September 30, 2003

The Jobless Recovery

Morgan Stanley's Richard Berner worries about the "jobless recovery":

Morgan Stanley: ...If the trend rate of productivity growth is higher than the 2% to 2% rate that we and others have assumed now prevails, then the so-called "output gap" -- representing the balance between aggregate demand and potential supply -- could well be bigger and the resulting disinflationary bias larger than we've thought. However, I think there are two important offsets. Recent reductions in capacity are beginning to trim supply, helping to put a bottom under disinflationary pressure (see "The Rebirth of Pricing Power: Still in its Infancy," Global Economic Forum, September 19, 2003). And for inflation, the change in the gap, not just its level, matters. That's because both inflation expectations and the output gap influence inflation, in my view. And if consumers and businesses adjust their inflation expectations gradually, the change in the output gap will affect the rate of inflation. So if the gap is wide but closing, that dynamic will begin to reverse disinflationary pressures. Of course, growth must be above the trend to close the gap, and if the trend in productivity is as high as 3%, even sustained 5% growth will only close the gap [and reduce the unemployment rate] slowly.

I believe that strong economic growth will soon promote hiring again, probably by November or December at the latest, for three reasons. First, Corporate America has purged the hiring excesses of the 1990s, by my calculations. In addition, surging profitability likely will revive corporate demand for labor just as the profits bust that began in mid-2000 doomed hiring. Finally, a peaking in the tide of red ink in state and local government budgets will unmask unmet needs for education and other public services. But that is still a forecast. And when employment does turn up, the headwind of rising labor costs suggests that the pace is unlikely to be robust quickly (see "When Will the Jobless Recovery End?" Global Economic Forum, September 2, 2003).

Fed officials such as Governors Kohn and Bernanke have gone to great lengths to spell out the implications of what could be a wider output gap: Monetary policy can remain focused on fighting deflation and encouraging robust growth, perhaps for longer than market participants even now anticipate. At the very least, convincing market participants that the Fed intends to stay on hold far longer than in past recoveries may well make the Fed's strategy of "opportunistic reflation" more likely to succeed.

Posted by DeLong at September 30, 2003 01:10 PM | TrackBack


>>Berner worries about the "jobless recovery"
Some commentators spell it "jobloss recovery", referring to payroll figures. And consumers worry too: (from
Consumer confidence in the U.S. economy dropped in September, a research group said Tuesday, weighed down by nagging worries about a weak job market.

The Conference Board, a business research group based in New York, said its closely watched index of consumer confidence fell to 76.8 from a revised 81.7 in August. Economists, on average, expected confidence to fall to 80.5, according to

Posted by: Mats on September 30, 2003 01:40 PM
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