Beat the Press is Dean Baker's commentary on economic reporting. Dean Baker is co-director of the Center for Economic and Policy Research (CEPR).

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For some reason the NYT wants to scare its readers about Japan's economic situation, warning that the country faces a "demographic squeeze" because its population is declining. Simple arithmetic shows that this is nonsense.

The article tells readers that the share of the population over 65 is projected to rise from 25 percent in 2010 to 40 percent in 2050. Given that roughly 20 percent of the population is under age 20, this implies that the current ratio of people ages 20-65 to people over age 65 is approximately 2.2 to 1. Assuming the under 20 portion falls to 15 percent of the population by 2050, in that year the ratio will be 1.4 to 1.

If productivity growth averages just 1.5 percent annually (it has been averaging more than 2.0 percent in the U.S. over the last 15 years), then output per worker will be more than 80 percent higher in 2050 than it is today. If the average retiree currently consumes 70 percent as much as a prime age worker, then this increase in productivity would allow retirees in 2050 to enjoy a 50 percent rise in living standards above current levels, while still leaving workers almost 30 percent better off.

The situation will be even better insofar as more workers are pulled into the labor force. As this article notes, because of weak demand, many younger workers cannot find jobs. If Japan were facing a "demographic squeeze" then young workers will have no problem finding jobs since there will be a shortage of workers. Also, because of the longevity and relative good health of many older Japanese, it is likely that many people will opt to continue working past age 65.

The decline in population is in fact a benefit in many respects for Japan. It is a very crowded island with expensive land prices. A falling population will reduce the pressure on land making housing more affordable. It will also reduce congestion in cities. In addition, the decline in population will make it easier for Japan to meet commitments for reducing greenhouse gas emissions, if countries are ever held responsible for the contributions to global warming.

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USA Today ran a piece warning of the projected rise in Medicare costs associated with the baby boom cohorts turning 65, the age of eligibility. While the article told readers that the projected increase in Medicare costs will eventually exceed the program's revenues, it would have been worth mentioning that Medicare would be easily affordable if the U.S. did not pay more than twice as much per person for health care as other countries.

There are simple ways in which the United States could benefit from the lower cost of health care in other countries but the protectionists in Congress refuse to consider such options. Unfortunately this article relied exclusively on protectionists as sources.

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It would be such a great thing if the people who made and wrote about economic policy learned third grade arithmetic. Then they would be able to recognize little things like $8 trillion housing bubbles before they reach such enormous sizes where their collapse can wreck the economy.

The latest person flaunting his ignorance in this area is the usually sensible Ryan Avent who tells us that, "I find the arguments for another big drop in national prices to be rather implausible."

Avent gets many things wrong in making his case. Among the biggest is his assertion that price to rent ratios are about normal. In fact rents are roughly at the same level they were at in the mid-90s in real terms, while real house prices are still close to 30 percent above their mid-90s level. This basic measure suggests that prices still have considerable room to fall.

Avent's effort to explain the price decline reported in recent months' data on short-term economic fluctuations makes no sense. House prices have never responded in any significant way to short-term economic conditions. House prices have never fallen in the past because of 3-4 months of weak job growth or soared because of a similar run of strong job reports. In other words there is zero reason to believe that house prices would be moved in any noticeable way by 1-2 good or bad quarters.

If you look at the Case-Shiller data there is a very simple story. The first time buyers credit supported the market first and foremost by pushing up prices in the bottom tier. This support disappeared when the credit disappeared. Prices in the bottom tier have been plummeting in the few months of post-credit data that we have available. In the four available months since June, prices in the bottom tier fell by 6.4 percent in Seattle, 8.0 percent in Portland, 12.5 percent in Minneapolis, and 23.0 percent in Atlanta.

The logic is that the credit most immediately affects the bottom tier. (This is where first time buyers mostly buy.) It will soon feed over into the higher end homes, since the people buying these homes are selling homes in the bottom tier.

In terms of the fundamentals, the basic story is that we continue to have a record supply of vacant units. It was an astounding failure of the economics profession that almost no one in a prominent position was able to see an enormous and dangerous development like the housing bubble. It shows the incredible lack of controls within the profession that no one seems to have paid any career consequence for this failure.

As economic theory would predict,  when there are no negative consequences for poor performance, we see more of it. That appears to be the case as the people who write and talk about the economy still don't seem to have a clue about the housing bubble and its impact on the economy.

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The NYT told readers that the November 2010 index for pending home sales was:

"5 percent lower than November 2009 when buyers were scrambling to close purchases to qualify for the first federal tax credit."

Actually, the credit that expired in November of 2009 was based on completed sales. It typically takes 6-8 weeks from when a home is put under contract until the sale is completed. As a result, no one who signed a contract in November of 2009 could have reasonably expected to complete the sale in time to qualify for the tax credit. The actual surge in contracts was in September and October. Pending homes sales in November of 2009 were 18 percent below the October level.

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Robert Samuelson is once again calling for cuts to Social Security and Medicare, ostensibly in the name of generational fairness. Samuelson makes the now common argument that a hugely disproportionate share of government spending goes to these programs that primarily serve the elderly. Of course, using Samuelson logic we should also complain that a hugely disproportionate share of government expenditures go the very wealthy.

The reason that the wealthy get a disproportionate share of government expenditures is that they bought government bonds which pay interest. The reason that the elderly get a disproportionate share of government benefits is that they paid Social Security taxes and Medicare taxes that were intended to support these programs.

Samuelson goes on to complain that Social Security has become a "middle-age retirement system," citing Eugene Steuerle of the Urban Institute. Samuelson apparently is not familiar with data on life expectancy that shows that workers in the bottom half of the wage distribution have seen relatively small gains in longevity over the last three decades. He is apparently also unfamiliar with Steurele's calculations on the rate of return that retirees get on their Social Security benefits. For many middle income retirees in the baby boom cohorts it will be less than 1.0 percent and in some cases less than zero, according to Steuerle.

What is remarkable about Samuelson's piece is that there is absolutely zero effort to consider any real issues of generational equity in a piece that is ostensibly devoted to the topic. For example, there is no discussion of the fact that the current generation of near retirees experienced an unprecedented period of wage stagnation over their working lifetime. The median hourly wage in 2010 is less than 10 percent higher than it was in 1973. 

By contrast, the Social Security trustees project that average hourly wages will rise by more than 40 percent over the next three decades. While it is possible that income inequality will continue to increase so that these gains again go overwhelmingly to the top, there is no precedent in U.S. history for the level of inequality that this would imply.

It is also striking that Samuelson never mentions health care costs in discussing the enormous burden created by Social Security and Medicare. If per person health care costs were the same in the United States as in any of the countries that enjoy longer life expectancies, we would be facing huge long-run budget surpluses, not deficits. In other words, the problem is not that our benefits are too generous but rather that we pay too much for them.

There are simple mechanisms that would help to restrain health care costs in the United States. For example, supporters of the free market would suggest allowing retirees to buy into the more efficient health care systems elsewhere, with the U.S. government, the host government, and the beneficiaries dividing the savings.

We could also develop more efficient mechanisms for financing prescription drug research. This could save hundreds of billions of dollars a year on prescription drug costs, in addition to eliminating the incentive for drug companies to lie about the safety and effectiveness of their drugs.

However, raising these issues involves confronting powerful interest groups like insurance companies, drug companies, and the doctors lobbies. Robert Samuelson and the rest of the crew at the Washington Post (a.k.a. Fox on 15th) doesn't like to get these folks angry, they would rather just beat up the elderly.

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The NYT has a lengthy piece that notes the sharp rise in inequality in the last three decades due to the "superstar effect." This is attributed in part to the fact that technology allows a top athlete or entertainer to be seen by far more people in 2010 than in 1960.

It is important to recognize that it was not technology alone that allowed superstars to profit from this change. The U.S. government has gone to great lengths to strengthen the reach and enforcement of copyright law, in many cases leading to serious restrictions on individual behavior. For example, it was briefly illegal to sell digital recorders because they were not encoded to protect copyrighted material.

This fact it is important because it means that policy decisions, not just technology, was central to the rise in inequality. This is also the case with the soaring pay of top corporate executives. This is attributed to their growing responsibilities as the size of the largest corporations increases. However, companies in Europe and Japan expanded as well without a corresponding increase in CEO pay. This suggests that the difference in compensation is more likely attributable to differences in laws and norms surrounding corporate governance than any increase in the value of effective leadership to corporate profitability.

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How many state or local jurisdictions have lost 40 percent of their population in the last four decades and have their top elected officials convicted of corruption? While this may fit the bill in some places, it is not typical for the country as a whole. Populations are continuing to rise in most areas and the number of elected officials who are convicted for corruption is still a relatively small minority. 

This might lead one to wonder why both the New York Times and Wall Street Journal were so anxious to tell readers that the city of Prichard, Alabama foretells the future for their public employee pension plans. The city has stopped making pension payments to 40 retired workers who have earned them.

According to the articles, it appears that the pension funds have long been drained, at least partly through corruption. Due to its depressed economy the city is now finding it difficult to make ends meet.

It is worth noting that the pension obligations do not appear to be quite the crushing burdens implied in these articles. The NYT reports that the average pension is $12,000 a year. This means that if the full payment were made out of current tax revenue it would imply a tax of approximately $18 per capita on the town's 27,000 residents. This is less than 0.14 of the city's per capita income.

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The Wall Street Journal told readers today that "pensions push property taxes higher," in a headline of a news article. The article notes that large pension shortfalls, together with a loss of other tax revenue, are causing many local and county governments to raise property taxes.

Of course the reason that pensions face large shortfalls is that economists like Alan Greenspan and Ben Bernanke were not able to see the $8 trillion housing bubble, the collapse of which wrecked the economy. These pension funds also suffered because they listened to highly paid investment advisers who had no idea what they were doing. It is worth noting that almost all of these highly paid investment advisers still hold their high paying jobs.

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That was the topic of its lead editorial which complained that China did not respect U.S. style intellectual property. Patents and copyrights are government granted monopolies that allow items like prescription drugs to sell at prices that can be several thousand percent above their free market price. This leads to the same sorts of economic distortions that would be predicted from tariffs of this size. As a result of this protection, software and recorded music and movies, which would otherwise be available at no cost over the Internet, can instead command high prices.

Given the enormous costs associated with patent and copyright protection it is not surprising that China would not be anxious to impose these costs on its economy. There are more efficient mechanisms for financing research in prescription drugs and creative and artistic work. It is understandable that China will only agree to accept these costs that it will demand something important in exchange, for example the option to maintain a seriously over-valued exchange rate that gives its goods a huge advantage in international trade. In effect, a policy that imposes U.S. style intellectual property rules on China is redistributing income from manufacturing workers and non-college educated workers (who disproportionately work in manufacturing) to companies like Pfizer and Microsoft and their highly educated workers.

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The anchor introduced a Morning Edition segment on ethanol subsidies by referring to the "crushing deficit." Is this bit of editorializing now official NPR policy? If NPR needs an adjective for deficits right now, a more accurate one would be "essential," since demand and therefore GDP would plummet if the country were to balance its budget. Add a comment

The news stories are coming out on the Commerce Department's release of revised data on 3rd quarter GDP and it seems that almost everyone has missed the story. The headlines of the articles are telling us that GDP growth was revised up slightly from 2.5 percent to 2.6 percent. While that may sound like at least somewhat positive news a more careful review of the data shows the opposite.

While the rate of GDP growth was revised up, the rate of final demand growth was revised down. Final demand, which is GDP excluding inventory accumulations, grew at just a 0.9 percent annual rate in the 3rd quarter, the same as its growth rate in the second quarter. The reason that GDP growth was revised upward was a more rapid reported growth in inventories.

The reported rate of inventory accumulation in the 3rd quarter was $121.4 billion (in 2005 dollars), the fastest pace ever. This added more than 1.6 percentage points to the rate of GDP growth in the quarter.

It is very unlikely that this pace of inventory growth will be sustained. Suppose that in the 4th quarter the rate of accumulation falls back to the pace of the second quarter. This would mean that inventories would subtract 1.6 percentage points from the growth rate. If final demand growth is 2.5 percent in the quarter (higher than it has been in any quarter of the recovery so far), then GDP growth would be just 0.9 percent.

In short, because the upward revision to GDP growth was based on more rapid accumulation of inventories it should not be viewed as a positive for the economy's growth prospects.

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Okay, I was going to ignore this one. After all, it is in an opinion piece in the Washington Post, so a lot of leeway is granted, but give me a break.

This sentence is given as an example of "obfuscation through language distortion," in a column by Kathleen Parker. She goes on to say:

"Pardon? How does money in someone's own pocket add to another's debt?"

Umm, is this one really hard? I owe my bank $200,000 for my mortgage. I don't pay the money. Is it hard to understand that my decision to keep the $200,000 in my own pocket adds to the bank's financial woes?

More practically, the deficit is the difference between spending and tax collections. Anything that reduces tax collections adds to the deficit just as anything that increases spending adds to the deficit. We all may not like certain taxes just as we don't like some areas of spending, but that doesn't change this accounting identity.

One would hope that accounting identities held true even on the opinion pages of the Washington Post, but apparently not.

 

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Way back in the last decade the United States had a huge housing bubble. The Wall Street banks made money hand over fist making and selling the loans that fueled this bubble. The economic policymakers and regulators who were supposed to prevent the growth of such dangerous bubbles, people with names like Greenspan, Bernanke, Paulson, and Geithner, assured the public that everything was just fine. When they were proved horribly wrong, they then congratulated themselves for avoiding a second Great Depression.

This background is important to any story on the financial problems facing state and local governments, since it is 90 percent of the picture. It also would be good if the public remembered this history, since many of the people who either profited from the bubble or failed to take measures to counter its growth are now at the forefront in demanding that state and local governments sharply reduce their budgets and that public sector employees take big cuts in pay and benefits.

On Sunday night, the CBS News show 60 Minutes joined this campaign. The piece begins by telling viewers that:

"in the two years, since the 'great recession' wrecked their economies and shriveled their income, the states have collectively spent nearly a half a trillion dollars more than they collected in taxes."

That's not what the data show. If we look to the Commerce Department's National Income and Product Accounts we find that in total state and local government spent $45 billion more than they took in (line 27). CBS does not give a source for the "nearly half a trillion" number.

It is also worth noting that any shortfall is due almost entirely to the recession caused by the collapse of the housing bubble. If revenue had increased in step with normal growth (2.4 percent real growth, plus inflation), state and local governments would have had an additional $290 billion since the start of the downturn.

Another way to think about the size of the state and local government shortfall is that we could envision the Federal government giving state and local governments trillions of dollars in loans at below market interest rates as they did with the Wall Street banks through TARP and the various Fed special lending facilities. If the state and local governments got $3 trillion in loans at rates that were 4 percentage points below the market rate, and then they relent this money at market rates, it would largely make up for the shortfall in revenue they have faced. (It would provide them with $120 billion a year in additional revenue.)

When the governments repaid their loans, plus the below market interest, the Treasury and the Fed would then get all their money back, plus a small premium. This would allow people like Treasury Secretary Timothy Geithner and the Washington Post editorial board to declare that they made a profit, just as they have with the TARP. This would be one possible solution to the fiscal problems faced by these governments.

The piece also told viewers at the onset:

"There is also a trillion dollar hole in their public pension funds."

In fact, this shortfall is overwhelmingly attributable to the plunge in the stock market that followed in the wake of the collapse of the housing bubble. According to Federal Reserve Board data (Table L.119) if pension fund assets had increased at just a 5 percent nominal rate since the 4th quarter of 2007, they would have $935 billion more money at the end of the third quarter than is currently reported.

While some of us did try to warn of the risks that the housing bubble posed to the economy and financial markets (we were not featured on 60 Minutes, which was busy touting deficit stories even then), the primary fault of state and local officials was listening to Wall Street and the mainstream of the economics profession, not excessive pensions.

It would also be useful to provide a basis for assessing this "trillion dollar hole" since it is virtually certain that almost none of CBS's viewers regularly deal with such numbers. The discounted value of GDP will be more than $400 trillion over the next 30 years (roughly the period in which this shortfall will have to be addressed). This implies that additional revenue equal to 0.25 percent of GDP over this period should be sufficient to cover this projected shortfall. By comparison, the increase in annual defense spending associated with the wars in Iraq and Afghanistan is approximately 1.8 percent of GDP, more than 7 times larger than amount of revenue needed to cover the projected pension shortfall.

Another point of comparison is the revenue that could potentially be raised from a financial speculation tax. Such a tax could easily raise more than 1.0 percent of GDP, four times the projected shortfall, with the incidence being born almost entirely by Wall Street banks and speculators.

The segment also includes assertions that imply state and local workers are overpaid. In fact, after adjusting for education and experience state and local workers earn slightly less than their private sector counterparts. Public sector workers do get higher pensions on average than workers in the private sector, but this does not offset the pay difference. It is also important to remember that many public sector workers are not covered by Social Security so that their pension is virtually all of their retirement income.

Interestingly, New Jersey Governor Chris Christie is presented as a heroic visionary in this story because of his willingness to make cuts in areas like public and education and to force workers to take pay cuts. In one instance he is shown telling teachers complaining about cuts in their benefits that they should get another job if they are unhappy with their pay.

While such an approach may be an effective short-term strategy it is absolutely disastrous in the long-term. At any point in time it will be difficult for long-time workers to leave their jobs with the state and find comparable employment elsewhere, especially in the midst of the worst downturn in 70 years. However, as new workers come into the labor force, lower pay and worse benefits in the public sector will make these jobs less attractive. This means that New Jersey's schools and other public agencies will have less choice in selecting their workforce, which is likely to lead to a deterioration in the quality of education and other public services. This is not obviously far-sighted thinking.

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USA Today touted the portion of the recent tax package that allowed for 100 percent expensing of new investment. The piece neglected to mention the fact that the stimulus package already allowed for 50 percent expensing. This is likely to reduce the impact of going to 100 percent expensing. Add a comment
That doesn't seem quite right. But the NYT reported that Iran's president, Mahmoud Ahmadinejad, claimed that the country spends $114 billion a year on energy subsides. This would imply that the country spends almost one-third of its GDP on energy subsidies. That doesn't seem plausible. Add a comment

The NYT showed that there were still good paying jobs for unskilled workers in the economics profession by citing two economists who touted the growth in temporary employment as evidence for the growth of structural unemployment in the economy. Structural unemployment results when there is a mismatch between skills and the available jobs.

Economists with skills would have noted that temporary employment plummeted in the downturn and is only now beginning to recover lost ground. After the recent gains in hiring in temporary employment the number of jobs in the sector is still down by almost 20 percent from its pre-recession level. In the real world, this is not evidence of structural unemployment.

 

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The Post has a nice piece examining the situation of a group of construction workers in the Las Vegas area one year after a major project on which they had worked was completed. The piece does a good job of examining the difficulty that these workers are facing finding new jobs without leaping to the unsupported claim that the bulk of the unemployment that the economy is now experiencing is structural (as opposed to cyclical) in nature. Add a comment

The NYT reported that inflation in China is higher than its leadership's targets. It might have been worth noting that a higher valued currency helps to lower inflation.

This is for two reasons. First, insofar as inflation is driven by excess demand, a higher valued currency will reduce exports (it makes them more expensive for foreigners) and thereby bring demand more in line with potential output.

A higher valued currency will also make imported items, like food and oil, less expensive. This will directly reduce inflation.

For some reason China is apparently not considered this obvious path for addressing its problems with inflation.

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Reuters decided to abandon evidence-based reporting in a news story that told readers that the United States is suffering from "structural" unemployment. The use of the term "structural" is important because it implies that the main reason that people are unemployed is that there is a mismatch between skills and the available jobs. The alternative explanation, is that we just need more demand in the economy to drastically increase employment levels.

There are certain pieces of evidence that economists would look to as evidence of structural unemployment. For example, there should be high rates of job openings, which would suggest that there are sectors of the economy or regions of the country in which employers are having difficulty finding workers. In fact, data from the Bureau of Labor Statistics show the job opening rate at 2.5 percent. This is above the 1.9 percent low hit last year, but only slightly higher than the 2.3 percent low from the last recession. It is well below the 3.4 percent pre-recession rate.

If the economy's main problem is structural unemployment then there also should be sectors where wages are rising rapidly as firms are forced to compete for an inadequate supply of skilled workers. There is no major sector of the economy where wages are rising substantially more than the rate of inflation.

If the main problem is structural unemployment then we should also expect to see sectors where workers are putting in large numbers of hours. The reason is that employers cannot find enough workers so they pay over-time wages and other premiums to get the available workers to put in more time. Again, there is no major sector of the economy where average weekly hours has even risen to its pre-recession level.

In short, this article presents no evidence whatsoever that the U.S. economy is suffering from structural unemployment. The focus of the article is the decline in the manufacturing industry, and especially the auto industry, in the Midwest. However, there are always declining sectors of the economy. The question is whether these sectors are large enough and the workers in these sectors sufficiently ill-prepared for other lines of work to lead to structural unemployment in an otherwise growing economy. This lengthy piece provides no evidence to suggest that this is the case.

Remarkably, in a piece that includes many references to international competition, there is no discussion whatsoever of the value of the dollar. In a system of floating exchange rates, like what we currently have, a large trade deficit is supposed to adjust through a decline in the value of a country's currency. Such adjustment has not happened in the case of the United States due to a deliberate policy of both the United States (in the Clinton administration) and some of our trading partners in keeping the value of the dollar up.

The piece also includes the bizarre assertion that manufacturing workers in the United States are uniquely unable to compete internationally. In fact, our more highly educated workers, like doctors, lawyers, and accountants are even less competitive with their counterparts in the developing world. However, professionals have the political power to sustain and even increase the barriers to foreign competition. By contrast, U.S. trade policy has been quite explicitly focused on subjecting U.S. manufacturing workers to such competition.

The article also seriously misrepresents the experience of Germany, its model of a successful wealthy country. While it did have substantial reforms of its labor market, it did not have a long period of double-digit unemployment as this piece implies. Germany also did not have sharp declines in wages. Compensation for manufacturing workers continued to rise over the last decade and is currently almost 50 percent higher than in the United States.

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The NYT printed a scare story about San Francisco's retiree health care costs in lieu of a printing news. The paper told readers that the projected cost of providing health care for retired city workers has been estimated at $4.4 billion and the city has put aside just $9.7 million to cover this cost.

That sounds really really scary. However those who read through the article would discover that the city is currently spending more than $138 million a year for retiree health care. This fact implies that the city has been in the habit of paying for these expenditures out of its current budget. Furthermore the projection that is the highlight of this article implies that there will be no substantial increase in this figure in the years ahead. (If the $4.4 billion is spend over the next 30 years it would imply an average annual cost of $147 million.)

It is possible that the San Francisco's health care burden is more onerous than this calculation suggests, but readers of this article would have no way of knowing since the point of the article seems to have been to scare readers rather than provide information.

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The headline of a Washington Post article told readers:

"Economic recovery gains momentum."

The report that provided the basis for this assertion was the Fed's release of data on industrial production for October. This report showed a rise in production of 0.4 percent in November, after a revised decline of 0.2 percent (previously reported as 0.0 percent) in October. However, this swing was entirely the result of a reversal in the output of utilities, which plunged in October and then jumped in November.

Fluctuation in utility output are overwhelmingly determined by weather conditions, not the state of the economy. Economists usually focus on manufacturing output which is more stable. This increased by 0.3 percent in November, the same as the rate now reported for October (revised down from 0.5 percent). This is a somewhat slower pace of growth than the 5.3 percent rate over the last year.

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