August 29, 2016
We all have come to appreciate the economic wisdom of no one. After all, no one saw the housing bubble and no one expected the recovery to be so weak. So when no one talks, people listen.
That’s why people were impressed to see no one make an appearance in Robert Samuelson’s column. Samuelson notes the weak 1.2 percent economic growth in the first half of 2016, which he says puts us at the edge of a recession. He contrasts this with the relatively healthy job growth which he inaccurately describes as “booming.” (The 200,000 monthly rate of job growth is certainly respectable, but not exactly a boom.) Samuelson then tells readers:
“No one really understands the gap between the GDP and job figures.”
No one certainly does understand the gap. First and foremost, no one realizes that the slow growth in the second quarter was simply an inventory story. Final demand grew at a 2.4 percent annual rate in the second quarter. No one also knows that GDP growth is likely to be considerably faster in the third quarter as inventory accumulations raise growth. No one knows that the Atlanta Fed’s GDPNow projection shows GDP growth of 3.4 percent for the third quarter. In other words, no one knows that a recession is not now on the horizon.
No one also knows that the gap between relatively weak GDP growth and relatively strong job growth has been a feature of this economy for the last five years. It means that productivity growth has been very weak, averaging less than 1.0 percent annually. No one attributes this weak productivity growth to the weak labor market. Workers have been forced to take jobs at low wages, which means that businesses have incentive to create low wage jobs. (Think of the greeters standing around in Walmart or the people working the midnight shift at a 7-Eleven. These jobs likely would not exist if the companies had to pay $15 an hour.)
No one recognizes that several other points in Robert Samuelson’s column are wrong or confused. For example, Samuelson comes up with an wholly implausible story on the difference between the rate of job growth and GDP growth:
“By contrast, the job statistic could be what economists call a ‘lagging indicator.’ Employers’ hiring and firing decisions reflect recent experience more than future predictions. Employers don’t start hiring until a recovery is well established; similarly, they keep hiring until a recession hits them in the face. If so, today’s robust hiring could signal false optimism. The weaker GDP figures may better reflect reality.”
If this story were true then we should expect to see a fall off in average weekly hours as firms adjust to the reduced demand for labor. In fact, average weekly hours rose slightly in the latest data.
Samuelson also tells readers that, “despite the recovery, homebuilding in 2016 remains 36 percent below its 2006 level.” Of course the 2006 level was inflated by an enormous housing bubble. We should not expect homebuilding to get back to its bubble levels unless we again saw a housing bubble.
And, Samuelson says that the “jobs numbers suggest” that the Fed should raise interest rates, as the economy is “near full employment.” Actually, the rate of employment of prime age workers (ages 25–54) is still down by almost two percentage points from pre-recession levels. The percentage of workers who are involuntarily working part-time is still near recession levels. The same is true of the duration measures of unemployment as well as the low quit rate.
More importantly, there is zero evidence of any acceleration in the inflation rate which is still well below the Fed’s target of a 2.0 percent average rate. This indicates that the economy is not close to hitting its capacity constraints.
No one understands all this. It’s too bad that Robert Samuelson and most of the people involved in Washington policy debates are confused.
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