qtr 2011 – Revised

I missed posting this a few days ago.  Bureau of Economic Analysis says first revision of the GDP estimate for 1st quarter 2011 was essentially unchanged from the initial “flash” estimate provided at the end of April.  The U.S. economy grew at approx. 1.8% annual rate.

While the overall growth rate was unchanged, there was some shuffling among the categories.  The revised numbers indicate that consumption spending (C) was weaker than initially thought, accounting for only 1.53 points of GDP’s 1.8 percent growth rate as opposed to the original 1.91.

Offsetting this lower estimate of Consumption spending was a larger than originally thought increase in Inventories (part of I, Investment spending).

This is not a good sign.  It says that consumers are slowing their spending more and that as a result firms ended the quarter with more inventory than expected.  That tends to signal an economy slowing more than businesses had expected.

There’s a lot of headwinds and “aftershocks” that are hitting the economy now. Among them:

  • continued high oil and gas prices
  • slowed production and sales in the auto industry due to supply chain bottlenecks from the Japanese nuclear meltdown, earthquake, and tsunami
  • continuing cuts in government spending at all levels.  State and local governments in particular are cutting a lot.  Congress and the President have evidently decided this year that it’s more important to cut government spending and borrowing (despite less than 3% interest rates) no matter how much it slows the economy and raises unemployment.  Together state, local, and federal government cuts in spending reduced GDP growth rate by 1.09 points.  In other words, if we had simply continued spending at the existing rate instead of cutting, we could have had at least a 2.9% GDP growth rate.
  • Europe is having a lot of difficulties with their ill-designed monetary union and their ill-advised austerity policies.  Europe is slowing dramatically and some countries are falling back into recession.  Not good for overall global growth or U.S. exports.
  • China is struggling to contain it’s inflation and may need to slow down it’s growth rate.
  • and most significant, unemployment and wages continue to play out a depression for workers. 

Update on the 4th Quarter GDP numbers

Division of labor, specialization, and the Web are beautiful things.  In my earlier post on the 4th quarter 2010 GDP numbers I observed that inventories declined significantly and I wasn’t sure why. Well, James Hamilton at Econbrowser did the heavy lifting of investigation so I don’t have to.  I only have to quote him:

Consumption spending was strong in the fourth quarter, and could have generated essentially all the real GDP growth by itself. Exports added another 1%. Since imports are subtracted from GDP, the fourth-quarter decline in imports would have provided a further 2.4% boost to the reported GDP growth rate. Nonresidential fixed investment contributed 0.4%, almost entirely from equipment and software. And even housing made a slightly positive contribution.
gdp_comps_jan_11.gif
With all these strong positives, how did we end up with only 3.2% growth? The answer is that a huge estimated decline in inventories subtracted back out 3.7%. The extra spending by consumers and firms was much more than we produced domestically, and the difference represents goods sold out of inventory.

But the fact that a huge negative contribution of inventories coincided with a huge positive contribution of imports does not seem to be a coincidence. There’s a clear pattern in the recent data that when one of these makes a positive contribution to GDP growth, the other makes an offsetting negative contribution. Although we often think of inventories as a substitute for production (you could either produce a good or sell it out of inventories), in the current environment inventories seem to act more as a substitute for imports (you could either import the good, or sell it out of inventories). So although inventories shouldn’t be the same drag on GDP in 2011, I expect imports to go back up and exert a drag of their own.