October 29, 2003

Forthcoming Economic News

About five hours from now the Department of Commerce is going to release its first early estimate of the seasonally-adjusted pace of economic growth in the third, summer quarter of 2003. It will be a big number--growth at an annual rate of 6.0% per year or more. [UPDATE: It turned out to be 7.2%]

Sometime in the following week, the Labor Department will combine that estimate of the rate of economic growth with its own estimates that the number of hours worked in America fell at an annual rate of 0.7% per year during the summer. It will then announce an estimate of the annual rate of productivity growth over the summer--something close to a 7.0% annual rate. [UPDATE: My current guess is 8.0%]

How can such strong output growth coexist with such lousy employment news? It is this year's great economic data mystery. Everyone believes that it cannot last. Either (i) firms will find themselves unable to meet rapidly-growing demand with their current labor force, and will start hiring at a furious pace, rapidly expanding employment; or (ii) households will take a look at their less-than-certain employment prospects, cut back on spending, and the pace of demand growth will slow drastically.

Current forecasts are smack in the middle: predictions of output growth at an annual rate of between 3.5% and 4.0% per year over the next year and a half or so, coupled with employment growth of perhaps 125,000 a month on average--enough to keep the unemployment rate from rising, but not enough to make unemployment fall.

However, the longer the disjunction between fast output growth and stagnant employment continues, the less likely this smack-in-the-middle forecast becomes. Things are very likely to be either significantly better or significantly worse than the current consensus forecast--but we have no idea which.

Posted by DeLong at October 29, 2003 10:07 PM | TrackBack

Comments

Are quarterly productivity numbers worth the paper they are written on, or are they one of a number of economic statistics which must be taken with a pound or two of salt?

I'm not trying to make a point here - just curious.

Posted by: PJ on October 30, 2003 03:12 AM

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Are quarterly productivity numbers worth the paper they are written on, or are they one of a number of economic statistics which must be taken with a pound or two of salt?

I'm not trying to make a point here - just curious.

Posted by: PJ on October 30, 2003 03:12 AM

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Oh.. Maybe this explains why I am inundated with job offers in the last 30 days.

Posted by: Zooko on October 30, 2003 04:36 AM

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I am in the pessimistic camp based primarily on personal experience and anctedote. Too many of my friends, and myself are people who should be spending like mad as we are young single and massively endowed with educational capital. However the majority of us are either unemployed or underemployed, and the ones with real jobs that vaguely approximate their actual abilities are scared SH*tless of losing them soon. So we are all in save/conserve mode right now.

Posted by: fester on October 30, 2003 04:59 AM

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Recent studies have shown large structural changes in the US job market. Some sectors continue to shed jobs at a rapid rate and jobs are being replaced less rapidly in other sectors. Worker intensive sectors are being replaced by sectors that require fewer workers. Jobs in less productive sectors are being sent overseas while jobs in more productive sectors are increasing. Among the exceptions are health care and education where productivity gains are limited so the costs are skyrocketing. Thus the aggregate productivity numbers reflect increases in productivity within sectors AND increases in productivity due to shift in workers from less productive to more productive sectors. Because this recovery has a lot of economic restructuring, the productivity increases are no longer dominated by how rapid productivity can increase within a sector, but the differential in productivity between the job growth and job loss sectors.

In the textbook recessions of the 70s and 80s, companies laid off large numbers of permanent workers, but rehired once the economy recovered. In this recession, there is a lot of permanent job loss. Companies have shed workers, closed unprofitable divisions, etc. The dot bust has meant that the suppliers to the dot coms permanently lost customers and left with uncollectable bills and a glut of used equipment for competition. This has encouraged consolidation and job loss in this sector. Higher domestic steel prices and labor costs continue to contribute to the shift of manufacturing jobs overseas. Advances in communications and common language of commerce have eased the process of globalization of manufacturing.

When does the re-structuring slow down? That is the key to predicting when the job situation will turn around.

Posted by: bakho on October 30, 2003 05:43 AM

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bakho's response to PJ's question is the perfect example of why understanding the data is so important. There are few data series that, once understood, really need to be taken with a grain of salt. The federal government cranks out a mass of data, but most of it is comprehesible, and useful, with a bit of effort. Looking at today's GDP data, my first guess is that productivity growth will be reported at 7.6% (annualized). That implies a pretty massive drop in unit labor costs (guessing -4.9%), which implies a pretty solid rise in earnings. This helps confirm what we have been hearing from corporate reports - profit growth in Q3 was good. It also helps confirm that much of the growth in profits was from reducing costs (unit labor costs falling) rather than from pumping up revenues. That is not what I would have guessed if I just had corporate reports and GDP data in front of me. Based on those data alone, I would have expected the rise in Q3 earnings to have stemmed largely from a rise in gross revenues. So the productivity data are pretty useful.

Posted by: K Harris on October 30, 2003 07:26 AM

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How does a drop in inventory affect productivity growth?

Do inventory sales count towards GDP, but because they don't require current workers, make output per remaining worker (productivity) look higher?

Posted by: richard on October 30, 2003 07:45 AM

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How does a drop in inventory affect productivity growth?

Do inventory sales count towards GDP, but because they don't require current workers, make output per remaining worker (productivity) look higher?

Posted by: richard on October 30, 2003 07:51 AM

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How about the following as a factor: Some firms are hiring, but they aren't hiring Americans. They're "offshoring" the jobs that are being created.

I'm in the high-tech industry and it's phenomenal how many people I know whose jobs have moved to India. One of my friends (former technical writer) is now a personal chef. Another (former system support type) is now working on the packaging line of UPS. And these are two people who have "jobs."

Posted by: Vicki Meagher on October 30, 2003 08:26 AM

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How about the following as a factor: Some firms are hiring, but they aren't hiring Americans. They're "offshoring" the jobs that are being created.

I'm in the high-tech industry and it's phenomenal how many people I know whose jobs have moved to India. One of my friends (former technical writer) is now a personal chef. Another (former system support type) is now working on the packaging line of UPS. And these are two people who have "jobs."

Posted by: Vicki Meagher on October 30, 2003 08:28 AM

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Productivity should be substantially higher than +7.6% in Q3. GDP is not the measure of output used in the productivity calculation. They use a measure of business output (check the "related aggregates" table in the release) that rose 9.0% in Q3. With hours probably down (maybe not, depending on what they assume for self-employed), productivity growth could be 10%+.

Posted by: Bob on October 30, 2003 08:55 AM

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Productivity should be substantially higher than +7.6% in Q3. GDP is not the measure of output used in the productivity calculation. They use a measure of business output (check the "related aggregates" table in the release) that rose 9.0% in Q3. With hours probably down (maybe not, depending on what they assume for self-employed), productivity growth could be 10%+.

Posted by: Bob on October 30, 2003 08:59 AM

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Productivity should be substantially higher than +7.6% in Q3. GDP is not the measure of output used in the productivity calculation. They use a measure of business output (check the "related aggregates" table in the release) that rose 9.0% in Q3. With hours probably down (maybe not, depending on what they assume for self-employed), productivity growth could be 10%+.

Posted by: Bob on October 30, 2003 09:10 AM

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Productivity should be substantially higher than +7.6% in Q3. GDP is not the measure of output used in the productivity calculation. They use a measure of business output (check the "related aggregates" table in the release) that rose 9.0% in Q3. With hours probably down (maybe not, depending on what they assume for self-employed), productivity growth could be 10%+.

Posted by: Bob on October 30, 2003 09:14 AM

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"How can such strong output growth coexist with such lousy employment news?"

I don't see how there is any paradox. If productivity increases rapidly, I don't see any paradox of strong economic growth coexisting with lousy employment news.

Posted by: Mark Bahner on October 30, 2003 09:34 AM

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> If productivity increases rapidly, I don't see any paradox of strong economic growth coexisting with lousy employment news.

How about addressing the issue that Brad has stated, which is: where does all of this output go? That is, that productivity-based growth leaves you with a large number of people who've been squeezed out of jobs by that increase in productivity, and aren't, apparently, being hired. Therefore, you either have people spending money that they aren't earning (since the balance of payments doesn't suggest any great increase in exports) or... well, all the evidence suggests that you have people spending money that they aren't earning. And this vast bubble of consumer debt can't be shrunk by productivity growth.

Posted by: nick sweeney on October 30, 2003 11:16 AM

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We think the current situation is deplorable because we see it from the worker's point of view. If we view it from the corporate point of view, isn't this the best of all possible worlds? Cheap money, cheap taxes, and cheap labor. What's not to like?

Posted by: joe on October 30, 2003 12:38 PM

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Is this productivity growth good or bad for workers? Does it mean that they will probably get raises for producing more in fewer hours? Does it mean that their jobs are more vulnerable, since fewer of them are needed? I'm just wondering about the micro of this.

Posted by: James Wilkerson on October 30, 2003 01:07 PM

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Bob (Bob, Bob, Bob ... don't you hate it?),

Yeah, I cheated on the productivity estimtaes. I had the contributions table in front of me and ex-ed out the government contribution to get a rough estimate of business output growth. That method works better when the magnitudes aren't so large. It isn't gonna work out that well this tim. Which makes the unit labor cost estimate even weirder.

Posted by: K Harris on October 30, 2003 02:34 PM

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"How about addressing the issue that Brad has stated, which is: where does all of this output go?"

It seems to me that it could go at least two possible places:

1) lower prices, and/or

2) greater profits.

Around where I live, Home Depot, Food Lion, and WalMart all now have "self-checkout" lines. (Speaking as a consumer, I'm thankful that airlines have had "self-check-in" lines for quite a while.) Those companies all presumably lay off checkout people, and lower their prices and increase their profits.

"That is, that productivity-based growth leaves you with a large number of people who've been squeezed out of jobs by that increase in productivity, and aren't, apparently, being hired."

Yes, about 6 out of every 100 people who desire jobs aren't finding them. Whereas maybe 4 or 5 people out of every 100 people who desired jobs couldn't find them during the late 1990s:

http://data.bls.gov/servlet/SurveyOutputServlet?request_action=wh&graph_name=LN_cpsbref3

"Therefore, you either have people spending money that they aren't earning (since the balance of payments doesn't suggest any great increase in exports) or..."

...or you have lowering prices, and increasing profits.

1) Profits *do* seem to be coming back up.

2) And prices...well, I'm not even sure there's an accurate way to measure price trends these days.

For example, I just looked at LCD TVs a couple weekends ago. (I bought a 13 inch CRT TV+VCR instead...for $108! :-)) I swear, in the last 6 months to a year, LCD TVs have dropped in price by more than 50%. In the last year, a 3-megapixel digital camera has also dropped by about 50%. And a DVD player has probably dropped by 50%.

The standard thought of the last quarter century has been that the CPI overstates inflation by about 1%. I wonder, with the tremendous amount of new "stuff"--both products and services--whether the CPI doesn't now overstate inflation by more like 2 or 3%...or more?

Posted by: Mark Bahner on October 30, 2003 02:39 PM

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> Does it mean that they will probably get raises for producing more in fewer hours? Does it mean that their jobs are more vulnerable, since fewer of them are needed?

I think the micro is 'scared workforce = productive workforce'. Raises don't enter the equation. And even then, workforces might not be scared/productive enough to prevent the jobs going to, say, India.

(What's interesting, I hear from reports coming out of the UK, is that the Indian contractors are having to hire out of rural areas, since the existing labour pool for outsourced jobs appears to be dissatisfied with the wage level for unsocial hours, and turnover rates are like all manner of McJobs.)

Posted by: nick sweeney on October 30, 2003 03:22 PM

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Bob,

Paring a bit off the non-farm business, ex-housing categorie (since the output data used in the productivity report routinely show slightly slower growth) and, as you suggest, adding in a healthy dose of self employed hours, productivity is going to run more like 9.2% than 7.6%. That puts unit labor costs falling around 5.2% annualized. Gads.

Posted by: K Harris on October 30, 2003 04:55 PM

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Is it possible the high productivity growth figures are the results of poor accounting? Absent serious accounting reform, how accurate are the numbers, really?

The other area I would look at for structural changes in, is in the area of satisfying the need for human contact, which is a addressed by a whole range of new technologies (internet, cell phones, IM, etc) that have all only seen wide deployment in the past decade or so. It may be that use of the technologies is affecting the demand for some manufactured goods.

Posted by: Randolph Fritz on October 30, 2003 09:55 PM

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If there are less people employed to buy the stuff (supply demand) then they either have to be getting more money (presumably from credit) or they aren't buying. Who does that leave? The government. Don't know that that's the case, but there has been a lot of deficit spending.

Posted by: Ian Welsh on October 30, 2003 11:26 PM

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Ian, there's been a lot of spending on the war, so that could be a contribution--things that would be in the regular military budget and wouldn't necessarily appear in the specific war budgets. I don't know if it's enough to make a difference, though.

Posted by: Randolph Fritz on October 31, 2003 01:40 PM

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