September 16, 2003

You Need to Listen Carefully

Ah. Here's something interesting:

Rapid Growth Seen for U.S. Economy: The reason for the bleak outlook on jobs boils down to basic math. The number of new workers is climbing about 1 percent a year. If productivity increases by an annual rate of 3 percent -- and the rate has been above 5 percent both this year and last -- economic growth, as measured by gross domestic product, needs to be significantly more than 4 percent next year before there is drastic improvement in the unemployment rate. "I don't see where the demand is going to come from to produce a falling unemployment rate," said J. Bradford DeLong, an economist at the University of California at Berkeley. "Very few people are predicting real G.D.P. growth of more than 4 percent."

White House officials dispute that prognosis. If productivity and growth are rising, they contend, then new jobs will follow. "There is a very strong correlation between real G.D.P. growth and developments in the labor market," said N. Gregory Mankiw, chairman of the White House Council of Economic Advisers. "We will see employment picking up by the end of the year, and we will see very strong advances in employment in 2004."

Ah. But Greg doesn't dispute my claim. He knows better than I do that if trend productivity growth is 2.5% per year then real GDP growth at 4% per year reduces the unemployment rate by about 0.1% every six months. And he knows as well as I do that current forecasts are not for growth at a more than 4% rate.

So what does he say? He doesn't say that the unemployment rate will decline. He says that employment will grow. And, indeed, employment probably will grow: but if employment doesn't grow by an average of more than 110,000 a month, the unemployment rate will not fall.

I've never figured out whether reporters are just overwhelmed and so can't listen carefully, or whether they are so fixated on the "he said, she said" clash of opinions that they cannot write a story in which they say "pretty much everybody agrees." This is an example where pretty much everybody agrees: I think that the 3.5%-4.0% growth we are likely to have over the next couple of years will produce employment growth (an average of perhaps 130,000 a month) but will do little if anything to reduce the unemployment rate. Greg thinks that the 3.5%-4.0% growth we are likely to have over the next couple of years will produce employment growth (an average of perhaps 130,000 a month) but will do little if anything to reduce the unemployment rate.

But somehow the story is not complete without the "Administration critic says X, Administration rebuts" part.

Posted by DeLong at September 16, 2003 10:44 AM | TrackBack

Comments

Administration -

"We will see employment picking up by the end of the year, and we will see very strong advances in employment in 2004."

Employment Report -

http://www.epinet.org/content.cfm/webfeatures_econindicators_jobspict

The nation's payrolls contracted by 93,000 last month, the seventh month of consecutive job losses and the largest decline since March of this year, according to today's employment report from the Bureau of Labor Statistics.

Since the recovery officially began in November 2001, payrolls have fallen by 1.1 million, making this the worst recovery in terms of employment growth since the BLS began tracking monthly data in 1939.

Over the past year, payrolls have decreased by 463,000, with August marking the 25th consecutive month of year-over-year declines.

Posted by: jd on September 16, 2003 11:01 AM

Wow, my idea that the much smaller and less significative Manpower Survey in the same field of job creation, that was released today, got biased coverage by accident:

http://blogofpandora.blogspot.com/2003_09_01_blogofpandora_archive.html#106373498619992692

Now it seems to fit into a bigger picture.

Posted by: Mats on September 16, 2003 11:21 AM

That's a shame.. I bought a used textbook by Mankiw to use as a refresher for half-forgotten Econ 101 concepts, but I don't need to be misled by a sophist. I wish I had a birdcage so it wouldn't be a total loss.

Posted by: rps on September 16, 2003 11:39 AM

When I heard the summary of the Manpower survey on a Wall Street Journal radio report, I thought we had some encouraging employment prospects. Then, I read the Manpower report and found another sign that there is still NO indication there will be significant job creation this year.

The prospects for significant job creation this year are really glum. Though the situation is glum, there is NO reason to distort ot lie about the report or about employment prospects. We have a serious problem. Face it! Darn.

Posted by: anne on September 16, 2003 11:45 AM

anne, interesting to hear someone else reading the Manpower survey this way, I mean they actually do make a bullish story out of the usual seasonal pattern, interesting to hear that they made the same trick att WSJ radio.

BTW, you did cover that long position in the 10yr gov'ts you were so eager to sell us at 4.5%, didn't you ;)

Posted by: Mats on September 16, 2003 11:51 AM

goofed on that post above said "long position" meant "short position", my bad

Posted by: Mats on September 16, 2003 11:54 AM

I see your point about where the demand is going to come from with a 3% productivity rate and a 4% GDP rise.

But what about the supply of labor shrinking. I think we've had a lot of Indians, Mexicans, etc. that have come to the U.S. in recent years. I would think that they would start having an incentive to return home if there is excess labor here. That would eventually lead to lower unemployment. What am I missing?

Posted by: Chad Peterson on September 16, 2003 11:54 AM

Chad, did you think about the different wage levels in US, Mexico? In a country with higher export sector productivity, same work with same productivity in non-tradable sector gets better paid (Balassa-Samuelsson theorem on real exch-rates/comparative price levels).

I'm fact-free here, but I do guess that illegal housecleaning in US pays better than legal in Mexico?

Posted by: Mats on September 16, 2003 12:01 PM

The failure of job creation due to the combination of high productivity growth and limited demand growth shows no sign of changing soon. There is a distinct possibility that demand could slow if if there is no significant job creation. Wage gains have been quite limited since the recession ended in November 2001. Where will another spurt in demand come from?

By the way, there was no mention of the 422,000 new jobless claims for the first week of September in the Administration fluff puff.

My guess is that interest rates will range from 4% to 4.5% for the 10 year treasury for several more months. We are growing too slowly!

Posted by: anne on September 16, 2003 12:13 PM

"interest rates will range" - that sounds like good fluff puff to me, you might be able to join the admin. I better try it myself:

US supply is going to be violent, so I short 10yr treas against the Bund or corresponding(10yr Euro gov't). The FED will surprise, (like they did last bus.cycl trough) beeing more dovish than market expects, so I buy 2yr treas against Schatz or corresponding (2yr Euro gov't).

Posted by: Mats on September 16, 2003 12:25 PM

Mats -

Well done. I could argue either for rate to fall because of continuing weak American and world demand or for American rates to rise because of the $500 billion deficit this coming year. When I can argue either way, I do not bet. The deficit problem may have a more muted effect.

Also -

Migration to or from America will have no discernible effect on employment in the coming year.

Posted by: anne on September 16, 2003 12:39 PM

Brad,

You're just playing nice because Mankiw is a fellow economist. You know your numbers don't necessarily even support "And, indeed, employment probably will grow..." With forecasts for growth next year at 3.5-3.8% or so, and productivity growth at 5% last year and so far this year, there is plenty of room for employment to slip even if GDP growth is a bit faster than forecast and productivity growth falls slightly below the recent pace.

Of course the math could work out in Mankiw's (and everybody elses) favor. And Mankiw is hardly out of the ballpark in anticipating job growth by the end of this year (there may be a bigger risk next ear), but you did give him an easy ride after he ducked and dodged, when he could well be dead wrong even on the easier issue of job growth.

Posted by: K Harris on September 16, 2003 12:42 PM

K Harris

Unless consumer demand picks up in September and October, there is little reason corporations will change their minimal plans for employment for the last quarter. The Manpower survery was discouraging. Either consumer demand picks up fast or employers stay cautious - too cautious.

Posted by: anne on September 16, 2003 01:14 PM

rps - Mankiw's macro textbook is still, nonetheless, great. I don't think JBdL would even dispute that. Plus, you get to find out the name of Mankiw's dog (which was an exam question for extra credit in Ben Friedman's intermediate macro class back when I took it).

Posted by: ETC on September 16, 2003 03:24 PM

If my math is right, these forecasts suggests that real GDP will be only 11.5% higher in 2004 than it was in 2000. For a normal four year period, this is pathetic. For a period when the internet, computer, and technology productivity increases continue, this is Hoover like.

Posted by: Hal McClure on September 16, 2003 03:25 PM

If my math is right, these forecasts suggests that real GDP will be only 11.5% higher in 2004 than it was in 2000. For a normal four year period, this is pathetic. For a period when the internet, computer, and technology productivity increases continue, this is Hoover like.

Posted by: Hal McClure on September 16, 2003 03:28 PM

>>You're just playing nice because Mankiw is a fellow economist. You know your numbers don't necessarily even support "And, indeed, employment probably will grow..." With forecasts for growth next year at 3.5-3.8% or so, and productivity growth at 5% last year and so far this year<<

Except I don't believe trend productivity growth is 5% per year. "North of 2.5% per year" is what I believe. I trust my models more than the data...

Posted by: Brad DeLong on September 16, 2003 05:13 PM
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