Fed Vice-Chair Roger Ferguson gives a speech about what pre-Keynesian business-cycle theorist Knut Wicksell called the "natural rate of interest." This adds another data point to the idea that this concept is the, or one of the, ways the current Federal Reserve thinks about monetary policy.
This poses me a problem. I'm revising my macroeconomic textbook right now. If this is how the Fed (or a substantial chunk of the Fed) thinks about monetary policy these days, I need to teach it. But where? Somewhere in chapter 12 on inflation and unemployment in the sticky-price business-cycle model, I think:
FRB Speech: Ferguson--Equilibrium Real Interest Rate: Theory and Application--October 29, 2004: What is needed is a benchmark summarizing the economic circumstances--including, among other variables, the underlying strength of aggregate demand, the level of aggregate wealth, and economic developments in our trading partners--combining to shape the expansion of activity and the extent of pressures on inflation. One way of providing that benchmark is to consider what level of the real federal funds rate, if allowed to prevail for several years, would place economic activity at its potential and keep inflation low and stable. If the actual real rate is below that benchmark level, policy can be viewed as accommodative, in that if that stance were maintained, ultimately pressures on resources would build. If the actual real rate is kept above that benchmark level, policy would seem to be contractionary. This definition makes clear that the most relevant aid in policymaking is an intermediate-run measure, in that there may be forces at work in the shorter run that push spending away from potential output even if the real rate were pegged at this benchmark rate. It also makes clear that the concept involves a good amount of judgment--indeed, the same judgment that goes into making any economic forecast--about the determinants of spending, the trend of productivity, and the forces affecting inflation in the intermediate term.
Economists famously cannot agree on much. In this case, we cannot even agree on the name of the benchmark concept that I have just described. The real interest rate consistent with the eventual full utilization of resources has been called the equilibrium real federal funds rate, the natural rate of interest, and the neutral real rate. I prefer the first name, the equilibrium real federal funds rate, because, by using the word "equilibrium," it reminds us that it is a concept related to the clearing of markets. Even if economists settled on a name, however, we are not likely to agree on a single model to describe a system as richly complicated as the U.S. economy. Thus, there are as many ways of estimating the equilibrium real federal funds rate as there are different economic models.
This wage pattern is the main reason that I don't believe the unemployment rate of 5.4% means that we are near full employment. By wage trends, this smells like an economy with a lot more slack:
MaxSpeak, You Listen!: THE WAGELESS RECOVERY: The Prez says the economy is strong and getting stronger. By the evidence of the labor market, however, it is weak and getting weaker. My colleague and labor market genius Jared Bernstein shows that from the third quarter of last year to this year, the wage and salary component of the Employment Cost Index increased by 2.4 percent, relative to inflation of 2.7. The does not mean that total compensation in these terms is less, since these figures do not reflect fringe benefits, but it does mean that for workers this recovery stinks. Faster employment growth and better jobs would put upward pressure on money wages.
About half a point less than expected:
The New York Times: WASHINGTON (Reuters) - The U.S. economy expanded at a 3.7 percent annual rate in the third quarter, below expectations... accompanied by the lowest inflation in decades, the Commerce Department said on Friday... below Wall Street economists' forecasts for a 4.2 percent pace of growth
Slides for a paper I have not yet written--but very much want to write--on whether or not loose monetary policy is especially dangerous as a creator of potential bubbles.
Slides for the current (October 2004) version of my talk on The Current World Economic Situation.
(For Nightly Business Report, October 25, 2004.)
The unemployment rate right now is 5.4%--up relatively little from the 4.1% or so that it was at the start of 2001. In a normal business cycle we would expect such a small increase in the unemployment rate over four years to go with an increase in payroll employment of about 3.9 million: the rising adult population would add 6 million to the trend labor force, and most of them would find jobs even over a period in which unemployment rises.
But we haven't added 3.9 million jobs: we've lost about 0.6 million. The trend labor force has grown by only about 1.5 million over the past four years.
Where are the other 4.5 million? Republicans, anxious to see Rosy Scenario, believe that they have found better things to do than go into the labor force--that they have decided it is a better use of their time to go to school, or raise kids, or windsurf. Democrats, equally anxious to see Dismal Scenario, believe that the missing 4.5 million have given up hope of finding a good job.
I'm a Democrat. I *think* that if the jobs were there, the 4.5 million would return--that even though most of those out of the labor force aren't identifying discouragement as their primary reason for not looking for work, they would be looking for work if the labor market were better. But I don't *know*. And until we do really know, we won't be able to figure out what we really think of the economy over the past four years.
Andrew Samwick has a bunch of smart posts about labor force participation. Here's one:
Vox Baby: Ask and you shall receive. The Division of Labor Force Statistics at the Bureau of Labor Statistics kindly responded to my e-mail, and they set me straight on whether Ryan, who commented on the original post, would be classified as discouraged or just not in the labor force. Recall that Ryan described himself in this way:
"I was let go and looked for work for 6 months before deciding that what I really needed to do to get a decent paying and more stable career path was to go back to school. If I had been able to find a job, I'd be working."
Here's the text of the very helpful e-mail...:Good afternoon,
Your question was forwarded to me. This is a good question. I have attached a document below that will provide more information on the concepts and definitions used in the Current Population Survey or CPS. The CPS is the main source of information on the labor force in the United States and is a monthly sample survey of about 60,000 households.
Questions posed to respondents in the CPS refer to their activity during the Sunday to Saturday that includes the 12th day of each month.
To be classified as unemployed, a person would have not had any employment during the survey reference week, had to be available for work (except for temporary illness), and had made specific efforts to find employment sometime during the 4-week period ending with the reference week. (Individuals who were waiting to be recalled to a job from which they had been laid off are not required to have been looking for work to be classified as employed.)
People who are defined as discouraged workers are individuals who are not in the labor force (i.e. they are not employed or unemployed), but want and are available for a job and had looked for work at some point in the prior 12 months; however, they are not currently looking for work because they believe there are no jobs available or are none for which they would qualify.
Discouraged workers are a subset of the "marginally attached" and these individuals meet the same conditions with regard to their ability to take a job and job search in the prior 12 months, but the reasons they provided for not looking include, for example, transportation problems, child care problems, or ill health/disability.
To specifically answer your question: this person would be considered to be not in the labor force. Additional information would have to be obtained to determine whether this person meets the criteria mentioned above.
Again, I have attached a document below that provides more information on the concepts and definitions used in the CPS. http://www.bls.gov/opub/hom/homch1_c.htm
This person most likely would fall under the broader group of people who say that they "want a job now" and we do publish this estimate monthly. These individuals are considered to be not in the labor force, but are not considered to be marginally attached because they did not meet the criteria for job search in the prior year and/or were not available to take a job during the survey reference week.
BLS does publish this series monthly and here is the code for this series. (This is the code for the seasonally adjusted monthly data.)
LNS15026639
Simply paste this code into the box on this site, choose "All Years" and then click on "Retrieve data". http://data.bls.gov/cgi-bin/srgate
I hope this information is helpful and please let me know if you have any additional questions.<
Well deserved, and a good choice. The time-consistency of monetary policy stuff is absolutely fundamental: it sets out the credibility and consistency problems in a uniquely insightful and powerful way. The real business cycle stuff is inadequate as a theory of depressions, but very interesting and powerful as a theory of booms.
Still, were I in charge, I would have given the Sargent-Barro Nobel Prize before this one...
Press Release: The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel 2004: The Royal Swedish Academy of Sciences has decided to award the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel, 2004, jointly to Finn E. Kydland (Carnegie Mellon University, Pittsburgh and University of California, Santa Barbara, USA) and >
Edward C. Prescott (Arizona State University, Tempe, and Federal Reserve Bank of Minneapolis, USA) "for their contributions to dynamic macroeconomics: the time consistency of economic policy and the driving forces behind business cycles".
John Harwood of the Wall Street Journal reported, before the employment release:
WSJ.com - Bush Hopes Economy Will Offset Iraq: BUSH TEAM hopes economic data offset bad news on Iraq. Campaign strategists await jobs report today that's expected to show employment gains. Since the economy has been out of the spotlight, that news is "less redundant" and more likely to affect voters, a Bush adviser says.
It's highly foolish to make claims about things that you don't know but that are about to be revealed. The right thing to say is always: "We don't know now, but we will know soon, and then we will see." Anything else runs the risk of making it *very* clear that your picture of the world is based not on reality but on wishful groupthink.
"We" have been wondering this week about just why the Bush administration was talking up this morning's payroll report and the BLS March 2003-March 2004 job growth revisions. It seemed that if their estimates were too high, it would do further damage to the administration's credibility. And if the numbers did turn out to be good, they would speak for themselves.
Al Hunt of the Wall Street Journal now reports that the Bush administration was pushing the employment report because they had no other answer to reporters' question: "What will you do on Friday?" With no other accomplishments to point to--with Bremer and Rumsfeld off the reservation--with Dick Cheney's eternal lies playing the part of the elephant in the living room wearing a pink tutu--the only thing they thought they could say was: "The employment numbers will be very good, and we will talk about how the economy is improving and prosperity is just around the corner."
But once again, hope is not a plan:
WSJ.com - Campaign Journal: The final major economic report before the presidential election was a setback to President Bush and will provide further talking points for challenger John Kerry in tonight's debate.
The government report that only 96,000 jobs were added to the employment ranks last month was bad news for the Bush campaign in at least three ways: it was only about two-thirds as large as expected, the gains actually didn't keep pace with the growth of the population and it assures that Mr. Bush will be the first president since Herbert Hoover to experience a net loss of jobs during his administration.... Earlier in the week, Bush political officials had leaked word that a more robust employment report was expected today. They were planning to then claim credit for a turnaround in the economy, arguing that after the post-9/11 slump the Bush tax cuts are now starting to produce a vibrant economy.
Greg Ip of the Wall Street Journal reports that the CEA expects payroll employment to be revised upward by 400,000 or so on Friday:
WSJ.com - Political Debate Over Jobs Intensifies: In August, nonfarm payroll employment stood 913,000 jobs, or 0.8%, below the level when President Bush took office.... "This is a very preliminary estimate," said CEA spokesman Phillip Swagel, adding it was generated by an economic model with a typical statistical error range of plus or minus 140,000 jobs. "The only number that matters is the number that the BLS announces on Friday." The BLS will incorporate its revisions in the official data in February.... The CEA memo uses publicly available unemployment insurance records to calculate that employment from March 2003 through December 2003 grew by 288,000, or 32,000 per month, more than previously published BLS estimates. The memo says "it is tempting" to extrapolate the monthly figure out to March 2004, producing a total increase of 384,000. But it downplays the higher figure....
Even with positive revisions, Democrats probably will be able to attack Mr. Bush as the first president to oversee no net job creation since Herbert Hoover....
Not to mention slower real GDP growth than in ten of the last thirteen presidential terms! And a "Bush Boom" which turns out on closer examination to mean "faster growth than seen since 1999, or maybe 2000."
I had guessed that the upward payroll revision was likely to be some 200,000, but Phil Swagel is convincing: my guess is now up to 350,000 or so.*
Now Bush is not responsible for the fact that his first term will see payroll employment growth effectively flat. He is responsible for (falsely) selling his tax cuts as big short-term employment-generating job-creating boosters when that was not their main effect. And he is responsible for failing to put forward policies to guard against and alleviate the impact of the kind of bad business-cycle employment outcome that we have seen.
Indeed, the details of Bush's tax cuts--heavily weighted toward the rich, focused on reducing the taxation of income for capital--are powerful evidence against the common theory among Democrats that Karl Rove is king. In the summer and fall of 2002, Karl Rove must have been asking questions like, "What will the jobs situation look like in October 2004?" "Is there a chance that the jobs situation will be much lousier than the forecast suggests?" And "What can we do to guard against such a bad outcome?" And the failure of the administration to pursue a substantial Keynesian stimulus in 2002-2003--when it was clear that the Federal Reserve regarded itself as very short of dry powder--is powerful evidence that Rove was ignored. I've swung over to the belief that it's not political calculation, but ideology and chance--which advisor with which pet project happens to push Bush's hot button just before he makes his underbriefed seat-of-the-pants snap decision.
*Which would still leave payroll employment some 1.4 million short of where the administration forecast released last February said it would be by now.
Andrew Blackman of the Wall Street Journal writes:
WSJ.com - Stocks Slide on Run-Up in Oil: With oil futures approaching $50 a barrel, investors fretted over whether high oil prices are a temporary spike or a permanent fixture. Judging by the declines in the major stock indexes, the pessimists won that debate – at least for today. The Dow Jones Industrial Average fell... to 9988.54, down 58.70 points. The Nasdaq Composite Index fell 19.60 points to 1859.88, and the Standard & Poor's 500-stock index shed 6.59 to 1103.52.
The November contract for light, sweet crude jumped 76 cents to settle at $49.64 a barrel.... The surge in oil also sent Treasury prices higher, with the yield on the 10-year note briefly falling below 4% again...
Why are bond yields so low? Because the market expects the U.S. economy to slow markedly. Why is the Federal Reserve raising interest rates so fast? Because it expects a booming recovery? What does the stock market think? It agrees with the Federal Reserve? Why aren't bond traders shorting stocks (which they see as overvalued) while stock traders short bonds (which they see as overvalued)? Ah. That is a mystery...
Economist.com | The Buttonwood column: The fall in Treasury yields has been as dramatic as it has been unexpected.... Ten-year yields peaked in the middle of June at 4.9%, and have ratcheted down ever since.... That is decidedly odd. For short-term interest rates in America are still strikingly low. Real rates—that is, adjusted for inflation—are, in consequence, still negative. Very negative, in fact. Consumer-price inflation in America is currently about 3%, which makes real interest rates around -1.25%.... If the past is a guide, and assuming that inflation remains where it is, the Fed funds rate would need to rise to 3.5-4% to bring real rates back in line. Yet the futures market thinks that the Fed will put up rates by only another half a percentage point or so, to about 2.25%, and then stop. The reason lies in growth and inflation expectations, both of which have been falling....
Alan Greenspan, the Fed’s chairman, thinks this only a temporary lull; and the strong performance of equities and corporate bonds recently suggests that investors are giving him the benefit of the doubt. The key therefore seems to be inflation, which is low and getting lower.... [T]he inflation expected in ten-year inflation-indexed Treasuries (so-called TIPs) has fallen by six-tenths of a percentage point since June.
o anyone raised in the 1970s, such expectations are astonishing. Oil is now over $46 a barrel, the real Fed funds rate is still negative, the dollar is weak and looks set to get weaker, the budget deficit is climbing to the stars, yet still markets expect inflation to fall. It seems to defy logic.
Yet logic there is. The high oil price is a tax.... But it can be passed on to consumers in higher prices, or lower growth.... The market seems to have decided that it is being passed on only in the form of lower growth.... If this is indeed the case, the more surprising thing to Buttonwood’s eye is not the level of government-bond yields, even though much disinflation is taken on trust, but the level of the stockmarket, which seems to ignore it entirely.
Angry Bear: As we all know, Bush pushed through two massive tax cuts -- "the largest tax relief in history," according to the Bush campaign. Yet the current recovery is among the weakest in history, as illustrated in the previous post. Shouldn't the largest tax cuts in history have had more effect? How could such massive tax cuts have such little impact on the economy?
The answer is that it matters a great deal exactly how you cut taxes. Some tax cuts have bigger effects on the economy than others, for a given dollar amount of taxes cut. And clearly, the specific types of taxes cut by the Bush administration had just about the smallest bang for the buck imaginable.
Why? There are several ways in which those tax cuts were terribly designed to stimulate the economy. I won't go into all of them here, but let me address a couple of ways. First of all, the lion's share of the tax cuts went to the richest housholds. Since the marginal propensity to save is so much higher among high-income households than lower and middle-income households, this meant that a large proportion of the tax cut was simply saved, adding no demand to the US economy.... Much of the tax cut's 2003 effect was lumped into the third quarter of 2003. According to the BEA, the 2003 tax cut, which took effect in July of 2003, reduced personal income taxes by nearly $100 bn in the third quarter of 2003 compared to the same quarter a year earlier.... [T]he majority of that tax giveback was saved, not spent.
A few quotes on the Bush administration's February employment forecast that I don't want to forget:
And I am still amazed that none of these reporters has asked George W. Bush or his aides the following question: "What has gone wrong with the economy to leave us with an employment level 1.7 million below what you projected last February that it would be by now?"
Jason Furman says that the New York Times's Eduardo Porter is smart, careful, and willing to listen. Porter's story has a good lead. So why is Porter reporting that the administration's forecast earlier this year was for 216,000 net new payroll jobs a month, rather than the real number of 320,000 or so?
The New York Times > Business > News Analysis: In Trying Time, Scaling Down Expectations of Job Growth: There was a time when adding just under 150,000 jobs a month, three years into an economic recovery, would have been considered a disaster. As recently as last December, President Bush's Council of Economic Advisers forecast that in 2004 employment would grow, on average, by about 216,000 jobs a month.
Yet on Friday, when the Labor Department reported employment growth of 144,000 jobs in August and bumped up its earlier estimates for June and July, yielding a three-month average of 104,000 new jobs a month, many economists said it was good news. "The August jobs report fails to return us to visions of boom, but it nonetheless puts the U.S. back on a reasonable employment income trajectory," wrote Robert J. Barbera, chief economist at ITG/Hoenig, in a note to investors. N. Gregory Mankiw, chief economic adviser to the president, said the report "confirms that the economy is going in the right direction."...
The 313,000 jobs created in the last three months are hardly enough even to keep up with population growth, which on its own adds about 150,000 people to the labor supply each month...
PGL at Angry Bear thinks about the state of the labor market:
Angry Bear: This Labor Day weekend is a good time to discuss two ways of viewing the state of the U.S. labor market. The President’s reaction to the August employment report was to suggest that the fall in the unemployment rate was a sign of an improving labor market. But the unemployment rate is simply one minus the ratio of employment as measured by the Household Survey (E) relative to the measured civilian labor force (F). With E rising by a mere 21,000, the reason that the unemployment rate fell is simply that F fell, which was due to a fall in the civilian labor force participation rate from 66.2% to 66.0%. This civilian labor force participation rate is the ratio of F to the civilian adult population (P). [All data taken from the FRED database from the St. Louis Federal Reserve, which provides some near graphs.]
Several economists have suggested that the ratio of employment to the civilian adult population (let EP = E/P) is a better measure of the strength of the labor market. EP was 64.4% when Bush took office but fell to 62.2% by August 2003. For many months, EP remained virtually constant even as the Employment Survey was showing moderately strong employment growth. Some have suggested that employment growth has barely kept pace with population growth, but we noted earlier that the Household Survey was showing less growth for 2004 than the Employment Survey. We also noted, however, the jump in the Household Survey measure in July offset this tendency. So the 62.4% EP ratio reported as of August 2004 can be reasonably compared to the 62.2% figure a year ago to note that there has been a very modest improvement in the labor market situation. I shall also suggest that this measure is a better measure than the unemployment rate because of the decline in F/P, which was 67.2% as of January 2001 but only 66.0% as of August 2004. (We noted here how Brad DeLong challenged the notion that the drop in civilian labor force participation was voluntary).
If the natural EP ratio is 64.4%, then the 62.2% EP ratio as of August 2003 suggests we should have had 142.651 million employed as P was 221.507 million. Since E was only 137.693 million, this measure suggests [excess cyclical non-]employment was 4.958 million. The 62.4% EP ratio last month suggests we should have had 144.048 million employed as P was 223.667 million. Since E was only 139.681 million, this measure suggests [excess non-]employment was 4.367 million, that is, a mere 12% reduction.
Some Bush apologists are arguing we should not try to get back to an employment market where EP = 64.4%, which is odd since the Bush Administration still argues the economy was weakening when it took office. But EP’s peak in early 2000 was only 64.7%. Noting that EP reached 63.9% in July 1997 and continued to rise staying above this level through April 2004, it is reasonable to argue that the natural rate of EP is at least 64%. If the natural EP ratio is 64%, then the 62.2% EP ratio as of August 2003 suggests we should have had 141.764 million employed. This estimate suggests [excess cyclical non-]employment was 4.071 million. The 62.4% EP ratio last month suggests we should have had 143.153 million employed. This estimate suggests [excess non-]employment has fallen to 3.472 million, that is, a 15% reduction over the last year.
Unless one argues that there has been a reduction in American’s desire to work since 2001, any reasonable measure of the natural EP rate suggests two things: (1) we are still far below full employment; and (2) the recovery over the last year has lowered the employment gap by an amount between 12% and 15%.
Taking 64% as the natural employment-to-population ratio--and thus as a goal for macroeconomic policy--seems to me to make sense. The failure of inflation to pick up faster after mid-1997 is a powerful argument that the natural employment-to-population ratio is not less than 64%. And the calculation that we have 3.5 million people out of jobs who ought--in a well-performing economy--be working seems a good estimate to me.
144,000 increase in payroll employment in August, just enough to keep us from losing ground relative to the growing labor force. A nonfarm employment level of 131.47 million--but according to the forecast the Bushies released last February, it was projected to be 133.18 million by now.
I, at least, would very much like to know how George W. Bush answers the following question: "What has gone wrong with the economy to leave us with an employment level 1.7 million below what you projected last February that it would be by now?"
Intel cuts its estimate of its third-quarter sales by 5%:
Sept. 2 (Bloomberg) -- Intel Corp., the world's biggest computer-chip maker, cut its forecasts for third-quarter revenue and profit margins as demand from personal-computer makers slows. The shares fell as much as 9 percent in extended trading.
Sales for the quarter will be $8.3 billion to $8.6 billion, the Santa Clara, California-based company said in a statement. That compares with an earlier forecast of $8.6 billion to $9.2 billion. Gross margin will be about 58 percent, compared with a forecast of about 60 percent. Chip demand ``is trending below previous expectations,'' Intel said in the statement. Intel Chief Executive Craig Barrett reversed July comments that said demand is tracking as expected.
Growth in chip sales industrywide is weakening as personal- computer makers pare their own inventory amid lower demand for electronic goods, Intel said. The Semiconductor Industry Association said today that chip sales rose 1 percent in July from June, down from growth of 2.9 percent in the same time last year. Chipmaker Altera Corp. also cut its revenue forecast today.
``The shortfall in growth rates is large,'' said Pierr Johnson, an analyst at John Hancock Advisors Inc., which manages $30 billion including Intel shares. ``That tells me that demand has fallen off more than people expected.'' Intel's pared forecasts are below the reduced estimates that analysts such as Mark Edelstone at Morgan Stanley released this week. Intel shares...
Bad news about the third quarter:
USNews.com: Biz Buzz: Waning Wal-Mart sales (9/2/04): Wal-Mart. The nation's biggest discounter said sales at stores open for more than one year grew just 0.5 percent in August. That's about a percentage point below expectations.... Wal-Mart is the single biggest force in the retail economy, accounting for nearly $1 of every $10 in retail sales generated in the United States. Moreover, back-to-school season is considered among the most important windows of opportunity for retailers, second only to the holiday shopping season.
Wal-Mart also began to ratchet down expectations for September same-store sales, in part because of financial stresses among consumers.... Among the major department store chains, the news was no better. Federated Department Stores (parent of Macy's and Bloomingdale's) saw comparable-store sales fall 2.4 percent last month. May Department Stores (which operates major regional chains like Lord & Taylor, Hecht's, and Marshall Field) saw sales at stores open for more than one year fall 6.7 percent. And same-store sales at Sears were down 6.1 percent.
Specialty retailers got slammed, too. Limited Brands, parent company of such familiar chains as the Limited, Express, and Victoria's Secret, said same-store sales fell 2 percent last month. Comparable-store sales at Ann Taylor, a clothing retailer that caters to professional women, tumbled 4.5 percent in August. And same-store sales plunged 5 percent at Abercrombie & Fitch, a clothing company that caters to the youth market....
A disappointing unemployment claims number:
Bloomberg News: First-time applications for unemployment benefits rose by 19,000 to 362,000 in the week ended Aug. 28 from 343,000 the week before, the Labor Department said in Washington. The total was the highest since the week of April 10. Floridians put out of work by Hurricane Charley accounted for about half of the increase, a department spokesman said.... The economy probably created 150,000 jobs last month, according to a Bloomberg News survey of economists, about five times the number added in July though still below the 225,400 average of the first five months of the year. ``This number is high enough to be a little worrying...' said David Sloan, senior economist at 4Cast Ltd.... ``We're not heading back to recession, but the economy is not expanding at a pace that's going to create many jobs,'' he said....
``This number was a bit of a surprise, but once you take out the storm-related claims, we're still at a level that corresponds to monthly payroll growth of about 150,000,'' said Wesley Beal, an economist at financial research firm IDEAglobal in New York...
But 150,000 a month is a pace of growth for payroll employment that's just a hair above what is needed to keep pace with the trend growth of the labor force. It doesn't shrink the output gap by very much.
It is a very interesting and unusual business-cycle conjuncture. Output is growing at what would in normal times be thought of as a healthy pace. But our measurements of utilization and employment relative to potential suggest an economy with a large and slowly-growing gap between production and the economy's productive potential.
This is not good:
WSJ.com - GM, Ford Plan Cuts in Production: In moves that could slow the Midwest manufacturing economy -- particularly in election-year battleground states such as Michigan and Ohio -- the two titans of the U.S. auto industry, General Motors Corp. and Ford Motor Co., said they will cut fourth-quarter vehicle production. The announcement followed a disappointing August for auto makers, which saw American consumers steer clear of large, fuel-chugging sport-utility vehicles as oil prices surged. Sales of GM's big Chevrolet Suburban SUV fell 38%, amid a decline of 14% in overall sales, and Ford's large Expedition SUV slumped by 23%, despite discounts of as much as $6,000 per vehicle, amid a 13% decline in overall sales....
But the decision to ratchet back production is a significant step, because the auto makers play a huge role in the country's manufacturing economy. GM said it will cut production at its North American factories by about 7% during the fourth quarter in response to slowing sales. Ford said it will cut North American production by nearly 8%.
The Wall Street Journal's survey of forecasters:
Economists are decidedly less rosy in their outlooks than they were earlier this summer, but still expect growth to pick up by year end.
The 55 economists queried in the August forecasting survey on average expect GDP growth of 3.8% in the third quarter, down sharply from the 4.4% forecast in June. But they see fourth-quarter growth at 4.1%, down only slightly from their previous forecast of 4.2%. The economy grew at a 3.0% rate in the second quarter.
Most expect the "soft patch" in the economy, as Federal Reserve Chairman Alan Greenspan put it, will last three months or less. And, it hasn't changed their view on interest rates: They still expect the Fed's target for the federal-funds rate to rise to 2% by year end, up from 1.5% currently.
Economists are slightly less optimistic about jobs, expecting 194,000 nonfarm jobs to be created each month over the next year, down from their May estimate of 207,000 a month -- but well above the actual July gain of just 32,000. Most say a sustained drop in energy prices and an improvement in the labor market are needed to revive consumer spending.
Three new macro forecast revisions arrived in my inbox over the past week. They're all down--oil prices and the effective end of fiscal stimulus. In fact, they are all suggesting growth at or below the growth rate of potential output. This means that the labor market is unlikely to get any better over the next eighteen months or so.
This is really depressing...
Matthew Yglesias does his weekend update:
TAPPED: August 2004 Archives: WEEKEND UPDATE. Spent the weekend running marathons in Athens? Here's what you missed:
The Columnists
The Op-Ed You Actually Need To Read
- David Brooks. In it's time of crisis, the nation is hungry for generalist summer camps.
- Jim Hoagland. We should have fewer bases abroad, and fewer at home, and more soldiers, too.
- George Will. Watch me condemn McCain-Feingold without mentioning the president who signed the bill.
- David Broder. I guess this is what they mean by "working vacation."
- Gregory Mankiw explains that things were way worse during the Great Depression, so you've got nothing to worry about.
Damned if I can understand why Mankiw gets pride of place. As I have said, Mankiw's is one of those op-eds which does not quite say anything flat-out false, but which leaves all except the most expert readers with a less accurate and more muddled view of the issues than they had before. Specifically, if you read Mankiw with a non-expert eye, you are likely to think that he has told you that:
The piece certainly doesn't perform the economists' duty to raise the level of the debate. And I'm not sure what Yglesias thinks he has learned from it.