Caixin Online, April 9, 2012
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The March jobs data showed that the U.S. economy created just 120,000 jobs in the month. This was markedly slower than the 250,000 average for the prior three months. Suddenly commentators began to worry about the strength of the recovery and wonder whether the unemployment rate would continue to dip in the months ahead.
In fact the March numbers should not have come as big surprise to anyone. The problem here is simply one of fickle forecasters who are too influenced by the most recent reports and repeatedly fail to put economic data in a larger context.
Most of the economic reports that were released in December, January, and February were reasonably strong. However it should have been evident that extraordinarily warm weather through much of the country was an important factor in boosting the economy during this period.
Ordinarily, there are a number of severe snowstorms and cold spells in the Northeast and Midwest during the winter months. These delay the start of construction projects and often cause ongoing projects to be shut for days or even weeks. Bad weather also discourages people from going shopping, especially for big ticket items like cars. They are also less likely to go out to eat at restaurants when the streets are covered with snow or the temperature is below zero. Sometimes factories even shut down when heavy snow prevents them from getting necessary parts.
The unusually good weather this winter meant that we did not see the falloff in employment and growth that we would ordinarily expect. As a result, the data looked unusually good.
However the seasonal effects work in both directions. If construction workers stayed on the job all through the winter, then they won’t appear in the data as new hires in spring. The same applies to workers in retail stores, restaurants and all the other sectors of the economy that likely saw higher than normal employment through the winter months because of the weather. An unusually good winter, will mean a weaker-than-normal spring.
This is the story that must be kept in mind when looking at the March jobs data. Just as the winter months overstated the true rate of job growth, the March numbers almost certainly understated the rate of growth. The true rate will be somewhere in the middle.
This is hardly the first time that economic forecasters have been overly influenced by the most recent data releases. Last summer, several weak economic reports, most notably the less than 1.0 percent annual rate of GDP growth in the first half of 2011, led many economists to raise fears of a double-dip recession.
In fact, a closer inspection of the data showed that a double-dip was highly unlikely. Growth in the first half of 2011 had been badly depressed by the ending of President Obama’s stimulus. Just as the onset of the stimulus had provided an important boost to growth in 2009 and the first half of 2010; its unwinding was a serious source of drag on growth.
The slowing of government expenditures directly reduced growth by more than 1.0 percentage point over the first half of 2011, with the indirect effect of lower transfer payments adding a further drag. However once the stimulus spending had largely ended, this source of drag disappeared, allowing the economy to resume a somewhat more respectable path of growth.
As it turned out, growth averaged 2.4 percent over the second half of 2011. This is not a very strong growth rate, especially considering the large amount of excess capacity in the economy that remains from the downturn; however it is far from the double-dip of which we were warned.
This is the basic story that we have seen ever since the recovery began in the summer of 2009. The economy has been growing and adding jobs, but the rate is extraordinarily weak given the severity of the downturn. The underlying rate of growth is likely in the range of 2.5-3.0 percent with the economy adding close to 200,000 jobs a month.
Most estimates put the economy at roughly 6.0 percentage points below its potential level of output. With potential output rising at a rate of close to 2.5 percent annually, a 3.0 percent annual rate of growth would imply 12 years until the economy returns to potential GDP.
Similarly, employment stands at close to 10 million below its pre-recession trend level. The economy needs to generate roughly 1 million jobs a year to keep up with the growth of the labor force. This means that if the economy is generating 200,000 jobs a month then it will take more than seven years to get back near full employment levels of output.
This is the story based on the underlying trends in the U.S. economy. It is not quite the disaster that would be implied by a double-dip recession, but it is hardly a picture of a robust recovery and a prosperous economy.
Unfortunately, because economic reporting in the United States is so dominated by short-term swings in data, there is little opportunity for discussion of the underlying trend. As a result, there is little reason to expect any policy changes that could lead to a stronger recovery.