Thoughts on the recent economic data
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.
Tags:
6. December 2013 at 08:27
Don’t forget that in *Brazilian* favelas, it is already the case that there is a lot of “middle class consumption” when it comes to food and cars and the like. The idea of favelas by no means rules this out. When the fiscal squeeze comes, and many pensions underperform, and wealth remains below the trajectory expected circa 2006, I think many Americans will look to radical savings on their housing costs.
6. December 2013 at 08:33
“In my view the falling LFPR is not a cyclical issue, even though the variable is itself cyclical.”
Agreed. The LFPR for men since 1950 illustrates exactly your point; it has been steadily falling since the 50’s with flat periods between recessions. Also, the rate for women actually peaked in the late 90’s.
People tend to focus only on the past few years comparing the current rate to the peak in the mid to early 2000s.
6. December 2013 at 08:36
Tyler, Yes, I realize the favelas have been upgraded, but I don’t think we will fall even that far. I believe American housing will continue to improve over time. I don’t see any major problems in terms of falling wealth (going forward), or in terms of great inequality of consumption. The number at poverty level consumption has fallen sharply in recent decades, I doubt those gains will be reversed to any significant extent.
Germany has strikingly low levels of wealth, and they do fine in terms of living standards.
6. December 2013 at 08:36
Joe, Very good observation.
6. December 2013 at 08:38
It’s not exactly fair to describe the income of middle class workers like plumbers and electricians by their gross hourly rate rather than their net income. Subtract out the cost of bonding, their tools & truck, and factor in the substantial amount of down time they will intermittently have to spend between jobs, and you’ve got a net annual pay level that is much less impressive.
Also, we can only hope that Paul Ryan will cave on Medicare Vouchers; My grandmother trying to select an insurance provider when she was no longer able to balance her own checkbook would only yield opportunities for fraudsters and failure.
6. December 2013 at 09:09
I was going to say just what Randomize did. At $40 per hour charged to the customer, the handyman is barely eking out a living.
Anyway, a few days ago Scott said he’d hate to think our POTUS is a complete moron. His latest, to Chris Matthews (birds of a feather):
‘”The challenge, I think, that we have going forward is not so much my personal management style or particular issues around White House organization,” Obama said. “It actually has to do with what I referred to earlier, which is we have these big agencies, some of which are outdated, some of which are not designed properly.”
‘Obama said “it was obvious that we needed additional controls in place” before Affordable Care Act enrollment began Oct. 1. Yet he said none of those controls center around the structure and style of his White House.
‘”I’ve got a strong chief of staff, but I’m holding every cabinet member accountable,” Obama said. “And I want to have strong interactions with them directly. Number two is, I have an open door policy, where I want people to be bringing me bad news, on time, so that we can fix things.”’
Obama’s Law: The buck stops here…unless it doesn’t.
6. December 2013 at 09:12
I hope middle class workers have more to count on than Baumol’s cost disease.
6. December 2013 at 10:15
Middle class is much more an attitude than an income. Everyone with common sense knows this but crying about income disparity is much more political correct since doing this absolves those in the lower classes of personal responsibility.
6. December 2013 at 10:59
About point 1, even given a declining trend line, you would’ve expected to see a bigger rebound in the LFPR given just how steeply it fell in 2008-2009.
6. December 2013 at 11:20
The lags in monetary flows (representing our means-of-payment money times its transactions rate-of-turnover), have been mathematical constants for the last 100 years.
Rates-of-change (roc’s) in the proxy for real-output bottomed in Oct (a seasonal inflection point) and are rebounding over and above the seasonal pattern. The declining roc’s in the proxy for inflation is due to bottom this month or next.
Nominal-gDp growth in 2014 will thus be bolstered by both components.
6. December 2013 at 12:18
Randomize, I know that, but my plumbers and electricians get well over $100/hour. Regarding painters, I also have to pay for the the materials. And these guys seem fairly busy. Not saying they make $80,000, but certainly a middle class income.
JohnB, I would have expected that too, but apparently the downward trend is pretty sharp.
6. December 2013 at 12:45
The concept of necessities changes yearly. I personally can’t believe the number of people with smart phones at the current subscription rates…
I have a painter that went from $25 to $38 /hour a couple of years ago…(this is in a low cost area of the country not Boston….). He has a good reputation on Angie’s list and is also certified for lead paint removal…I need to find a new one, since he is booked why out into the future….I would say that with the number of hours he works he is making $80/year..his wife has the health insurance…
Solid middle class…
The trades are still doing pretty well…of course the key is to not work for someone else but find your own work..sites like Angie’s list helps out a lot…
6. December 2013 at 13:58
On the LFPR: since 2000 the overall LFPR has declined 4.3 ppt, but the LFPR for 25-54 year olds has also declined, down 3.2 percentage points. Now it could be that the distribution within that cohort has shifted towards the older end, and that is pulling the group down, but since 2000 part rates are down about twenty percentage points for 16-19 year olds, and 5-10 percentage points for 20-24 year olds. All of these cohorts exhibit the same pattern, rising through 2000 then declining thereafter with the rate of decline increasing in 2009.
25-54, total:
http://research.stlouisfed.org/fredgraph.png?g=pFd
16-19
http://research.stlouisfed.org/fredgraph.png?g=pFl
20-24
http://research.stlouisfed.org/fredgraph.png?g=pDS
Moreover, Canada had a baby boom, but Canada does not show the same pattern that is in all the US data. in Oct09 the CA part rate was about the same as it was in 1990. However, some interesting stuff happened in between. The recession in the early nineties hit Canada much harder than the US. The part rate fell ~ 3 ppt following the recession and took about 10 years to fully recover. This effect is on the same order of magnitude as the US decline.
I’m not saying the US decline is necessarily cyclical, though I would suggest that ageing is at best a small part of it.
6. December 2013 at 14:05
CA Part rate: http://i1295.photobucket.com/albums/b623/kaimullet/part_zpsfb4e58d3.jpg
6. December 2013 at 14:31
Scott,
Lots of good posts today. David Beckworth has two and the latest one quotes Michael Darda on the recent economic news.
Michael Darda:
“…Despite a two-year contraction in nominal federal outlays for the first time in more than five decades and a raft of tax hikes starting in early 2013, job gains are running slightly ahead of the 2012 pace. Non-farm payrolls (+203K in November and 200K in October) have averaged 189K during the first 11 months of 2013, ahead of the 179K 11-month average in November 2012 and the 170K average for November 2011. Over the last 12 months, non-farm payrolls have averaged 191K, also above the 12-month averages for the last three years. Indeed, year-to-year gains for overall payrolls and private sector jobs have been very steady despite the most intense fiscal consolidation since the Korean War demobilization. Many observers late last year were of the mindset that the fiscal cliff and/or sequester would either throw the U.S. economy back into recession, or slow it materially. It has done neither because, in our view, the Fed has offset it…”
http://macromarketmusings.blogspot.com/2013/12/the-great-macroeconomic-experiment-of.html
I encourage everybody to read David’s entire post as well as the preceding one where he explains clearly and concisely why helicopter money cannot make up for bad monetary policy.
In addition, Nick Rowe has an excellent post summing up the whole Stephen Williamson-QE-causes-deflation-trainwreck-on-stilts show.
6. December 2013 at 15:24
With the numbers today, I think supply side economics is done. We raised marginal tax rates on the rich and the economy got better.
6. December 2013 at 15:41
@Tom M.
From Jan ’83 to Mar ’84 a net 4,655,000 jobs were created. That averages to over 300K new jobs per month over 15 months (with a US population that was 25% less than today)
If you want to compare economic plans Reagan not only wins but Obama is yet to get out of the locker room.
http://washingtonexaminer.com/reagan-vs.-obama-whose-policies-brought-growth/article/1247191
6. December 2013 at 15:51
@Dan W.
True but Clinton smoked Reagan also after raising marginal tax rates on the rich.
http://www.politifact.com/truth-o-meter/statements/2012/sep/06/bill-clinton/bill-clinton-says-democratic-presidents-top-republ/
6. December 2013 at 16:01
Dan W.
I gather that was supposed to be a rebuttal to Tom M.
But recall that “Morning in America” occured only after Reagan signed TEFRA in September 1982, which was one of the largest tax hikes in American history. In contrast, ERTA, or the famed Reagan tax cut, was signed in August 1981:
http://krugman.blogs.nytimes.com/2010/01/18/reagan-taxes-jobs/
The point isn’t that tax hikes create jobs, but that in terms of short run Aggregate Demand (AD) management, monetary policy totally trumps fiscal policy.
Supply side economics only really matters for long run growth (i.e. Long Run Aggregate Supply or LRAS). Anyone measuring its success in terms of the number of jobs created over a period of only 15 month doesn’t really know what supply side economics is all about.
6. December 2013 at 16:03
I agree with you Mark. You might want to let the Republican party/tea-party in on that little secret.
6. December 2013 at 17:26
I will paint your house.
6. December 2013 at 17:47
If only Supply side economics was just about tax cuts. The Republican Party is more at fault than Democrats in promoting this myth. In fact the best summation of Supply side policy is this sentence from Wikipedia:
“Typical policy recommendations of supply-side economists are lower marginal tax rates and less regulation”
The key is lower marginal tax rates, not simply lower tax rates. Reagan’s tax argument was always based on the principle of economic incentives. If people get to keep more of what they WILL earn then they will work more. This is an important distinction and one that the Republican party quickly forgot. Thus we have a tax and welfare policy today that exposes people at different income groups to HUGE marginal tax increases. And we wonder why there are so many people claiming unemployment and disability?
The economy was already rebounding when Clinton took office in 11993. It did well his first two years and then it boomed, coincident with Republicans gaining a majority in the House of Representatives. Clinton then co-opted many Conservative economic policies, including a 20% tax rate on capital gains.
Unfortunately the focus on absolute tax rates has done a disservice to the economic agenda that Reagan enacted. Yes, a net reduction in tax rates was a key element and yes, in fact, there was a net reduction in income tax rates from when he entered office to when he left. More important to the agenda was to provide an economic environment where there was a greater personal reward for producing more pursuing greater individual profit. This was realized by cutting real and implied marginal tax rates on both the rich and the poor. Under Reagan the tax base was broadened, more people payed taxes, but this meant that lower income earners could pursue more income and actually keep it – unlike today when many low income earners lose as much in subsidies as they will earn in new income. Does it make any sense for such a person to work harder with such an incentive?
6. December 2013 at 18:12
Dan W.
Please source your data for any increase in economic growth coinciding with the Republicans winning Congress. My recollection is that we were doing really well in ’93,’94,’95 before any republican policies were enacted and then we decided to do a cap gains tax cut which did nothing but bring us the Nasdaq bubble.
And I agree with you that 100%+ marginal tax rates are a mistake and it is terrible that Republicans want more of the same with their ideas of means testing everything including Medicare.
The answer to the disincentive effects of high marginal tax rates on the poor is something along the lines of a universal guaranteed income along the lines of what Switzerland is proposing.
6. December 2013 at 20:20
@Tom M.
Google brought me to this article and this interesting fact: GDP averaged 3.2% in Clinton’s first term. It averaged 4.2% in his second term. If one wants to claim that an economy can grow WITH a tax increase they must also admit that an economy can grow even better with a tax decrease.
http://www.forbes.com/sites/charleskadlec/2012/07/16/the-dangerous-myth-about-the-bill-clinton-tax-increase/
6. December 2013 at 20:29
@Dan W
Sure an economy “can” grow better with a tax decrease but it can also grow very slowly after a tax decrease. The economic record following the Bush tax cuts was abysmal.
7. December 2013 at 07:09
Mike, Good point.
Kailor, The key is that the LFPR was declining even between 2000 and 2007, even though the economy was booming in 2007.
Mark, Thanks for the link. I did a new post on Nick’s post.
In the past David has argued that helicopter drops would work (I have not agreed) so I’m surprised to hear he now says they won’t.
Tom and Mark, I agree that supply-side is primarily a long run proposition, but some supply-siders have made excessive short run claims (Art Laffer, for instance.)
Tom, You said;
“My recollection is that we were doing really well in ’93,’94,’95 before any republican policies were enacted and then we decided to do a cap gains tax cut which did nothing but bring us the Nasdaq bubble.”
Not quite true. The GOP won a historic blowout victory in 1994, largely due to the sluggish recovery (in jobs)
7. December 2013 at 07:34
@ Tom M.
The Bush tax cuts were not supply side cuts. They lowered the tax rate on lower incomes and increased subsidies, especially with the child tax credit. This put more money in one’s pocket but it also greatly raised the marginal tax rate on additional earnings.
I already said that the GOP missed the point of Reaganomics and they got stuck on stupid pushing for tax cuts regardless of whether such cuts encouraged more economic activity.
7. December 2013 at 09:50
Dan W.,
Yes, it surprises me that so much of the emphasis on supply-side considerations in the US seems to be on marginal tax rates, rather than (say) tax reform. In the UK Conservative party (in the 1980s, at least) there was a lot of emphasis on tax reform, and this was a continuation of a supply-side strategy that had been developed back in the late 1960s.
Tax reform doesn’t get as much attention as it should on either side of the pond; in fact, increasing complexity seems to be the tendency in the UK.