09/02/2016

Jobs Report Shows Little Change

The August jobs report from the Bureau of Labor Statistics is very similar to the past few reports: lowish unemployment (4.9%), positive jobs growth (+151K) and disappointing labor force participation (62.8%).  I put this in the category of good (but not great) job reports.

The monthly unemployment rate since 2006 is plotted in the figure below.  This is the most popular statistic in the report and certainly the most positive macroeconomic indicator right now.  You can see why - it is low and this is not bad news. 

Unemp0816

But nonfarrm employment increased by just 151,000 jobs in August and the labor force participation rate remains stubbornly low at just 62.8 percent.  So overall, this jobs report is better than our recent GDP reports but just not great.

 

 

 

07/29/2016

Is 2% the New Benchmark? I Hope Not.

GDP growth continues to disappoint. Today's advance estimate from the BEA pegs real GDP growth at just 1.22% in the second quarter.  Further, the new report revises the first quarter rate down to just 0.8 percent.  Ooof.  The graph below shows quarterly growth rates in real GDP since the beginning of 2006.
 
Quaterly GDP July 2016
 
Before the Great Recession, we got used to an average of 3% real GDP growth for decade after decade.  But since that recession ended, real GDP has grown at just 2% per year. The last four quarters are now: 1.99%, 0.87%, 0.83%, and 1.22%.  A decade ago, we'd consider that a horrible year. 
 
So why isn't there more concern? Because unemployment rates have been consistently around 5 percent.  But don't forget about the very low labor force participation rate, which is below 63% and this past year has been lower than at any time since the 1970s.  So maybe this is the new normal: 2 percent real GDP growth, 5% unemployment, and millions of workers sitting on the sidelines.  I hope not. 

02/08/2016

Is the Unemployment Rate Really 4.9 Percent?

A first glance at last week's jobs report might lead you to believe that all is well in the U.S. economy - and perhaps that is true.  But there are recurring indications that some long-term negative trends may persist. 

Let's start with the good news.  The unemployment rate dropped to 4.9 percent, the lowest level since February 2008.  Back then, the economy was entering the Great Recession and the unemployment rate rose to 7.3% by the end of that year.  The graph below shows the unemployment rate since 2005.  It really is nice to see the steady declines over the past five years. 

Unemp0216

In addition, the 151,000 now jobs added to nonfarm employment extends a streak of more than five years now (since October 2010) of gains in nonfarm employment.  So the total number of jobs is growing and the unemployment rate is dropping.  What can possibly be bad about the labor market?

Digging a little deeper, we see continued evidence of a disturbing long-term trend that many economists are watching closely.  In particular, the labor force participation rate (LFPR) is still very low as more than 94 million remain outside the labor force.  The graph below shows the labor force participation rate going back twenty years to January 1996.

Lfpr0216

I've covered this before (see here and here), but a quick review is in order.  When the LFPR falls, it means that some work-eligible adults are no longer working or actively seeking work.  But it also means that GDP is being produced by a smaller fraction of the population.  More and more people are "sitting on the sidelines."   

Where are all these potential workers?  Economists are still teasing out the answer, but one big reason is demographic and the other big reason is a weak macroeconomy.  The demographic piece is due to the aging labor force: baby-boomers are now retiring and this will continue for the next 15 years.  But, as you can see in the graphic above, the weak economy drove many workers out of the labor force and many have not re-entered.  For many, job prospects are just not as good as they were prior to the Great Recession. 

This biases the unemployment rate downward.  Imagine the LFPR rose again to pre-Great Recession levels. In December 2007, at the onset of the Great Recession, the LFPR was 66 percent.  If the LFPR climbed to 66% again tomorrow, more than 8 million workers would enter the labor force.  If none of these workers found jobs, this would drive the unemployment rate up to 9.65 percent.  More realistically, if half the workers found jobs, the unemployment rate would climb to 7.34 percent.  That seems more in line with the economy I live in. 

The bottom line is that the economy is not doing as well as the unemployment data indicates.  Much of the reason why we only see 4.9% unemployment is because the labor force has shrunk.  Let's hope this is not a permanent change. of late. 

01/29/2016

GDP 2015: Not so Great

This morning, the BEA released the Advance Estimate of GDP for 2015, and boy is it disappointing.  Keep in mind that this estimate is early and will be revised over the next few months.  But still, 0.7% growth for the fourth quarter is positively pedestrian.  In addition, with all four quarters now in, the overall growth rate of real GDP for 2015 is estimated at just 2.4%.  Yuck.  These are the kinds of numbers that give fodder to those who think we are headed toward a recession.

The graph below shows quarterly growth rates since 2005.  As you can see, only the second quarter was above the long run average of 3 percent. 

GPD2015.IV

Finally, the table below shows the contribution to the overall 2015 growth rate from each of the four types of spending: consumption, investment, government, and net exports. 

GDPTable2015.IV

I certainly hope that these figures are revised upward over the next few months.  In the immediate future, I'll be very curious to see the jobs report from the BLS next week. 

 

12/04/2015

Unemployment Steady at 5%

The BLS released the November jobs report earlier today.  The key takeaways are that the unemployment rate stayed unchanged at 5 % and that 211,000 new jobs were created.  In addition, the labor force participation rate ticked up slightly to 62.5 percent.  All of this is good news.

Screen Shot 2015-12-04 at 12.28.29 PM

Even though nothing spectacular happened to the unemployment rate in November, the picture of the last year tells a different story. In the last twelve months, the unemployment rate decreased by 0.8 percent.  In the last two years, the unemployment rate fell two percentage points!

In November, 211,000 new jobs were created. This job growth was close to the average of 237,000 in the past twelve months. Gains occurred in construction, professional services, and health care.  Losses occurred in the mining and the information sectors.

It may seem odd that there are new jobs created but the unemployment rate stayed constant. This is because the unemployment rate is percentage based on the labor force, which grew by about 300,000 workers in November.  

 

11/30/2015

College Students Need Macroeconomics Principles

Should we ditch macroeconomics or perhaps reduce it to two weeks?  In a recent blog post, Noah Smith argues that most of the material in a Principles of Macroeconomics class isn’t really necessary.  After teaching macro principles to more than 1,000 students per year since 2003, it is easy for me to find the blind spots in Noah’s view.  More than anything, it is pretty clear that Noah doesn’t spend much time with college students. 

Let me start with what Noah gets right: students should learn the Solow model for long-run growth, and the AD-AS model for business cycle analysis.  He also includes “the standard Milton Friedman, New Keynesian, AD-AS, accelerationist Phillips Curve theory of monetary policy.”

Now we come to Noah’s first howler: he believes that this material should take “about two weeks.”  Two?  What students is he teaching?  I teach at the University of Virginia, a really great university with super students.  But this takes six weeks, not two. When my students show up for macro principles, very few even know that interest rates are market prices.  I do teach the Solow model but most Macro principles instructors believe it is just too hard for the intro level. 

More than that, Noah leaves out a host of other macro topics that students need to learn at the intro level, whether they continue in economics or not.  This list includes:

1. Key macroeconomic variables.  These need to be defined, explained, and put in their proper historical perspective.  These include real GDP growth, unemployment, inflation, and interest rates.  And not just for the United States.

First off, the way we measure these variables actually matters.  Consider that unemployment rates do not include underemployed or out-of-labor force workers.  Or that GDP only includes market goods.  Both of these are relevant for policy and have been discussed in the media recently.  And historical perspective is really key here – it can be one of the best gifts you can give your students. What is a big number or a small number?  When unemployment is 7%, is that high or low?  How about in the U.S. versus Spain?  Or when real GDP grows by 4%, is that high or low?  How about the U.S. versus Mainland China?  Most college students won’t know this without a macro principles course.

2. The loanable funds market. You can’t understand financial collapse/contagion without a good understanding of the loanable funds market.  A big part of this discussion is also forming an intuitive understanding of interest rates, which is not natural for most students.  In my principles course (and textbook) I even cover mortgage-backed securities, securitization and moral hazard now so that the students understand the Great Recession.

3. Fiscal and monetary policy. In many universities, this is the one place where real economic policy is taught - Intermediate Macroeconomics typically focuses on theoretical models.  I view these policy discussions as voter education curriculum.  Students need to know what deficits mean and something about historical perspective here too.  They also need to know where government revenue comes from and how it is spent.  Hint: it’s not all spent on foreign aid and welfare!  And what about the Fed? This is the course where students learn about Fed policy and both actual and perceived effects on the economy. 

If time permits, it is great to also throw in international trade and finance, like the balance of payments (many misconceptions arise from a misunderstanding of how capital inflows are related to merchandise trade). 

Basically, to cover all of this takes about a semester.  It is foolish to think that two weeks is enough.

By the way, my favorite macro textbook covers all of these topics clearly in a great one-semester format.

11/03/2015

GDP Third Quarter 2015

The latest GDP release from the BEA estimates that U.S.real GDP grew at 1.5% in the third quarter of 2015.  This is just a mediocre growth rate but revisions to second quarter data have now increased the final growth estimate to a robust 3.9 percent.

  Tmp2

Recall that inventory is part of investment expenditures in GDP.  In the second quarter, private inventories fell by 1.44%.  This drop was the biggest negative of the major pieces of GDP.  In total, investment fell by about 1% in the third quarter.  The table below shows how the four major pieces of GDP each contributed to third quarter growth.

Tmp

 

Consumer Prices Completely Flat Year-over-Year

Consumer prices dropped overall in September, according to the latest BLS estimate of the Consumer Price Index (CPI).  The CPI fell by 0.2 %, taking the index back down to the level where it was one year ago.  Think about that: many prices have risen over the past year, but the typical U.S. consumer pays the same amount for goods and services today that she did one year ago.

CPI Graph September 15

The main reason for the decline is decreasing gas prices - again. Gas prices fell by almost 30% in September. In contrast, the food index actually increased by 0.4 %.

Core CPI (the CPI index for all items except than food and energy) is helpful for some applications because it is less volatile.  This measure rose by 0.2 percent.

Basic supply and demand explains the falling price of gasoline why the costs of gasoline. New discoveries of oil and new oil extraction techniques (think fracking) have greatly increased the supply of gasoline, shifting the supply curve outwards and reducing the price of crude oil in world markets. 

The table below shows the one-year price change for selected items, along with the weight given in the CPI index. Remember that the weight is determined as the portion of the typical consumer's budget dedicated to that spending category.  For example, a typical U.S. consumer allocates 3.97 % of their monthly spending toward gasoline.  

CPI table Sep 15

Notice how many food item prices rose significantly (egg prices up another 36 percent!), but gasoline prices fell almost 30 percent.  Television and personal computer prices continue their decades-long slide downward.

10/12/2015

Why Is Unemployment so High in Spain?

Do you think it is hard to find a job in the United States? Try looking in Spain, where youth (15-24 years old) unemployment rates have exceeded 50% since 2012.  The figure below shows youth unemployment for both Spain and the United States beginning in 1995.  Even when Spain was experiencing strong economic growth from 1995 to 2008, youth unemployment rates were around 20 percent!

Spain Youth Unemployment

But it is not just rough for the youth of Spain: the figure below shows overall unemployment rates in Spain, which consistently dwarf those from the United States. 

Spain Unemployment

Economists believe the main reasons for these differences are labor market regulations in Spain – regulations that were actually put in place to help workers.

For example, mandated severance pay in Spain is particularly generous.  Until 2012, any Spanish firm that wished to fire a worker was required to continue to pay them for 45 days for every year they were employed.  Thus, if a firm wanted to fire a ten-year employee, they’d have to pay them for 450 days after their employment ended.  This regulation make it very difficult for young workers to break into the labor force.  They also incentivize firms to search longer for just the right worker to fill open positions.  Both of these increase frictional unemployment.  In 2012 this requirement was reduced to 20 days of pay for every year of employment.

Another regulation is mandated annual increases in wages and benefits.  That is, firms are required by law to give pay and benefits raises every year.  Think about this from the firm’s perspective: before you ever hire and retain a worker for more than a year, you will be sure they are worthy of their current pay plus raises.  These regulations increase the time firms spend searching for just the right match, and again, increase frictional unemployment.

Remember: Incentives affect behavior.

All of this data is available from the Organization for Economic Co-operation and Development (OECD).

10/05/2015

Unemployment Rate Steady, but Labor Force Participation Falls Again

On Friday, the BLS released its monthly jobs report. The good news is that the unemployment stayed low at the low rate of 5.1 percent. 

Screen Shot 2015-10-02 at 8.55.53 PM

However, the results regarding the labor force participation rate (LFPR) and the number of jobs added are not as positive. Labor force participation fell to 62.4% - the lowest rate since October 1977. So there are still millions of workers sitting on the sidelines in the U.S. economy.

Screen Shot 2015-10-02 at 9.43.03 PM

To understand just how low this rate is, consider that the LFPR has not been lower since women entered the labor force en masse in the 1960s and 1970s.  To see this, let's look at the LFPR for men only (graphed below).  The LFPR for men has not been lower since we began keeping records (1948).  In fact, I would guess that the only era in U.S. history when this could possibly have been lower would be the Great Depression era - too bad we don't have that data.  

Male LFPR

Finally, the economy only added 142,000 jobs in the last month. This is low compared to both the current years' average of 198,000 and as well as 2014's average of 260,000.

Screen Shot 2015-10-02 at 9.03.42 PM

Another reason economists are less enthusiastic about this report is that the number of jobs added for July and August is now revised downward - with 60,000 jobs added less than reporter earlier.

 

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