Tag Archives: unemployment

A Journey of 100 Months Starts With the First Month

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Finally we are getting some good news. At least most people will consider it good news. Republican Presidential candidates hoping to run against Obama on “weak economy platform” might not happy with the news.

Today the Bureau of Labor Statistics (BLS) released the January 2012 employment data.   The unemployment rate has declined again. It is now down to 8.3%.  The number of net new jobs was pleasantly above the consensus expectations.  Calculated Risk quotes the BLS for us:

From the BLS:

Total nonfarm payroll employment rose by 243,000 in January, and the unemployment rate decreased to 8.3 percent, the U.S. Bureau of Labor Statistics reported today. Job growth was widespread in the private sector, with large employment gains in professional and business services, leisure and hospitality, and manufacturing. Government employment changed little over the month. … Private-sector employment grew by 257,000 …

The change in total nonfarm payroll employment for November was revised from +100,000 to +157,000, and the change for December was revised from +200,000 to +203,000..

So what accounts for the increase?  As the BLS states, large gains were widespread – services, hospitality/leisure, and manufacturing. But overall positive effect compared to what was expected and to what we’ve grown accustomed is strongly due to two factors we didn’t see.  We didn’t see reductions in government employment dragging down the total numbers. I’ll have another post on that later today.  The other effect is that the weather was nice – the exact opposite of last January (2011) when the weather adversely affected the numbers.

Nonetheless, a solid increase is a solid increase and something to feel good about.  But in keeping with my skeptical self, it’s also very important to not declare victory yet. We’re not out of the woods by a long shot.  I can think of four reasons right away.

First, we’ve been here before.  As Calculated Risk explains,

Job growth started picking up early last year, but then the economy was hit by a series of shocks (oil price increase, tsunami in Japan, debt ceiling debate) – and now it appears job growth is picking up again.

Payroll jobs added per monthClick on graph for larger image.

This is the third or fourth time in this “recovery” that it appeared employment would finally be accelerating into the kind of “V-shaped” recovery we really need.  Each time before, something (often politics) interfered.

A second reason for caution involves both the employment-population ratio and the labor-force-participation rate.  Both rates are at lows we haven’t seen for 30 some years.  Both ratios indicate that large numbers of people have left the labor force and simply aren’t looking for work.  If they change their minds and start to look for work, then the unemployment rate could easily begin rising again as the denominator of the unemployment rate rises faster than employment (the numerator).

A third reason is that there are still too many unknowns on the horizon and most of them carry downside risk.  The UK and the Eurozone continue their self-inflicted austerity march into recession and flirtation with banking and default crises. House prices have continued to decline, threatening the ability of households to sustain increases in consumer spending. And there’s always the completely unknown.  Twelve months ago nobody would have considered the risk to economic growth from an earthquake that created a nuclear disaster.

The fourth reason to be cautious is the mismatch between the positive increase in employment we’ve just seen and the size of the employment gap we are facing.  This is the graph we need to keep in mind.  Again from Calculated Risk:

Percent Job Losses During Recessions

… third graph shows the job losses from the start of the employment recession, in percentage terms. The dotted line is ex-Census hiring.

This shows the depth of the recent employment recession – much worst than any other post-war recession – and the relatively slow recovery due to the lingering effects of the housing bust and financial crisis.

We are far, far from leaving this employment depression behind.  Dean Baker of the Center for Economic Policy and Research cautioned today that, while it appears that we are on stronger path, it is still too weak.  January’s numbers seem strong only because we have grown accustomed to such abysmal recovery for the last 2-3 years.  Even at the pace January showed, it will still be 2020 before we regain full employment.  That’s 8 years away – 100 months.  Government and central banks easily lose focus on growth in a period that long.  Congress and the President, while returning to jobs now in this election season, have already shown that they couldn’t sustain a focus on job growth last year as they turned to imaginary concerns over government debt instead.

We have a long way to go.  We should be running but we’re only walking. Nonetheless, at least we’re walking forward now instead of backwards they way we were in mid-2011.

The Problem in One Graph

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Yesterday I said I was reluctant to get over-optimistic about the recent slight upturn in employment data. This year may truly be different from the last few, but there’s a nagging feeling that we’ve seen this movie before. I’m not alone in the feeling. As 2012 dawns, Tim Duy summarizes the problem in one graph (emphasis is mine):

I have been hesitant to embrace the recent positive data flow - once bitten, twice shy perhaps.  Something about the current dynamics that seems a little too familiar.  Indeed, I felt something of relief when FT Alphaville came to a similar conclusion in the waning days of 2011.  Cardiff Garcia reports on a Nomura research note that details a new bias in the seasonal adjustment process, noting:

Up next, writes Nomura, you can expect exaggeratedly strong readings from the Chicago PMI later this month and the next ISM manufacturing survey at the start of January.

I imagine it is premature to call the readings “exaggerated,” but both did surprise on the upside, as much data has of late.  Read the whole piece – it is worth the time.

Indeed, flirtations with either excessive optimism or excessive pessimism were not richly rewarded last year, as on average the economy simply edged upward in pretty unremarkable fashion:

Potential
It seems reasonable to expect the same in 2012, at least as a baseline – a slow “recovery” that is really more of an adjustment to what appears to be the economy’s new equilibrium path, one that is decisively subpar to the pre-recession trend.  I don’t believe that such an adjustment is necessary, as in my view it simply reflects a shortfall of aggregate demand.  That said, the longer the cyclical downturn grinds on, the more likely it is that we will indeed see a new equilibrium path.  A greater percentage of the cyclical unemployment will become structural unemployment or permanent shifts in the labor force participation rate.  In addition, investments will go unmade as firms hoard cash.  And, increasingly, policymakers will manage policy along the new equilibrium path, forgetting entirely the pre-recession path.

The gap in the above graph, the gap between the green trend line of what we’re capable of doing and the blue-red trend from Jan 2009 onward of we’re actually doing is the challenge.  We are slowly becoming an economy that simply cut-off 7% or so of our economy in 2008 and we aren’t recovering it.  Instead it increasingly appears that the 90-93% of the economy that survived, those of us still with good jobs, are simply going on our way leaving behind those who lost out a few years ago.

There are over 13 million unemployed workers. Over 5.6 million of them have been searching fruitlessly for a new job for more than 6 months.  These are the people who got kicked off the American economy bus some time ago.  Unfortunately, even at the recently improved rate of 150-200,000 new jobs per month, there won’t be any room on the bus for them again.  Instead, the bus is moving on and they are left behind.

This is new. This is not the normal pattern. In past recessions, public policy, both fiscal and monetary, was managed to restore full employment rapidly after a recession.  It didn’t always succeed but the effort was made.  Now it is not. Now we focus more on long-term debt issues and spending concerns.  Politicians run on platforms of fear of some future default or financial crisis. This despite the fact that the government is able to borrow at record low rates of interest.

We are on path to a “new normal”, a “normal” that says it’s OK to have millions of long-term unemployed who have no hope.  I don’t think I like the “new normal”.

 

Setting the Bar Very Low: The Unemployment Report for December 2011

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Well I’m back.  Yes, it’s been a longer than expected break from blogging driven by work considerations, but contrary to the rumors, I have not been “doomed”.  So it’s on to a new semester and a new resolution to post frequently. I hope 3-5 times per week.

To start things off, yesterday was the first Friday of the month which means, of course, the monthly report on employment, jobs, and the unemployment rate.  I’ll let Calculated Risk report the news and graph first:

December Employment Report: 200,000 Jobs, 8.5% Unemployment Rate

There were 200,000 payroll jobs added in December. This included 212,000 private sector jobs added, and 12,000 government jobs lost.

The following graph shows the employment population ratio, the participation rate, and the unemployment rate.

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

The unemployment rate declined to 8.5% (red line).

The Labor Force Participation Rate was unchanged 64.0% in December (blue line). This is the percentage of the working age population in the labor force.

The Employment-Population ratio was unchanged at 58.5% in December (black line).

The good news then is that trend indicates we are creating net more jobs in the last few months than we have been doing for several years.  An unemployment rate of 8.5% is definitely a lot better than the 10% we had in 2009. And, the rate is coming down.  But we shouldn’t get too excited nor should politicians think  their work is done.  First off, although this is the strongest 3 month improvement in the rate we’ve seen since the start of the recession back in 2007, we have seen similar short trends of improvement that fizzle out. It’s always possible as some analysts have observed that the November-December numbers were driven by a surge in temporary hiring in the online retailing sector.  It’s possible that we’re only seeing  a temporary strengthening and that January and February will see a return to same stagnation we saw last summer.

Second, it’s always possible that Congress will do something incredibly stupid that dramatically cuts employment and aggregate demand immediately. A third, very serious risk is that Europe will continue to slide into government austerity-induced recession and possibly trigger a global financial crisis with the Euro.  A European slide will adversely affect our exports and depending on how severe it is, possibly reduce employment in U.S. exporting industries.  A Euro financial crisis would likely ripple back to big U.S. banks who could in turn cause problems here.

But the biggest reason that we shouldn’t be satisfied with these numbers is simple. This isn’t enough! An improvement of 200,000 net new jobs might be acceptable if we were already at full employment, but we’re not. We need to grow faster so we can put the millions of unemployed back to work.  Again back to Calculated Risk:

Percent Job Losses During RecessionsThis graph shows the job losses from the start of the employment recession, in percentage terms aligned at maximum job losses.

This is the worst post WWII employment recession. However, as bad as this is, the Great Depression would be way off the chart. At the worst, employment fell a little over 6% during the recent employment recession – although the data is a little uncertain – employment probably fell by around 22% during the Great Depression.

Calculated Risk makes the point that the past few years haven’t been as severe as the Great Depression.  That’s true in the sense of how deep or severe the crisis has been.  But in terms of length, how long we go without full employment, we are clearly on a path to making this on par with the Great Depression.  The Great Depression in employment was essentially 11 years long.  Unemployment started rising in late 1929. It never fully recovered until the war spending took off in a big way in 1940-41. That’s eleven years. The current recession/depression/inadequate recovery started in late 2007. It’s at least 4 years old already.  The current pace of jobs addition puts us another 3 or so years until we recover all the jobs we lost.   So that’s a total of 7 plus years.

But as Paul Krugman points out, the population and labor force has been growing during the last 4 years.  To really reach full employment we need even more.

Let me give two back-of-the-envelope ways to think about how inadequate 200,000 jobs a month is.

First, note that there are still about 6 million fewer jobs than there were at the end of 2007 — and that we would normally have expected to have added around 5 million jobs over a four-year period. So we’re 11 million jobs down — and we need at least 100,000 jobs a month just to keep up with working-age population growth. Do the math, and you’ll see that it would take 9 or 10 years of growth at this rate to restore full employment.

Alternatively, note that during the Clinton years — all 8 of them — the economy added around 230,000 jobs a month. As it did that, the unemployment rate fell about 3 1/2 percentage points — which is about what we’d need from here to get back to something that felt like full employment. Again, this suggests that we’re looking at something like a decade-long haul to have full recovery.

So yes, this is better news than we’ve been having. But it’s still vastly inadequate.

So, yes I’m encouraged by the recent employment reports, but not very much.  I still hold to my position that when all is done and we look back on this period we’ll be referring to it as some sort of depression, not a “Great” one, but some sort of depression.

Rick Snyder Advocates Government Planning to Fix the Labor Market

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In recent posts here, here, and here, I’ve been discussing structural vs. cyclical unemployment.  In particular I’ve observed how those who are opposed to government stimulus efforts, either broad-based tax cuts or spending, are desperate to assert that our unemployment is a structural problem and not cyclical.  Yesterday’s post about a story in the Wall Street Journal was one example.  But here in my home state of Michigan, our Governor Rick Snyder has been saying much the same thing.  Since Governor Snyder’s previous claims that the magic jobs genie would create jobs from budget cuts have not worked, he really wants to join the “it’s all structural” brigade.  So last week Snyder announced:

Michigan needs to do better training people for in-demand jobs, and matching skilled workers with potential employers, Gov. Rick Snyder said…

“Today, too few workers have the skills needed to meet the demands of employers in the new economy,” Snyder said, according to an advance copy of his message. “Despite an unemployment rate of 10.6 percent, thousands of jobs remain unfilled in Michigan.”

Snyder said state companies say there is a “talent disconnect,” with baby boomer retirements leading to a loss of skilled workers and increasingly technology-driven economy requires advanced skills that many of our workers do not have.

“Today, talent has surpassed other resources as the driver of economic growth,” he said. “Times have been tough in Michigan. We have failed to think strategically about the relationship between economic development and talent. Job creators are finding it challenging to grow and develop without the right talent and job seekers are struggling to connect with the right opportunities that leverage their skills.”

Among the proposals is a new website, Pure Michigan Talent Connect – MiTalent.org – will feature tools for job-seekers and employers to identify labor trends and help people assess their skills, look for the training they need and connect with mentors.

The site is being launched in phases through June 2012. The first phase, features the “Career Matchmaker” and the “Career Investment Calculator.”

Partnering with public colleges and universities to provide a post-secondary education that is marketable and transferable. Snyder noted that the Center for Michigan concluded that colleges graduated 20 percent too few computer and math professionals, 14 percent too few health care professionals, and 3 percent too few engineers in 2009-2010.

“We need to stop overproducing in areas where there is little or no occupational demand and encourage students and educational institutions to invest in programs where the market is demanding a greater investment in talent,” Snyder said. “The current imbalance creates a population of young talent that cannot find work in Michigan, is saddled with debt and is ultimately forced to leave the state. This is an outcome we cannot afford.”…

“The simple truth is that tomorrow’s opportunities cannot be realized with yesterday’s skills,” he said. “The challenge we face is to align the aptitudes and career passions of job seekers with the current and evolving needs of employers. The solution is to reinvent the way in which we prepare our children for successful, fulfilling careers; reshape the manner in which Michiganders look for work; and redesign the way in which employers obtain the skills they need.”

Basically, Snyder is now asserting that Michigan’s high unemployment rate is primarily structural – it has nothing to do with Snyder’s jobs cuts and spending cuts in the state or with the present contractionary federal fiscal policy.  Instead he blames the unemployed – they have the wrong skills and the wrong education.  What’s particularly interesting here is that normally Snyder, like most Republican governors, is very pro “free market” and “private sector”.  But apparently the free market and the private sector haven’t performed well in the labor market according to Snyder.  Snyder seems to be saying we need government planning and direction to tell people what skills and education to get.  Apparently Snyder also doesn’t think private employment agencies or employers do a very good job of identifying trends or make connections.

I think the problem is not that Michiganders don’t know the right way to look for work.  There simply aren’t enough jobs at reasonable wages when they look.  It seems strange to hear calls for such fancy government economic planning coming from a so-called advocate of free markets and the private sector.  But when you’re desperate to justify spending cuts instead of stimulus, I guess that’s what you say.

Below Market Wages Belies Claims of Structural Unemployment

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Continuing what has turned into a short series on unemployment and structural unemployment in particular (see Monday and yesterday’s posts), let us look at some of the claims that structural unemployment.

First up, Brad Delong points us to Kevin Drum who tells the following story:

Kevin Drum:

Skilled Jobs Go Begging? Not Quite: The Wall Street Journal has a piece up this weekend about the difficulty that many companies are having hiring skilled workers in certain areas…. Here’s a description of some skilled job openings at Union Pacific railroad:

When the railroad had openings for diesel electricians earlier this year, it took [Ferrie] Bailey 10 hiring sessions to fill 24 jobs….Known as “installation technicians,” the workers are responsible for putting in and maintaining a sprawling network of cable, microwave relays and related equipment that enables the railroad to monitor 850 trains running daily along its 32,000 miles of track.

This doesn’t require a bachelor’s degree but demands technical skills gained either through an associates’ degree or four years of experience in electronics. And it is grueling work. Technicians have to climb 50-foot communications towers, clamber up utility poles and work outdoors through Wyoming winters and Kansas summers. They put in 10-hour days, in clusters of eight or ten days, and are routinely away from home more than half of each month.

….Standing at the front of the room, Ms. Bailey described the deal. As installation technicians, they would earn $21.64 an hour, or close to $48,000 a year for the railroad’s regular work schedule.

Then there’s this:

After a website job posting, Ms. Bailey initially drew 58 applicants. Of them, she deemed about two dozen sufficiently qualified so that she invited them to take a $25 aptitude test, at their own expense.

Let me get this straight. Union Pacific is supposedly desperate for candidates and can barely fill all their open positions. And yet, when they identify 24 qualified applicants, they aren’t even willing to maximize their hiring pool by ponying up $600 to make sure they all take the aptitude test. Then, later in the story, there’s this:

Ms. Bailey faced more stiff competition at a job fair the next day, because then she was up against several other employers looking for the same sort skilled people as she was. “Make $70,000 – $80,000 the first year with FULL BENEFITS,” read a sign at a booth right across from Ms. Bailey’s at the job fair, put on by the U.S. Army in Fort Carson, Colo., largely to help departing soldiers ease back to civilian life.

So here’s the story. Union Pacific is offering $48,000 per year for skilled, highly specialized, journeyman work that’s physically grueling and requires workers to be away from home about half of each month. The competition is offering 50% more, but not only is UP not willing to increase their starting wage, they’re so certain they can fill all their positions that they make qualified candidates pay for their own aptitude test. And despite all this, they filled all 24 of their positions in ten hiring sessions.

It doesn’t sound to me like there’s a huge shortage of qualified workers here. It sounds to me like Union Pacific is whining about the fact that it took them all of ten hiring sessions to fill their quota even though this is a really tough job and they aren’t paying market rates for workers. It’s as if they think that actually having to make a modest effort to attract job candidates is an inversion of the natural order or something. Speaking for myself, I think I’ll hold off on breaking out the violins.

Kevin has done an excellent job of taking the structural claims apart, but I’ll pile on anyway.  The claim that unemployment is structural is a claim that the labor market is segmented into different labor markets for jobs with different skills.  Further it asserts that there is no elasticity of supply between these different labor markets – in other words, if either have the skills or you don’t, there’s no on-the-job training or adaptable skills possible.  Finally, if unemployment is structural then we are saying that there’s a shortage (lack of supply) of workers in that skill category in that geographic area.  The Wall Street Journal is claiming that because Union Pacific cannot find enough willing sellers (workers) at the price (wage) Union Pacific is offering then there must be a shortage of qualified sellers.  Umm, how do I put this?  No.  Rather it’s evidence that the Union Pacific simply wants to pay below-market prices to labor.  That’s all.  Saying this is evidence of structural unemployment is like me claiming there’s a structural supply shortage of new automobiles because no dealer will sell me a new Porsche for $15,000.

 

Fixes for Unemployment Depend on Whether It’s Cyclical (It Is) or Structural (It Isn’t)

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Yesterday I recapped the November employment report. The employment picture remains grim.  The workers depression continues.

As my favorite graph from Calculated Risk shows here, regardless of what happens to the unemployment rate, our recovery from the jobs lost in the recession is incredibly slow.  At the pace we have been on for the last 2-3 years, we won’t recover the jobs lost in the recession until around 2018 – a full lost decade.

Thanks partly to the #OccupyWallStreet movement, these 14 million unemployed aren’t so invisible as they seemed last summer when the policy debates were all about debt and deficits.  Since denial of a problem has failed, folks who argue against any attempts by the government to stimulate the economy need a different pitch.

That revised pitch is that the unemployment problem is “structural”, not “cyclical”.  Now before I move on to show the problem is not structural, let me explain the difference. I’ve looked at structural vs. cyclical before here and here, but I’ll summarize.  In economist-talk, “unemployed” means you are part of the labor force but you don’t have a job.  To be part of the labor force, you must be actively looking (“willing and able”) to work.  Those numbers come from government surveys. Economists unofficially classify those unemployed workers according to why they don’t have a  job.  There’s four possibilities:

  1. Frictional – there’s a job for them, they simply haven’t been matched with it yet.
  2. Seasonal – the job will exist again next year when the season is right (think downhill ski instructors in July)
  3. Structural – empty jobs exist but the unemployed workers either don’t have the right skills or aren’t in the right location.  Train the workers or move them and unemployment disappears.
  4. Cyclical – there simply aren’t enough empty jobs for the number of unemployed workers.  If the GDP were larger and spending greater, then jobs would be created and the people put back to work.

For policy reasons we aren’t concerned with frictional or seasonal. Time cures those individual unemployment situations. But if we only had frictional or seasonal unemployment, our unemployment rate would be much, much lower – 4% or even lower.  Clearly we have either have a lot of structural or cyclical or both.

Which we have matters for policy reasons. If unemployment is structural, then we can effectively blame the unemployed for their fate.  They didn’t get the right skills. They chose to live in the wrong place. From a policy standpoint, the government might adopt policies that support re-training but that’s about it.   If, however, unemployment is cyclical, then government has plenty of room to reduce unemployment through stimulus programs, either effective tax cuts and/or increased government direct spending.

Brad Delong points us to David Wessel of The Wall Street Journal who tells us how and why today’s high unemployment is not structural. In other words, we could bring down the unemployment very dramatically and very quickly if we chose to.  Politicians in Washington simply choose not to do so. (bold emphases are mine)

DW:

Untangling Long-Term Unemployment: Herman Cain, the Republican presidential candidate, avoids carefully calibrated talking points. “If you don’t have a job and you’re not rich, blame yourself,” he said in a Wall Street Journal interview.

Beneath Mr. Cain’s blunt words lurks an economic hypothesis: that there’s nothing much government policy can do to bring unemployment down from today’s 9.1% rate…. [I]f the unemployed aren’t willing or able to fill jobs that muscular stimulus might produce then there’s little wisdom in borrowing more money or chancing inflation. We just have to suck it up.

But according to Fed governor Daniel Tarullo, a veteran of the Clinton White House and Obama presidential campaign who has spent the past few months consulting with Fed and other labor economists for a speech on the job market he is to deliver Thursday at Columbia University, there is little evidence that the bulk of today’s unemployed would still be unemployed if the economy were growing faster or that the bulk of today’s unemployment is, in the jargon of economists, “structural.”…

The Labor Department counts 14 million unemployed and 3.1 million job openings, or 4.6 jobless workers per job opening. Before the recession, the ratio was 1.5. If every opening were filled instantly, there would still be many unemployed.

Wages aren’t rising. “We don’t see rapid wage growth almost anywhere, which is what you would expect if firms were bidding up the wages of qualified workers and were unable to find qualified workers among the unemployed,” said Harvard University’s Lawrence Katz.

Unemployment is up across ages, occupations, industries and years of schooling. “We had a fast-advancing economic decline with layoffs and hiring freezes in a broad range of sectors of the economy. That is not consistent with an increase in structural unemployment being the big explanation,” Mr. Tarullo said…

 

November Employment and Revised 3rd Qtr 2011 GDP

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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.

UPDATE on President Obama’s Jobs Proposal – Better, But Still Weak

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First an update on a post I made a few days ago. When I commented last Monday on President Obama’s jobs proposal, I was less than excited. Having read more detail of the proposal, I should correct some statements I made.  I incorrectly left the impression that the payroll tax (Social Security/Medicare tax) cut that the President was proposing was only an extension of the present year cut that is scheduled to expire December 31, 2011.

In fact, the President is proposing not only a 1 year extension of this year’s temporary payroll tax cut, but an increase in the size of that tax cut.  Estimates are that for a median household income of near $50,000, it would result in a $1,500 reduction in payroll taxes compared to not having any payroll tax cut at all. However, the existing, this-year only, payroll tax cut had already cut payroll taxes by up to $500 per household.  So of the claimed $1,500 tax cut for next year for the median household, $500 is an extension of this year’s situation and  $1000 is new stimulus.  Today’s economy is weak even with the existing temporary $500 tax cut, so extending that cut won’t improve things. It will only prevent things from deteriorating further.  In my world, simply agreeing to not put on the brakes is not the same thing as actually hitting the accelerator.

But, the proposal does contain perhaps $1000 worth of tax cut stimulus to nearly all working households. That’s perhaps $150 billion of pure, new stimulus to economy.  It’s more than I estimated on Monday, so the plan will likely have some more stimulative effects than I thought.  But how much?  Let’s do a quick “back of the envelope” type calculation.  The proposal puts $150 billion in consumers’ hands that wouldn’t have been there without it.  But for this money to generate jobs, people have to spend the money.  Simply saving the money or paying down debt won’t cut it.  That improves individual household balance sheets but it doesn’t cause any firm out there to go “oh, more business! I need to hire people!”  In normal times like the 1960′s or 1970′s people would have spent 85-90% of the tax cut.  But these aren’t normal times. We live in high debt, high debt payments, and scared-of-the-future times.  More people save in these kind of times. (paying down debt is economically the same as savings – think of your debt as a negative balance in a savings account).  Let’s assume that people spend 2/3 of the money.  Both history and theory indicate that people save more of a tax cut when they know it’s temporary, but let’s be generous/optimistic and say 2/3 gets spent.  That’s $100 billion in new spending.

Now when it gets spent, it generates business demand and jobs.  Those people get paid and then they go spend the money again – the circular flow of money in the economy.  How much?  That’s a huge controversy in empirical macroeconomics.  This is the question of what the spending multiplier is.  Estimates vary widely, although often the studies are heavily biased by ideology to begin with.  Let’s be modestly optimistic and say the multiplier is 1.5 – 2.0.  This is a relatively high estimate given recent studies as far as I know, but let’s run with it.  That means that after some months, this initial $150 billion in tax cuts becomes $100 billion in new, initial spending which ultimately increases total spending by $150-$200 billion.  Total spending is another way of saying GDP.  This puts it in the range of 1.0% to 1.5% of GDP.

There’s a rule of thumb about the relationship between changes in GDP to changes in unemployment rate. It’s called Okun’s Law.  It’s not a law so much as a statistical regularity. There are many versions, but let’s use a real simple one: each 2 percentage point change in GDP equates to a 1 percentage point change in the unemployment rate.  So if we have GDP growth increasing by 1.5% points, we can count on unemployment rate going down by 0.75 to 1.0% points.

We’re currently over 9% unemployment rate and stuck there.  I’m not real excited about a proposal that aims to reduce the unemployment rate from over 9% to maybe 8%.  We know 4-5% unemployment is possible.  We did it in 2006 even with the slow-growth policies of the Bush administration.  We did better than that under Clinton. In the 1960′s we were even below 4%.   Why are we settling for tepid responses and setting goals of only getting to 8% unemployment and then calling this “bold”?  I don’t know.  But then maybe I’m just a grumpy old man.

Jobs And Unemployment Report For August 2011 – More Bad News, More Signs Economy Is Stalled, No Net New Jobs

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This being the first Friday of the month, the latest U.S. employment report was released this morning.  Not good news.  In a nutshell:  no new net jobs created and the unemployment rate holds steady at 9.1%. It disappointed even the weak expectations of forecasters. The news continues to show an economy that has stalled without recovering and is in danger of relapsing to recession. CalculatedRiskBlog does it’s usual exemplary reporting of the latest monthly jobs and unemployment report:

From the BLS:

Nonfarm payroll employment was unchanged (0) in August, and the unemployment rate held at 9.1 percent, the U.S. Bureau of Labor Statistics reported today. Employment in most major industries changed little over the month. Health care continued to add jobs, and a decline in information employment reflected a strike. Government employment continued to trend down, despite the return of workers from a partial government shutdown in Minnesota.
…
The change in total nonfarm payroll employment for June was revised from
+46,000 to +20,000, and the change for July was revised from +117,000 to +85,000.

The following graph shows the employment population ratio, the participation rate, and the unemployment rate.

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

The unemployment rate was unchanged at 9.1% (red line).

When looking at the detailed numbers we find that the private sector created a net total of 17,000 new jobs.  Unfortunately this was entirely offset by government reducing employment by 17,000 jobs.  I suppose for Tea Party and Conservative types who blame government for most all economic ills and who fantasize about a society with no government, this is moving towards their ideal economy.  Somehow, I don’t see it that way.

Further details behind the numbers show that the number of private sector jobs was likely understated by 45,000 since during the survey week the 45,000 Verizon workers who were on strike were not counted as having jobs.  Those jobs will return in the report on September, assuming Verizon doesn’t lay off some of them.

Overall, the picture for recovering from the Great Recession has been turning bleaker.  We were never on a very robust path for recovery at all during the last 2 years.  However, now what modest slow momentum we had towards job recovery has stalled and job recovery has essentially flatlined.  At the current rate, we never recover the jobs lost in 2008-09 until at least a decade has passed, if that.  This is definitely starting to look like depression territory, not “recession”.  The following graph, also from Calculated Risk,


Percent Job Losses During Recessions

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

The red line is moving sideways – and I’ll need to expand the graph soon.

The current employment recession is by far the worst recession since WWII in percentage terms, and 2nd worst in terms of the unemploymentrate (only the early ’80s recession with a peak of 10.8 percent was worse).

The details in the report also show more depressing (sorry for the pun) news:

  • U-6, an alternate unemployment rate measure that includes both traditional unemployed (no job but looking), part-time workers who want but can’t full-time hours, and some other marginally-attached workers has risen to 16.2%, a new high for this year.
  • There are 13.967 million Americans unemployed now.
  • Of those unemployed workers, 6.0 million have been without a job and looking for work for over 6 months.
  • The previous reported totals for both June and July were revised downward.

 

Unemployment Benefits Cut Will Worsen Things.

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CalculatedRiskBlog reports:

Here is a depressing report from the National Employment Law Project: States Made Unprecedented Cuts to Unemployment Insurance in 2011

NELP’s new analysis shows that in 2011, six states cut the maximum number of weeks that jobless workers can receive unemployment insurance to less than 26 weeks—a threshold that had served as a standard for all 50 states for more than half a century, until this year. Michigan, Missouri, and South Carolina cut their available weeks down to 20; Arkansas and Illinois cut down to 25; and Florida cut to between 12 and 23 weeks, depending on the state’s unemployment rate. Double-digit unemployment in Michigan, South Carolina, and Florida did not discourage lawmakers there from making the cuts.

… Indiana changed the formula it uses to calculate weekly benefit amounts so that the average unemployment check will drop from $283 to $220 a week.

Ouch.
This makes things worse.  It increases the risk of  another drop in GDP.  See, when people who have been getting unemployment benefits have their benefits cut, they cut their spending.  That means some businesses are selling less stuff. Those businesses in turn layoff more workers, or at best case avoid hiring new ones.
As for the argument that people who get unemployment benefits avoid working just to get the benefits, there’s two responses.  First, even by the micro-economic models and theories so beloved by conservatives, it’s totally irrational to do so.  I mean, do you really believe people pass up opportunities to have $48,000 a year or more (median household income) in order to collect $8,000 (maximum unemployment benefits for 26 weeks)?  No, it’s totally irrational.  Second, cutting unemployment benefits to try to get people to have jobs is essentially punishing the unemployed. If there are no jobs to be had, it makes no difference how much we punish them.  They can’t get a job.  The beatings will continue until morale improves.