*U.S. employment continues to decline, albeit much more slowly than at the beginning of 2009.
*Declining more slowly is not the same as increasing. The President’s team wanted to trumpet good news as early as possible and they jumped the gun. A few weeks ago they had to adjust their message (again) to a less optimistic one. This was a communications mistake, not a policy one.
*Employment growth will return. We just don’t know when, and the when is critical economically and politically.
*Most forecasters expect a strong Q3 GDP number, to be released Thursday, October 29th. The two big questions are: (1) will that GDP growth be sustained through 2010, and (2) will it translate into job growth? The fiscal stimulus is temporary, and needs to translate into job growth and consumption growth to be sustainable.
*It is normal for employment not to grow at the beginning of a recovery. As demand for their products begins to increase, employers typically make their employees work longer hours before hiring new workers. Once the increased demand looks stable and predictable, and once the current workforce is working as much as they can, then employers start hiring. First you increase hours per worker, then you increase the number of workers.
I recommend watching two numbers:
-1. the unemployment rate – It was 9.8% in September. Most economists consider about 5% to be “full employment.” When will it begin to decline, and how long will it take to regain full employment?-The press is paying a lot of attention to a third statistic, the U-6 measure of unemployment + underemployment. It’s an interesting and politically significant statistic, because it’s so much bigger than the traditional unemployment rate metric. But so far I don’t think it tells us a lot more about the trends than the above two metrics.
2. the net change in payroll employment – This was –263,000 in September. First this needs to turn positive. Second, since the labor force grows with population, this number needs to reach +100K to +150K per month to keep up with population growth and keep the unemployment rate constant. Finally, it needs to exceed this range for the unemployment rate to decline toward 5%.
*I will begin to feel good about the employment picture when we have had two consecutive months of payroll numbers >100K. At the same time you would expect the unemployment rate to start declining. I think the most important question you can ask an economic forecaster right now is, “When do you think the unemployment rate will begin to decline?”
*Job growth was slow to start in the 2003-2004 recovery. You may remember the political attacks from the left about the “jobless recovery” in the 2004 campaign. The recent severe recession was cause by a financial shock. Economists have widely dispersed views on two questions:
*Did the jobless recovery of 2003-2004 signal a fundamental change in the pace of job growth in a “normal” recovery?
*Will the somewhat unusual cause of this recession affect the pace of job growth in the recovery?
*There is even more uncertainty than normal in projecting near-term job growth. I generally treat economic forecasts more than 12 months out as wild guesses. This year I have shortened that window to 6 months. I don’t think anyone has a clue what the employment picture will look like 9 or 12 months from now.
*This uncertainty makes it hard for businesses to plan. Consumer spending is about 70% of GDP, and the most important determinants of consumption are (1) how many people are working and (2) are their paychecks going up?
*Some on the right argue the fiscal stimulus is not helping increase economic growth. That’s silly. The government is pushing hundreds of billions of dollars out the door. At least in the short run, that’s going to increase GDP growth. We should see some of that effect in the Q3 GDP numbers nine days from now. The fiscal stimulus should continue to help increase GDP growth above what it otherwise would have been into and through most of 2010, especially in the first half.
*I believe the stimulus is helping boost GDP growth now above what it otherwise would have been, but that it is too late, poorly designed, and horribly inefficient and wasteful. They are getting some bang, but their bang-for-the-buck and effectiveness are terrible.
*At the same time, the Administration irresponsibly overstates and overspecifies the employment impact of the fiscal stimulus.
-Their “jobs created or saved” numbers are claims, not measures. Since we can’t know how many jobs would have been lost without policy changes, we can’t measure the change that policies have caused.-Given the above caveats about unpredictability, the Administration’s forecast for 2010 is gloomy. The Administration forecasts an unemployment rate hovering in the high 9’s throughout 2010. If they’re right, there will be a period where net job growth will be slightly positive (say, 100K-150K jobs per month) and the unemployment rate will be inching downward. This could create a dangerous political dynamic, in which the Administration and Congressional Democrats will be tempted to argue that things are getting better, but where it won’t feel like they’re getting better because the unemployment rate is still so high.
*This means they cannot prove their statements about the number of jobs saved or created by policy, and critics cannot prove those statements are incorrect. This lack of verifiability, and the vulnerability of these statistics to political bias, allow the Administration flexibility to adjust their claimed success to meet political demands. It is irresponsible for an Administration to use these numbers as definitive, and irresponsible for the press to report them without heavy caveats.
*Every time I hear “[number] jobs saved or created,” I ignore the number and assume I am being spun. This is particularly true when the numbers are specific, e.g., “250,000 education jobs saved or created.” I think this is irresponsible and misleading. It feels like they’re just making these numbers up. Reading the methodology behind the numbers only reaffirms this view.
*The fiscal stimulus is one of several policy moves contributing to stronger (or less weak) economic growth. The Fed’s and Treasury’s actions (begun last September) to stabilize large financial institutions and financial markets helped a lot. The Fed is also keeping interest rates extremely low. Administration officials routinely attribute all of the unmeasurable economic benefit to one of three major policy changes. This is invalid.
*If this economic forecast plays out, it will pose an interesting question for the 2010 Congressional elections. Which is a more important determinant of how Americans vote: the level of unemployment, or the direction and rate of change? It’s possible that next November things will still be bad, but getting slowly better. Will voters punish the party in power for the level, or reward them for the change underway?
*Elected officials in both parties correctly think their rhetorical efforts can affect how voters view the economy. Expect the political jobs battle to continue for another year.
A great bit of commentary...