Given the recent strong numbers for jobs and GDP, where are we today in terms of the business cycle?
1. It’s true the payroll gains and falling unemployment rate overlook the low labor force participation. In my view the falling LFPR is not a cyclical issue, even though the variable is itself cyclical. This is very confusing to most people. Imagine a LFPR that has a strong downward trend for structural (non cyclical) reasons. Also assume the actual LFPR falls in a more cyclical pattern, falling steeply during recessions and leveling off during booms. The level periods look like “nothing happening,” whereas the LFPR is actually growing relative to the declining trend line. My prediction is that the LFPR will stay low even after we recover from the recession, and we always recover from recessions. It’s not a cyclical problem. This will become obvious by 2016.
2. That means we are now more than 2/3rds of the way back to the Fed’s natural rate estimate, which is 5.6%. In my view the actual unemployment rate and the natural unemployment rate would both fall by about 0.5% if maximum unemployment insurance benefits were scaled back to the normal 26 weeks. That will happen at some point.
3. The unemployment rate fell by 0.6% in 2010, by 0.8% in 2011, by 0.7% in 2012, and by 0.8% in 2013. Look for an unemployment rate of about 6.3% by the end of 2014, and 5.6% at the end of 2015, or 0.5% lower if maximum UI is cut to 26 weeks. By the end of 2015 the recession will be over but we’ll still be mired in the Great Stagnation. Interest rates will remain low. By the way, I think people overstate the decline of the middle class. I have to pay a guy $40/hour to do routine painting. I pay a lot for plumbers, electricians, car repair guys, etc. Nearly 90% of Americans consider themselves middle class and that won’t change much. Poverty level consumption will steadily decline over time. Working class and rich people drive cars and wear clothes that are objectively similar. They eat similar quantities of food. Obama says we now have universal health care for anyone who wants it, and we’ve long had universal education. The poor in America live in bigger houses than the middle class have in Europe. Contra Tyler Cowen, we won’t have favelas. Technology will make it easier and easier to provide a comfortable lifestyle for almost all Americans. The inequality issue is grossly overdone in the US; internationally it’s still a huge problem. (Wage subsides are the answer to low wages, as in Germany.)
4. The 3rd quarter GDP number was overstated, but the actual RGDP growth according to the Philly Fed is still running about 2.5% in 2013, above 2012 levels. Ditto for employment. Growth is picking up. The recent increase in growth was picked up by the markets faster than by the statisticians. That’s one reason stocks have been strong, and its why 10 year yields remained 100 basis points above late 2012 levels, despite the Fed’s decision not to taper. Taper fears did raise rates slightly, but much less than people assumed at the time. Interest rates are not always “the Fed.” That’s really hard for many people to see, but important. Indonesia should blame American growth, not the Fed.
5. The “demand-side” view of the Great Recession looks better and better each month, as unemployment steadily falls. We have steady 4% NGDP growth, and just over 2% RGDP growth. Nominal hourly wages keep rising at about 2% and hence hours worked keeps rising as well. The musical chairs model continues to explain the recession best. The Keynesian model failed big time in 2013 when the fiscal austerity had no effect, and of course all our conservative competitors fell by the wayside much earlier.
6. I’m really worried that Paul Ryan is going to cave, just when the GOP has the Dems where they want them, desperate for more spending. Hope I’m wrong.
7. Tim Duy’s model nailed the employment report:
The model predicts payroll growth of 211k for November, somewhat higher than consensus of 180k.
He also says:
What happens after the unemployment rate hits 6.5% is going to be interesting; at that point, if they don’t want to change the thresholds, I expect they have to get rid of the thresholds altogether. The unemployment threshold itself would be nonsensical at a 6.4% unemployment rate.
I’ve argued they should get rid of the employment threshold, and keep the inflation threshold. Counterintuitively that would make policy much more expansionary, even though “inflation only” sounds hawkish.
PS. I suppose I should clarify that I do not believe $40/hour is a typical working class wage. I live in a high cost affluent area. My point is that it is not true that ALL working class jobs are low pay. As wages become more unequal there is more incentive for non-college students to get the training needed to be a plumber, or other decently paid working class job. That’s why I don’t expect extreme inequality to develop. Of course transfers will increase before-tax and transfer inequality, by making the incentive lower.