August 31, 2003

Third Quarter Growth Forecasts

Andrea Hopkins of Forbes writes about expectations for faster U.S. growth:

Forbes.com: U.S. recovery is here -- we mean it this time: ...Often burned but never shy, economic forecasters have ramped up predictions for growth for the rest of 2003 and into 2004, certain -- once again -- that America has turned the corner on the 2001 recession. "All the data's saying the same thing: this quarter is going to be a cracker," said Ram Bhagavatula, chief economist at Royal Bank of Scotland Financial Markets, predicting gross domestic product growth will hit a 6 percent to 7 percent annual rate this quarter. He's not alone. A raft of positive economic news in recent weeks has many economists hiking third-quarter growth forecasts as high as 7 percent -- more than double the 3.1 percent annual growth rate notched in the second quarter...

And this leaves me looking at the labor market and scratching my head: if workers are becoming so much more productive so fast, why aren't firms hiring more of them. I have no special reason to doubt either the output or the work hours figures, but this business-cycle configuration is very, very unusual indeed...

Posted by DeLong at August 31, 2003 10:04 PM | TrackBack

Comments

Mark Fiore has his clear and simple explanation fir this business-cycle configuration. Very good audio-visual presentation!
http://www.markfiore.com/animation/jobless.html

Posted by: Mats on September 1, 2003 12:01 AM

" 'All the data's saying the same thing: this quarter is going to be a cracker,' said Ram Bhagavatula, chief economist at Royal Bank of Scotland Financial Markets, predicting gross domestic product growth will hit a 6 percent to 7 percent annual rate this quarter."

Don't expect pearls of prescience from Mr. Ram Bhagavatula. If he were a weather forecaster he'd make his forecasts by first checking the newspapers to see what the other forecasters were saying and then would look out the window to see if the sun had got his hat on or not.

A little Bhagavatula - my personal favourite is Feb 20, 2003:

Tuesday October 29, 2002

"The dominoes are falling one by one and the consumer is just the latest," Ram Bhagavatula, chief economist of Royal Bank of Scotland Financial Markets, told Reuters. "You should expect the Fed to cut rates on November 6, probably by 50 basis points ... why hesitate? What's the downside of cutting rates? Inflation isn't a problem so why wait?"

7 December 2002

Ram Bhagavatula, chief economist at Royal Bank of Scotland Financial Markets, told Reuters, “These numbers are a complete shock and give the impression of an economy toppling over again.”

Thursday, February 27, 2003

“It’s clear that the reality of a dismal labour market is finally sinking in,” said Ram Bhagavatula, chief economist at Royal Bank of Scotland Financial Markets. “It raises question marks about hopes for a strong recovery this year.” 

Thursday, Feb. 20, 2003

Royal Bank of Scotland Financial Markets chief economist Ram Bhagavatula said, "... the magic's worn off Greenspan and the Fed," because of 12 ineffective interest rate cuts and an equities market that has halved in value since 2000.

March 4, 2003

"No one is hiring.... I would not be surprised at all to see another fall in payrolls," said Ram Bhagavatula, chief economist at Royal Bank of Scotland Financial Markets

Posted by: Pooh on September 1, 2003 03:54 AM

"Mark Fiore has his clear and simple explanation fir this business-cycle configuration."

http://www.markfiore.com/animation/jobless.html

Now, this is economics....

epinet.org Jared Bernstein argues convincingly that this recovery has seen less of a demand surge than any recovery since 1945. Productivity is rising at an above average rate, but demand is rising too slowly to stimulate job creation. Debt accumulation may be a core reason for too little demand, while fiscal policy other than recent military spending has not focused on stimulating demand.

Canada, Germany, Italy, the Netherlands and Korea all had declines in GDP last quarter. Latin America is weak. There will be less help than usual from abroad. Energy prices are an economic darg. Jobs appear to be flowing to Asia. I would still be cautious about sustained rapid GDP growth and so significant job creation.

Posted by: anne on September 1, 2003 04:14 AM

http://www.epinet.org/index.cfm

Labor Market Left Behind

Although the recent recession was officially declared over as of November 2001, on Labor Day 2003 the job market will remain in a rut. Unemployment has climbed, the nation’s payrolls reveal the worst hiring slump since the Great Depression, and wages have been growing more slowly and even falling in real terms for some workers. How could it be that the nation’s economy is supposedly in recovery yet the job market is much weaker now than when the recession ended? ...

Posted by: lise on September 1, 2003 04:58 AM

NYTimes
9/1/03

Lawrence Katz, a labor economist at Harvard, said that even though the labor market was weak and real wages were slipping, workers were better off than in the mid-1990's, largely because of the boom in the late 1990's.

"Wages have done very poorly the past couple of years, but wages did very well from 1996 to 2001," Dr. Katz said. "That was the only time they did really well in the last 25 years because of the low unemployment rate and huge growth in productivity."

Posted by: anne on September 1, 2003 08:45 AM

Brad wrote: "And this leaves me looking at the labor market and scratching my head: if workers are becoming so much more productive so fast, why aren't firms hiring more of them. I have no special reason to doubt either the output or the work hours figures, but this business-cycle configuration is very, very unusual indeed... "

I must be stupid. Why would increasing productivity lead to more workers being hired? If you can produce the same amount with less workers, or more with the same amount of workers - why would you hire unless demand for your product was up - or you anticipated strong increases in demand soon?

Perhaps someone can explain it to me - because no company I've ever worked for has ever said "hmm, with our new procedures we can do the necessary work with 80% of the people. Let's go hire some more people."

Posted by: Ian Welsh on September 1, 2003 10:31 PM

Ian,

I think I understand why Brad is confused, and I think there is a certain stubbornness in the face of reality at work. The idea is that a more productive worker is more valuable - and you want more of what is more valuable. That is especially true when the cost of that valuable thing is rising slowly. Average hourly earnings are up 3.1% on the year, while non-farm output per hour is up 3.9%, so workers are pretty cheap on that basis. My problem is, I think one needs to keep in mind the source of the productivity gain. Laying off younger or less experienced of less versatile (less productive) workers is probably driving up the productivity of remaining workers. I suspect Brad's confusion derives from insisting on a textbook assessment of the situation, but I could be wrong. Brad, do you find this situation odd?

Posted by: K Harris on September 2, 2003 06:49 AM

Oops, I meant "Brad, why do you find this situation odd?"

More evidence that factories can go on and on dealing with growing demand without hiring. Today"s ISM factory data have a headline index of 54.7 (highest since June of 1999), up from 51.8. (Anything above 50 bespeaks factory sector growth.) The production index rose to a magnificent 61.9 from 53.3. Ready for the other shoe? The jobs index edged just a tiny bit lower, to 45.9 from 46.1. (Anything below 50 bespeaks contraction.) The inventory index was at 42.5 vs 45.9.

So the two costs that managers can control, but in doing so make themselves vulnerable to market share loss, are apparently still being held down. Between the risk of losing market share or letting costs rise, managers risk losing market share. They won't hire and they won"t build inventories. (The official government data, by the way, say managers are putting on inventories, but are not hiring.)

This puts President Bush's pledge of jobs, and Secretary Chao's confidence, in a worrying light. China -- there's an answer. Let's make China give us some jobs back.

Posted by: K Harris on September 2, 2003 07:40 AM
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