November 07, 2003

Todays "Good" Employment News

The estimated number for payroll employment in America in October grew by 126 thousand--that's a rapid enough pace of hiring to, if it is sustained, stop the unemployment rate from rising and the output gap from growing. As far as production and employment relative to the economy's potential is concerned, it's a sign that we're treading water--that we're no longer sinking lower.

Good news!

Well, neutral news. But when the employment news has been so bad for so long, the fact that the news isn't absolutely bad this month is good, sort of.

The fact that we are all happy at two months during which payroll employment grows as fast as the labor force--the fact that we regard this as good rather than bad news--shows us how low the employment-news bar has become, because of how bad the employment news has been for such a long time.

After all, today's employment level is 2.3 million lower than at the start of 2001, 2.6 million lower than the president's Council of Economic Advisers projected back in February would be employed today if the congress passed the administration's "jobs and growth" program, and even 75 thousand lower than the Treasury Secretary projected last month would be employed today.

George W. Bush is not responsible for the forces that have been pushing employment down (well, except to the extent that beating the phony Saddam-is-building-nuclear-weapons-to-kill-us-all drum diminished business confidence). But he is responsible for refusing to buy insurance when he had the chance--for pushing tax cuts designed not to boost spending and employment now and next year but to give the $200,000-plus-a-year crowd more money 5, 10, 20 years in the future. He made two bets: He gambled that congress and the press would be too sheep-like and too lazy to challenge story that these tax cuts for the $200,000-plus-a-year crowd were an effective employment-boosting policy. And he gambled that the economy would recover on its own so that a real employment-boosting policy wouldn't be needed.

He won on the first bet (God! Unbelievably sheep-like!).

So far it looks like he has lost on the second.

Posted by DeLong at November 7, 2003 08:21 AM | TrackBack

Comments

I conjecture that W & Co. hopes the picture gets better soon enough that either people forget about it before the election or are improving enough so he can claim success on that basis. Remember that Reagan caused a horrible recession in 1982, with the highest unemployment levels since the Depression, but still won in a landslide in 1984. Is his window big enough? I wish I knew.

Posted by: Jonathan Goldberg on November 7, 2003 06:47 AM

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Is it likely that this sort of employment growth will continue? Brad has said that he expects things to get worse in the coming months. Why is that?

Posted by: Brian on November 7, 2003 06:47 AM

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I conjecture that W & Co. hopes the picture gets better soon enough that either people forget about it before the election or are improving enough so he can claim success on that basis. Remember that Reagan caused a horrible recession in 1982, with the highest unemployment levels since the Depression, but still won in a landslide in 1984. Is his window big enough? I wish I knew.

Posted by: Jonathan Goldberg on November 7, 2003 06:52 AM

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>> God! Unbelievably sheep-like!

Ah yes, another pet peeve of mine. When people don't think as you do, they're sheep-like. But once they start polling in ways that agree with you, they're "too smart to be fooled."

I don't think you can have it both ways. Either they're always dumb, in which case any argument could sway them, regardless of who it comes from (Hitler, Reagan, DeLong, Stalin), or they're always smart, and they simply disagree with you. Claiming that they're sheep-like demeans you just as much as it demeans them.

And yes, I continue to say that even when they disagree with me (as they do now on various things).

Posted by: John Brothers on November 7, 2003 06:55 AM

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Not that I'm a fan of unemployment, but I wonder why 6.1% is such a big deal. Before the bubble, anything much south of that figure would have been considered inflationary and unsustainable. During the bubble, everyone marvelled that the rate was so low. So it pops back up into what used to be considered the "optimal" range and everyone's saying the house is on fire.

Sure, if indicators say it's going to get worse (and a lot of them do, right?), then it's a very worrying trend. But people are bent out of shape about the present rate? Is it just another example of our collective historical Alzheimer's, or what?

Posted by: David Yaseen on November 7, 2003 07:05 AM

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John,

I agree with your point about labeling people, but Brad didn't say people in general were sheep-like. He said specifically that Congress and the press have been sheep-like with regard to Bush's tax policy.

And he didn't say Congress and the press are sheep-like because they don't think as he does, he said they're sheep-like because they didn't do their job and ask critical questions or point out obvious inconsistencies.

Posted by: Mitch Mills on November 7, 2003 07:12 AM

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Mitch is right, which is why Brad is right, on that point, anyhow.

Brad, give us your range of estimates for the monthly pace of normal labor force expansion. If 133k (or lower) is the low end, then yes, 125k new jobs per month is enough to stabilze the "real" jobless rate, whatever happens to the reported jobless rate. I thought the typical figure for new entrants to the labor market (not during periods of employment contraction) was closer to 150-170k. That would mean 125k jobs per month are still not enough to assure 94% of new labor market entrants find jobs.

By the way, the September revision is pretty typical. That is not to say that the 125k job rise is wrong (rather, it says it was predictable) or that it doesn't matter. If September did what it normally does, there is a good chance October will, as well. October revisions tend to be downward, not upward.

Posted by: K Harris on November 7, 2003 07:27 AM

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David,

The rate is not 6.1%, it has dropped to 6.0%.

Academics can argue all they want about what is the root cause of economic performance. But the political reality is that if job growth continues, and people feel the economy is good (AND the rate is less than 6%), Bush claims victory on the economic front.

Remember, Reagan won 49 states and unemployment was over 8%. Imagine what the dems would be saying if the rate were that today...

Posted by: mark on November 7, 2003 07:35 AM

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To this sheep it looks like the economic (including the employment situation) is improving at an increasing pace (I was one of those new hires in October).

What will it take (other than a Democrat in the White House) for the regulars on this board to deem the economy healthy? BTW I seem to remember the natural rate of unemployment being 5-6% when I took econ 101 back in '94. What changed?

I am not trying to be entirely snarky here - I would like to know what you think.

Posted by: Jason on November 7, 2003 07:42 AM

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Jason,

I am getting a little exasperated here myself. The employment news isn't good, it's at best "good".

I think the notion that Bush is a bad president is an unfalsifiable one among most on this board, ergo, the economy must either be doing badly because of him, or well in spite of him.

Posted by: maciej on November 7, 2003 08:23 AM

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You cannot simultaneously claim that Bush is stupid because he subscribes to wrong economic ideas, and then turn around and claim that he's gambling that the economy will recover on its own because he understands that his program will do nothing to help the economy.

Either Bush has crazy economic ideas, or he's cynically playing with economic policy to help the very rich for reasons that haven't been really well elucidated, short of "he's Republican, ergo he's evil."

Posted by: Ray on November 7, 2003 08:28 AM

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As the deterioration in the employment situation has only just reversed, and almost nobody expects a repeat of the Q3 GDP growth rate, it seems premature to gauge the second-order changes ('improving at an increasing rate') in the macro situation.

One note about the employment situation in November '84. Payroll employment was up just over 4M jobs y/y, and a bit more than 7M from the trough in December '82. Based on Snow's job growth talking points, this sort of performance would seemingly be a huge surprise to the administration itself if it were to come to pass.

Perhaps an equally instructional case could be November '91 to November '92: a payroll employment increase of 1M, big budget deficit, Gulf War victory worn off... we'll see.

Posted by: Tom Bozzo on November 7, 2003 08:31 AM

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Just a quick observation to the tarpit:

The observations on the Bush presidency are as follows. The policies actually inacted have very little effect on the short run, outside the immediate tax-rebates used to sell the larger tax cuts. Thus improvements ARE outside the roll of the white-house, and largely luck/greenspan.

Likewise, the attacks on Bush on the economy are not the short run negatives, but the long term systematic overhang caused by the ballooning debt due to massive misspending on the military and tax cuts largely targeted at the uberrich.

See http://www.d-n-i.net/charts_data/evolution_of_the_fy_2004_supplemental.htm for a good graph on how the military spending really is out of control. Not a happy chart.

Posted by: Nicholas Weaver on November 7, 2003 09:03 AM

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Back again, on the question of how many job gains are needed per month to stabilize the labor market. Beckner at Market News has a Fed "source" on record today saying "we still have to add jobs on the order of 150k per month to stay even with people coming into the job market." I know 25k jobs per month sounds like quibbling, but with 1 million jobs lost since the recession was declared over, 2.5 million since it began (not to mention job growth missed), I feel inclined to err on the side of too many jobs. I think 125k/month is going to leave a lot of people out for a long time. I like the trajectory, though.

Posted by: K Harris on November 7, 2003 09:19 AM

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An important point to make is that the intensity of the unemployment experience due to permanent dislocations and the length of spells may still keep the economy a politically salient issue for 2004. I discuss this and other related issues of today's job report at Economists for Dean

http://econ4dean.typepad.com/econ4dean/2003/11/finally_jobs_pi.html

Posted by: lerxst on November 7, 2003 09:37 AM

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The sky is still falling! The sky is still falling!

Posted by: Doomicrat on November 7, 2003 09:51 AM

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I notice a bit of a political wind blowing through this series of replies. Guess that has something to do with the way Brad kicked it off. So, just for a brief glint of perspective... The labor market did something very similar to what we see now in late 2002, then tanked. It was pretty obviously war worry that sank employment then, so there is no reason to expect another interuption of the expansion is around the corner. Still, there is little we know with certainty about this cycle. Those who like what they see are not being unreasonable - there are widespread signs of economic improvement. However, it is entirely possible to have doubts about this restarted recovery, even if you aren't a traitorous, US hating, partisan. Those who try to construct political forecasting models based on economic performance generally find that economic data from about 6 months prior to the election have the most predictive power, so we are 6 months early for drawing any electoral implications from the economy.

Posted by: K Harris on November 7, 2003 09:55 AM

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K Harris,

I thought the probability of my agreeing with you was very small, but here we are...

Posted by: maciej on November 7, 2003 10:11 AM

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Well, but i don't agree with K Harris: the idea that "war worries" had something to do with employment not growing is just plain silly, and i don't care how many times alan greenspan cites it.

Employment didn't grow because top-line revenue wasn't growing, which is why productivity grew instead as businesses declined to add costs.

The appropriate way to judge Bush policies is against what the backbone administration claimed for them: as Brad has noted, we were supposed to, by now, have added north of 1M jobs if we passed the '03 tax cut, and we haven't. So Bush's policies have failed on their own terms.

In terms of the economy as a whole, with the inordinate amount of fiscal stimulus sloshing around, we will probably still see some job growth, but i'm betting that we don't get anywhere close to the revised north of 2.5M jobs by next november that the backbone administration is now predicting.

Jason, there is no such thing as a "natural" rate of unemployment. What you learned about was NAIRU (IIRC!), the non-accelerating inflation rate of unemployment (i may have the order and the acronym wrong). Since you took econ 101, though, we had the late '90s, in which we saw that it was most assuredly possible to have unemployment hovering around 4% without inflation accelerating.

Posted by: howard on November 7, 2003 10:58 AM

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Maciej, Mark and Jason: First, Jason, congratulations on your new job. It's a reason to celebrate.

The question is (as I keep pointing out) how much economic growth under Bush is costing in terms of deficit spending and future high interest rates. During the Clinton presidency, excellent growth was obtained even while paying down the national debt. That allowed interest rates to fall despite the excellent growth.

The Bush economic record has not been terrible-- but it has relied on deficit spending. If you happen to be buying a car or home now, you get the low interest rates that recessions permit. But what happens two or three years from now, when the economy is firing on all cylinders? Interest rates will be above what they should be. High interest rates mean high unemployment. And if you happen to need to buy a car or house then, well, too bad. You'll pay a premium.

There really are two economies. One is for people who have stable work and enough savings to be able to time buying decisions to get the best deal. The other is for people who happen to lose jobs or don't have enough savings to be able to time purchases. And, as one gets older, and burdened with obligations to a spouse, children and a mortgage company, the fear of losing a job becomes much greater. Depending on which economy you're in, or your relatives and friends are in, or you think you might end up in, you have a different view of things.

I propose that you not ascribe wrongful motives for people who simply disagree with your view of the world.

Posted by: Charles on November 7, 2003 11:09 AM

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By my math, if we double this rate of employment increase and sustain for over 2 years, we might get close to full employment then. Using the A tables from www.bls.gov, it looks like total civilian employment has grown only 294,000 over the past 34 months while labor supply has grown by over 3.5 million. So the new GOP spin might be 100 thousand new workers per month and 100 thousand new jobs per YEAR.

Posted by: Hal McClure on November 7, 2003 11:09 AM

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the question also that needs to be asked--
what is considered unemployed ? and how is that different than during Reagan's term.

seems like the definitions and they way work is structure has changed in 20 years.

if you used the Reagan definition i would predict Unemployment would be considerably higher than 8%

Posted by: smartone on November 7, 2003 11:31 AM

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the question also that needs to be asked--
what is considered unemployed ? and how is that different than during Reagan's term.

seems like the definitions and they way work is structure has changed in 20 years.

if you used the Reagan definition i would predict Unemployment would be considerably higher than 8%

Posted by: smartone on November 7, 2003 11:32 AM

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Since the raw numbers of persons employed is larger now than at the start of Bush's term, I couldn't explain to right-wing nuts how the 2.3MM jobs lost is calculated. (Luckily, since Sept I have not been one of them.) Can an economics-savvy person explain?

Posted by: Andrew Lazarus on November 7, 2003 11:50 AM

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Since the raw numbers of persons employed is larger now than at the start of Bush's term, I couldn't explain to right-wing nuts how the 2.3MM jobs lost is calculated. (Luckily, since Sept I have not been one of them.) Can an economics-savvy person explain?

Posted by: Andrew Lazarus on November 7, 2003 11:57 AM

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Another dimension which hasn't been discussed in this thread regards the types of jobs being created. What proportion of these are permanent full-time positions, or part-time perhaps seasonal jobs? Are there concentrations in certain sectors which may be experiencing short-term growth, or is this across-the-board sustainable growth?

Posted by: hamstak on November 7, 2003 12:20 PM

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smartone: the Current Population Survey FAQ claims that the underlying concepts have not been "substantially altered" -- http://www.bls.gov/cps/cps_faq.htm.

Andrew: the decline is in payroll employment, measured by a survey of establishments. See the employment situation 'B' tables: http://www.bls.gov/webapps/legacy/cesbtab1.htm.
The 'A' tables, based on the CPS, present a better (by some indicators) but still not quite rosy picture. (Total employment is not down, but a variety of other indicators are not that bright.) IIRC there has been some discussion in past posts of how one might resolves the discrepancies between the surveys, and why the payroll numbers are the favored measure.

hamstak: the 'B' tables present sectoral detail for payroll employment, and some 'A' tables have some info on motivation for part-time jobs, broader unemployment concepts, etc. (e.g. http://www.bls.gov/webapps/legacy/cpsatab12.htm).

Posted by: Tom Bozzo on November 7, 2003 12:44 PM

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Andrew, here's a stab at an analogy. You're at a diner drinking coffee with sugar (or cream, if you prefer). The waitress comes by and refills your cup when it's half empty. Which conclusion would you draw about the coffee: A) No sugar has been removed from the cup, therefore the cup has not lost any sweetness; or B) The fresh coffee has diluted the sweetness and more sugar must be added just to keep the coffee as sweet as it was before?

Posted by: neil on November 7, 2003 12:49 PM

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> Bush claims victory on the economic front.

Deficits don't matter?

Posted by: middle class on November 7, 2003 01:01 PM

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Tom

Enjoyed the short discussion of the various BLS tables. It took me a while to realize that the B tables and the A tables both existed and that the Democratic claim of the number of jobs lost is based on the B table figures. I looked at the A table figures this morning to get my 294 thousand rise in employment v. new workers being 3.5 million. But then I remembered the many times Dr. DeLong has mentioned average workweek which has declined by about 1.7% over the past 34 months. And the "participation rate" (percent of adult population reported as workers with or seeking jobs) has fallen somewhat. So had we stayed at full employment and he we seen the promised incentive effects of the 2001 tax cuts - just think how much more labor input we would be using.

Posted by: Hal McClure on November 7, 2003 01:18 PM

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K Harris as usual is a superb voice on data analysis.

Though I am delighted at the September and October job creation gains, we are still not growing fast enough to do more than possibly keep up with population growth in the labor supply. The growth of productivity shows just how rapidly we could be growing. There is an employment and wage gap that is troublesome, and it will be months before we know if this job creation surge can be kept and added to.

Lokk at the fine analyses on EPINET -

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

Posted by: anne on November 7, 2003 01:21 PM

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Tom

Enjoyed the short discussion of the various BLS tables. It took me a while to realize that the B tables and the A tables both existed and that the Democratic claim of the number of jobs lost is based on the B table figures. I looked at the A table figures this morning to get my 294 thousand rise in employment v. new workers being 3.5 million. But then I remembered the many times Dr. DeLong has mentioned average workweek which has declined by about 1.7% over the past 34 months. And the "participation rate" (percent of adult population reported as workers with or seeking jobs) has fallen somewhat. So had we stayed at full employment and he we seen the promised incentive effects of the 2001 tax cuts - just think how much more labor input we would be using.

Posted by: Hal McClure on November 7, 2003 01:21 PM

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Some of the automakers and big manufactureres are initiating call backs of laid off workers. It looks like employment will trend up.

Posted by: bakho on November 7, 2003 01:23 PM

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what is driving consumer demand? is it still debt driven big ticket stuff, like cars and housing?

Other than the wealthy, are there enough people out there who can continue to spend?

Posted by: Termination Shock on November 7, 2003 01:30 PM

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Special Note:
Good Grief -

http://www.talkingpointsmemo.com/archives/week_2003_11_02.html#002176

According to an email sent out Wednesday by director of the White House Office of Administration, Timothy A. Campen, the Bush administration will no longer respond to budgeting questions from congressional Democrats. And they imply they may apply this new principle, if you can call it that, to non-budgetary oversight....

Posted by: anne on November 7, 2003 01:38 PM

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One thing that no one seems to be mentioning is the nature of the new jobs allegedly being created. If 10,000 high-paying, skilled IT jobs are sent to India, and in the same month Wal-Mart hires 12,000 clerks and greeters at $8 an hour, then this shows up in the figures as a reduction in the unemployment rate. But only a moron would consider this to be a real improvement in the jobs situation. Raw unemployment numbers may have been sufficient in the 1930s when people were happy to have *any* job, but these days the bar is set a bit higher. And no one seems to be watching that.

Posted by: Firebug on November 7, 2003 02:09 PM

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One thing that no one seems to be mentioning is the nature of the new jobs allegedly being created. If 10,000 high-paying, skilled IT jobs are sent to India, and in the same month Wal-Mart hires 12,000 clerks and greeters at $8 an hour, then this shows up in the figures as a reduction in the unemployment rate. But only a moron would consider this to be a real improvement in the jobs situation. Raw unemployment numbers may have been sufficient in the 1930s when people were happy to have *any* job, but these days the bar is set a bit higher. And no one seems to be watching that.

Posted by: Firebug on November 7, 2003 02:14 PM

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The point in the employment report that is not discussed is the extremely weak wage data. The
real problem in the economy is extremely weak income growth and the recent increase in employment does not change that. The three month growth rate of average hourly earnings just fell under 1% and the year over year number is under 2%.Part of this is the quality of jobs problem .Real weekly real earnings growth is now negative.Without tax cuts or morgage refinancing the consumer does not have the income to sustain strong spending. Moreover, in my real retail sales model actual real growth is more than one std error above the fitted value. Historically when that has happened real sales growth has slowed sharply. Finally, we had three months of employment growth last year and at that time the growth bull said we were off to the races just as they are now. It is still far from clear that the recent strength is not just a blip, and the case that we are now at the start of sustained stronger growth is not all that strong.

When you look at the productivity and real growth data, what is unusual is not that productivity is so strong, but that real growth is so weak by historic standards. The last years productivity gains are perfectly normal for a first year of a cyclical recovery, but the real GDP and final demand numbers are extremely weak by historic standards.

Posted by: spencer on November 7, 2003 04:50 PM

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I've asked these questions before, but either I haven't gotten any answers or I have forgotten them. Does anyone here expect the good news to stop, or even for the economy to get worse, over the next few months? If so, why?

Posted by: Brian on November 7, 2003 04:50 PM

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Putting aside exogenous shocks (another terrorist attack, for instance), things that could go wrong in the next few months include: a pullback in consumer spending; an increase in long rates harms the housing market and chokes off the incipient rise in business investment; overseas investors rebalance their portfolios and reduce their committment to us government paper, thereby leading to the increase in long rates i just mentioned; increased economic activity leads to the first indications of inflation, leading the Fed the raise rates, leading to the increase in long rates i keep mentioning!; new business tax breaks without offsetting spending cuts (as are currently being planned by the house gop) and/or the new medicare drug benefit that we can no longer afford remind the markets of the fiscal trainwreck that is the backbone administration's legacy (see the writeup in the current Economist: "Long after Dubya is back on his ranch, Americans will be trying to recover form the mess he created"), leading to interest rates, blah, blah, blah - things like that.

Things that could go well: a continued steady growth in job creation supports continued consumer spending, while a continuation of the productivity boom (at a slightly reduced level) enables companies, even with modest top-line growth, to hire new workers and still increase profits.

Me? I'm betting on something going "wrong."

Posted by: howard on November 7, 2003 05:23 PM

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Well, I expect real GDP growth of 3.5% or so for the next two quarters, with a stable unemployment rate (and payroll employment numbers of about +120,000 a month or so). But I could be wrong--and surely will be, either on the upside or the downside...

Posted by: Brad DeLong on November 7, 2003 05:52 PM

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Brian:
Almost everyone expects growth to slow sharply in the next quarter. Most forecasters are in the range of 3% (bears) to 5% (bulls) for growth over the next year. The big thing is that the sharp increase in consumer spending this summer was people spending the tax rebates and that source of income is no longer available. Consumer spending growth will slow, the debate is over how much it will slow. Capital spending should be OK -- growth in a wide range of from 5% TO 15%, stonger than over recent years but weak by historic standards -- expecially when compared to the 1990s. Housing is already so strong that it can not add much to growth. Inventories were still being cut last quarter -- just going to zero change in inventories will generate a significant temporary pop in growth.
The real question revolves around what is the proper I/S ratio. The current I/S ratios is at historic lows. Growth bulls believe it will go back to historic norms or averages. I personally believe that we will stay at new lows -- that is what part of the 1990s tech revolution was about. Moreover, in high tech prices are falling so sharply that you lose money if you hold inventories, so you minimize inventories.
Finally is trade. the bulls assume trade will not be a significant factor. I think that is bull, and expect imports to soar in the next quarter cutting growth and offsetting the bounce from inventories. The US import elasticity is extremely high. imports are a function of real final demand over the prior couple of quarters and inventories. To cut inventories imports were cut in recent months to well below their long term trend. Consequently, trade was a positive this quarter. But I expect import growth to explode next quarter. It is also part of the financing the defict problem. The gap between savings and investments means that foreign capital inflow will have to continue growing rapidly. But since the savings-investment gap must
equal the current account deficit this means the current account deficit must continue to soar. If it goes from 5% fo GDP now to 7% of GDP in two years, what many international experts expect, it means the current account defict will be growing at over a 20% annual rate. This also feeds back into the consumer spending -- consumer income problem. Fiscal stimulous is suppose to start a chain reaction. You spend you tax rebate and it is someones elses income, they then spend it and it is someones' income to spend. A self reinforcing spiral started by the initial tax cut.
In a closed economy that is how it works. But in an open economy if you take your tax cut and buy
a new VCR it was probably made in Asia. Consequently, the income for making the VCR goes to someone in Asia and the self-reinforcing spiral I described earlier is aborted. Many people say the federal deficit is doing a poor job of stimulaing the US economy but a great job of stimulating the Chinese economy because of this. Historically, you saw this at work when spending always led income. But now you are not seeing the income being generated because of the leakages abroad. The typical large scale econometric model and most forecasters really still look at the US economy as a closed system. Trade is sort of added on as an afterthought if it is even considered. Most models do not have feed back loops from trade into the domestic economy. Consequently, in most models the negative impact of trade is almost always underestimated.

Does this give you the framework to answer your question?

Posted by: spencer on November 7, 2003 05:57 PM

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Spencer --

But then the person you give to the dollars to in Asia either uses the money to buy U.S. treasuries, keeping interest rates low which allows you to refinance your home, or to buy U.S. stock, cutting the cost of capital and making it more likely for companies to invest, or invests the money directly in the U.S., creating jobs.

Perhaps more to the point, if you couldn't buy the Asian DVD player for $69, and had to buy an American one (well, there are no American DVD players, but let's imagine there were) for $129, perhaps you wouldn't spend that money at all, since at $129 it might make more sense to you to save it. Then Wal-Mart (which you've strangely left out of your "self-reinforcing spiral" equation, even though presumably some American retailer is selling you the Asian DVD player) loses your money, and there is no stimulus at all.

In any case, while it's fine to say that in the short term tax cuts can stimulate spending, no one seriously thinks that their effect can be long-lasting. So the "self-reinforcing spiral" is over now, and trade's impact on it going forward will be nil. So if trade is going to hurt the economy going forward, it has to be in some way other than bleeding away the stimulus. So what is the evidence that trade deficits are a long-term drag on growth? (I understand trade deficits are subtracted from GDP, but that's an accounting decision, which does not demonstrate that in the absence of trade, GDP would be higher.) Would we really be better off in a closed economy, which is what the implication of your last point seems to be?

Posted by: James Surowiecki on November 7, 2003 08:12 PM

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Spencer --

But then the person you give to the dollars to in Asia either uses the money to buy U.S. treasuries, keeping interest rates low which allows you to refinance your home, or to buy U.S. stock, cutting the cost of capital and making it more likely for companies to invest, or invests the money directly in the U.S., creating jobs.

Perhaps more to the point, if you couldn't buy the Asian DVD player for $69, and had to buy an American one (well, there are no American DVD players, but let's imagine there were) for $129, perhaps you wouldn't spend that money at all, since at $129 it might make more sense to you to save it. Then Wal-Mart (which you've strangely left out of your "self-reinforcing spiral" equation, even though presumably some American retailer is selling you the Asian DVD player) loses your money, and there is no stimulus at all.

In any case, while it's fine to say that in the short term tax cuts can stimulate spending, no one seriously thinks that their effect can be long-lasting. So the "self-reinforcing spiral" is over now, and trade's impact on it going forward will be nil. So if trade is going to hurt the economy going forward, it has to be in some way other than bleeding away the stimulus. So what is the evidence that trade deficits are a long-term drag on growth? (I understand trade deficits are subtracted from GDP, but that's an accounting decision, which does not demonstrate that in the absence of trade, GDP would be higher.) Would we really be better off in a closed economy, which is what the implication of your last point seems to be?

Posted by: James Surowiecki on November 7, 2003 08:17 PM

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The strange thing about the second bet is that he knew the tax cut was his last chance to avoid the fate of his Father. Why take a chance on a form of tax cutting all reputable economists knew was inefficient? The mind of Bush is an amazing thing.

Posted by: BobNJ on November 8, 2003 06:13 AM

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No, we would not be better off in a closed econ, and I agree with most of what you say. But the question is the size of the current account deficit. It reflects how we are living beyond our means. We are running a current account deficit to finance consumption much more than investments.
It is the flip side of the govt deficit more than anything. If the CA deficit is driven largely by the savings-investment gap it changes how crowding out from govt deficits work. Rather than hurting the financial sector it hurts the sectors exposed to foreign competition.

The point that some of the income from spending goes to retailers and transport does not change the point that the Keynesian multipliers from stimulous is not the same now as in earlier eras when the US did not have a massive CA deficit.

Posted by: SPENCER on November 8, 2003 06:51 AM

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