May 09, 2013
Much analysis of the economy is excessively swayed by one or two economic reports or short-term fluctuations that may be driven by random factors like the weather. This appears to be the case following the Labor Department’s release of the April jobs report last week. In a post for the Roosevelt Institute’s Econobytes, economist Dean Baker, co-director of the Center for Economic and Policy Research, on why the April jobs report does not presage an economic boom:
The April jobs report showed somewhat faster than expected job growth for the month, along with upward revisions to the prior two months’ numbers, and a drop in the unemployment rate to 7.5 percent. This led many commentators to speculate that the recovery was accelerating and that perhaps the Federal Reserve Board should be pulling back from its quantitative easing program. A more careful assessment of the data does not support this view.
- The Commerce Department released a report showing that durable goods orders had declined 4.0 percent in March from their February level.
- Even pulling out the volatile transportation component, the drop was still 2.0 percent.
- More narrowly, new orders for non-defense capital goods (excluding aircraft) rose 0.9 percent in March, but were still almost 4.0 percent below their January level. The March number is less than 0.2 percent above the year ago level suggesting that the equipment investment component of GDP is barely growing.
The data that the Commerce Department released on construction last week was not any better.
- In spite of strong growth in residential construction, total construction spending fell 1.7 percent in March driven by a 4.1 percent falloff in spending by the public sector.
- This sector will likely continue to show weakness as cutbacks at all levels of government, coupled with weakness in non-residential private construction, offset growth in the residential sector.
Of course the overall GDP growth numbers have been weak ever since the fourth quarter of 2011.
- First quarter GDP growth was a modest 2.5 percent, however a full percentage point of this growth was due to inventory accumulations.
- Final demand grew at just a 1.5 percent annual rate.
- Over the last year GDP has grown at just a 1.8 percent annual rate.
- This is well below the 2.2-2.4 percent rate that is generally viewed as necessary to keep the unemployment rate from rising.
- Unless GDP accelerates substantially from its recent pace it is difficult to see how the unemployment rate will continue to decline. In fact, it is more likely to rise.
In spite of the upbeat reporting, the April jobs report was not especially positive.
- With an underlying growth of the labor force of 100,000 a month, the April job growth of 165,000 would imply that we are reducing the number of unemployed at the rate of 65,000 a month.
- With the number of jobs still almost 9 million below its trend level, it would take more than a decade of growth at this pace to bring the economy back to its trend level of jobs.
- Even if the economy added jobs at the 214,000 average pace of the last three months it would take more than six years to fill the jobs gap.
- By comparison, in the same three months last year the economy generated jobs at a slightly slower 196,000 monthly rate.
Furthermore there were some important negative items in the April jobs numbers.
- Most importantly, there was a decline of 0.2 hours in the length of the average workweek. As a result, the Labor Department’s index of aggregate weekly hours fell by 0.4 points, tying the largest drop since the recovery began.
- There was also a 1.0 percentage point drop in the share of unemployment attributable to people who voluntarily quit their jobs to 7.4 percent.
- This is generally viewed as measure of workers’ confidence in the labor market since they are willing to leave a job without having a new job lined up.
- The share of unemployment due to quits in April was well below the average for 2012 and in fact was below the average for the fourth quarter of 2011.
- The data from the Labor Department’s Job Opening and Labor Turnover Survey (JOLTS) released this week showed a similar decline in quit rates, suggesting that the numbers reported last week were not a fluke.
- The JOLTS data also showed a decline in hires and job openings.
There is a great deal of data showing that growth remains weak, with very little evidence of any sort of uptick. It appears as though some analysts have been influenced by the recent strength in the stock and housing markets.
- Both of these markets have only indirect effects on growth.
- The main impact on the stock market is through the wealth effect on consumption. While we will likely see this in the year ahead, the effect does take time.
- It is also important to realize that, relative to the size of the economy, the stock market is still down by close to 40 percent from its 2000 peaks.
- The housing market is influencing the economy through its effect on construction.
- However the building boom of the bubble years left an enormous over-supply. As a result construction is still far below normal levels.
- Further price rises will impact consumption through the housing wealth effect, but this will also take time and we will have to see far more price increases, essentially a re-inflation of the bubble, than what we have seen to date.
In short, there is little reason to believe that the economy will depart from its slow growth path any time soon.
