A Journey of 100 Months Starts With the First Month

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 Federal Government HAS Been Cutting Spending – And That’s A Major Problem

One of the my major frustrations as a blogger and as a follower of economic news is the way in which misinformation and falsehoods get repeatedly passed around as they were facts.  For example, one common meme that we hear a lot is that the  government, especially under Obama, has engaged in a massive spending spree.  The idea is pushed that government is growing out of control.  This idea has been pushed heavily by Republicans and Tea Partiers. It is often combined with the conclusion that “stimulus doesn’t work”.  The unfortunate part is that this idea of a government spending spree is completely untrue!

Look at this graph from the FRED database at the stlouisfed.org.  This shows the annual change in real dollars in government consumption and investment expenditures.  In other words, it shows how additional spending was added each year by all layers of government in the U.S.  During the recession, 2008 and 2009, governments were spending more.  They were spending approximately $60 billion a year more.  But notice that once the “official recession” ended in 2009 (the end of the shaded bars) governments began cutting back.  By late 2010 government has cut back so much that it is now spending less each year than the last year.

It’s no coincidence that this is the same exact timing when two things happened: the Republicans asserted control over the House of Representatives and began pushing to cutting spending, and the economy began to slow again and the recovery stalled. These two phenomena are related.  Cutting government spending when there is high unemployment and a slow economy is a sure-fire recipe for an even slower economy and even higher unemployment.

A critical thinking reader might ask “how can this be true (that government spending is lower than a year ago) if the federal government deficit is so large?”.   Well there’s two explanations.  The first is that the federal government deficit in the economy is largely due to the slow down in tax collections and the tax cuts that delivered little economic stimulus since they were saved, not spent.  Second, government in the U.S. is more than Washington D.C. There’s as much state and local government as there is national government, particularly when it comes to spending (as opposed to transfer payments).  State and local governments are cutting back and cutting back big time.  The 2009 “stimulus” bill of the national government actually had a large component that involved the national government transferring money to states and locals so they wouldn’t have to cut as much.  State and local governments cannot run deficits the way the national government can (they don’t have central banks).  That’s over now.  Now state and local governments are cutting big time – over 345,000 jobs lost at the state and local government level in just the last 12 months.  Of those, the majority are teachers in education.

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

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.

 

The Mess We’re In – Trillions of Dollars of Missing GDP

According to the Congressional Budget Office (CBO) the U.S. has a cumulative output gap of $2.8 trillion so far since the recession began.  That’s trillion with a TR, as in a million millions.  This is the core problem in the U.S. today and for the next couple years.  The recession saw the economy shrink and we simply haven’t aren’t getting back to where we were, let alone to where we could be.

Two of the most basic concepts in economics are the idea of opportunity costs and the technique of the counter-factual.   Both play a part in this analysis.  First, opportunity cost is the idea of the real cost of something or some choice isn’t the money expended but rather what you could have done but didn’t/can’t because of your choice.  Analyzing opportunity costs involves using the other idea, the technique of the counterfactual.  A counterfactual is a hypothetical outcome that could have been or even would have been, but didn’t happen because of the choices made.  People use counterfactuals often, they just don’t call them such.  For example, if you imagine decide not to go to a party and you choose to stay home one night, you might imagine what would have happened if you had indeed gone to the party.  That’s a counterfactual.  It could be good and attractive (you would have had fun at the party and met someone very interesting) or it good be negative (you would have gotten drunk, tried to drive home, and got arrested for DUI).  Comparing actual events to counterfactuals is integral to economic analysis.

In the case of macroeconomics, we often use a counterfactual called “potential GDP”.  Potential real GDP is the amount of real GDP that would have been produced IF we had made policy choices that produced full-employment.  In practice potential real GDP is often estimated by a combination of extending the long-run trend line of GDP from previous decades and of calculating output per worker and multiplying times the number of potential workers.  In this case, the additional workers include not only those presently recorded as “unemployed” but also those workers or part of the population that used to work but are no longer working or classified as unemployed.  It’s a fairly involved statistical undertaking, but fortunately we have the CBO to do the heavy lifting for us.  The numbers and graphs are accessible via the wonderful FRED database at the St.Louis Federal Reserve bank.  The data series is called GDPPOT.

The CBO released it’s latest long-run estimates for GDP.  Here’s a graph comparing potential real GDP to actual Real GDP. It shows actual numbers for 2008- first half of 2011.  From then on it’s the CBO’s best estimates of future actual real GDP given present government policies.

Yeah, that’s an ugly gap between those two lines.  That’s the opportunity cost of lost potential.  We could have been $2.8 trillion dollars better off over the last 3 years (cumulative, not annual). We could have had tens of millions more working. But we didn’t.  More disturbing is that we will continue to underperform for many years.  The CBO doesn’t project getting back to full-employment and our achieving our potential output until the end of 2015 – four years from now.

But now here’s the catch.  The CBO estimates and analysis don’t offer any rationale or reason why they suddenly forecast a recovery in 2015.  Basically they are saying that surely something will happen in 2015 to bring recovery, but they can’t point to any policies or dynamics that will cause such a recovery.

My own sense is that this will take a lot longer to recover given the government’s current focus on debt, deficits, and cutting spending.  It’s the wrong policy mix to achieve full employment given this kind of output gap.  We will eventually get back to full employment – if nothing else, sooner or later people die off and equipment rusts away.  But we’re in the middle of an ongoing depression and current policies won’t change that.  (note I said depression, not a “Great depression”)

 

The Economy Is Stalling – Employment Report for May 2011

First the facts and then my comments.  Calculated Risk Blog reports from the BLS:

From the BLS:

Nonfarm payroll employment changed little (+54,000) in May, and the unemployment rate was essentially unchanged at 9.1 percent, the U.S. Bureau of Labor Statistics reported today. Job gains continued in professional and business services, health care, and mining. Employment levels in other major private-sector industries were little changed, and local government employment continued to decline.

The change in total nonfarm payroll employmentfor March was revised from +221,000 to +194,000, and the change for April was revised from +244,000 to +232,000.

The distressing news here isn’t so much the rise in unemployment rate from 8.9% to 9.1%.  Given the margin of error in measurement*, the unemployment rate has essentially been 9% for the last few months.  The distressing part is three fold.  First, the number of net new jobs created was only 54,000.  We need at least 150,000 and closer to 180,000 net new jobs each month to keep pace with population growth.  54,000 is simply not enough.  What’s worse, it’s a very significant drop from the March and April levels with no obvious explanation other than the economy overall is seriously slowing down.

The second distressing item is the revisions to the April and March numbers.  Normally previous months’ numbers are revised as the Bureau gets more and better data.  But revisions typically aren’t very large and may be either up or down.  But to have 12% and 4% downward revisions to the previous two months means the mild optimism folks were expressing two months ago was misplaced.

Finally, the most distressing part news, but totally unsurprising, is that local government employment (think teachers and police) continues to decline and be a significant drag on the economy as state, local, and the national government continue to think they can cut their way to prosperity.  They can’t.  There’s no history or empirical evidence that shows drastically cutting government spending in the middle of a significant slump will bring prosperity.  Quite the contrary, we have extensive theory and evidence that says cutting government spending in the middle of a slump will make the slump worse, make unemployment higher, and actually increase the government’s deficit.

So just how bad is this continuing failure to recover from the Great Recession of 2007-09?  Again Calculated Risk obliges with a great graphic.  This graph compares each official recession since the end of World War II.  It plots the percentage decline in total employment (the loss of jobs!) by month and then shows how long it took to recover employment.  At the rate we are “recovering” (it’s not really a recovery!), it will be many years before we again get back to the employment levels we had when this disaster began to unfold in 2007.  Without major changes in policy direction, we are definitely facing a lost decade for the U.S.

There are a total of 13.9 million Americans unemployed and 6.2 million have been unemployed for more than 6 months. Very grim numbers.

Overall this was a weak report and reminds us that unemployment and underemployment are critical problems in the U.S.

Percent Job Losses During Recessions

Percent Job Losses During RecessionsClick on graph for larger image in graph gallery.

This graph shows the job losses from the start of the employment recession, in percentage terms – this time aligned at the start of the recession. …

In terms of lost payroll jobs, the 2007 recession is by far the worst since WWII.

* for a more detailed explanation of how to read unemployment rate and employment numbers, see these four posts on the Employment Muddle Part I, Part II, Part III, Part IV.

So Where Are We? Part I

A new semester is beginning, and with it get start another dialogue on the macro-economy with new group of students.  So to start the conversation I’m going to make a few posts that take a look at just where are we in the U.S. economy.

This first post is going to look at GDP and the growth trend (or lack thereof).  For my first expert witness I call Menzie Chinn of Econbrowser and the University of Wisconsin.  In a post last Monday (source here), he observes just how much the U.S. economy has lost as a result of the financial crisis and resulting Great Recession of 2007-2010.

In our forthcoming book [5], Jeffry Frieden and I tried to tabulate the likely costs of lost output associated with the Great Recession that followed the financial crisis driven by financial deregulation, lax fiscal and monetary policy, and ample capital supplies abroad. Using the January 2010 CBO projections, we calculated the cumulative GDP loss (relative to potential GDP) from 2007Q4-2014Q1 at 3.53 trillion Ch.2005$, 11349 per person (Ch.2005$), or about $12604 in current dollars).

Macroeconomic conditions, as well as the projections of potential output, have changed somewhat since I undertook that calculation earlier this year, so I decided to update the calculation. I present the estimated cumulative loss from 2008Q1-2010Q3, as well as the cumulative loss from 2010Q4-2011Q4.

cumloss1.gif
Figure 1: GDP, in bn Ch.2005$, 2010Q3 3rd release (blue), mean forecasted GDP from WSJ January 2011 survey (red), potential GDP as projected by CBO. Light green figures are cumulative output gap figures for indicated periods. NBER defined recession dates shaded gray. Sources: BEA, GDP 2010Q3 3rd release, WSJ January 2011 survey, CBO, Budget and Economic Outlook: An Update (August 2010) – additional data on potential GDP, NBER, and author’s calculations.

Fears of overheating, when counterbalanced against the costs of lost output, seem somewhat misplaced in this context. [

Menzie (one of the premier academic econometricians around), projects that by 2014 the cumulative lost output in the U.S. from the crisis-recession (and the weak recovery policies following it) will be over $3.5 trillion, or over $12,000 per person in the U.S.

As the graph also shows, our recovery is weak and nearly non-existent.  Instead of “healing” and returning to health (long-term trend) as the economy did after recessions during the long 1948-2000 period, we have effectively said good-bye to a large chunk of the U.S. economy. What’s left is returning to normal growth rates, but we are not really recovering what was idled.  This is not good.

It’s Over. Economists are Speechless.

I’m a few days late with this, but much of the mainstream media have covered it already.  The recession is over.  Officially.  We are now in recovery officially.  Actually we’ve been in recovery for over a year now, ever since June 2009.  The official pronouncement is here. Of course this has led to much confusion and contention.  Many people, rightly feeling the pain of nearly 10% unemployment, slow sales, foreclosures, weakening incomes, etc. are wondering “In whose universe is the recession over? I’m still hurting!”

What this all points out, though, is confusion over terms.  Or, more precisely, the lack of vocabulary among economists.  First, the whole reason for dating recessions “officially” is so that economic research amongst different economists can go on without endless confusion and arguments about the timing of some historical decline in GDP.  In this case, the practice of “officially dating recessions” might well be a bust.  It’s hard to tell.  But in the larger public discussion, the current confusion of “how can the recession be over if I still don’t have my job back and it still looks grim?” actually reveals two serious flaws in economic theory/terminology.

First is the fact that economists have not defined the term recovery adequately.  Basically, there’s a definition for recession, but not for recovery.  Instead, a recovery is happening anytime a recession isn’t happening.  So, since the period since June 2009 doesn’t really seem to fit the definition of recession (no broad-based decline in aggregate measures of the economy such as output, employment, and production), we are therefore, by default, declared to be recovering.  Except of course that we aren’t really recovering. We’re going nowhere. In aggregate we stopped declining in summer 2009, but we haven’t started really growing in a broad-based way.  We certainly haven’t come anywhere near re-couping what we lost.  And that brings us to the second terminological problem.  Economists and theory are based on the assumption that an economy is either growing significantly or declining significantly.  We have “recovery” for when we’re growing, getting better, and moving upward.  We have “recession” for when things are declining, getting worse, and moving down.  We don’t have a word, indeed we barely have a concept, for an economy that’s parked. Stationary. Going nowhere. That’s why we’re speechless.  The economy has fallen and it can’t get up. But we don’t know how to say that.

BTW:  Want to know the official dates of previous recessions?  Check it out here.