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Jobless Recovery

 
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Selected piece from a ginormous blog about the Universe
My second prediction: the recovery will continue apace for another few months... but will start to die out by summer 2004.
Why? Put simply, I think that the bulk of the economic growth that we�re experiencing right now is due to the credit card binge that AB so aptly described yesterday. And that credit card binge will be coming to an end soon, without any source of economic growth to replace it.
We can divide the economy into four pieces, and consider each in turn.
1. Government taxing and spending (G and T, for those of you who've taken a course in macroeconomics): We haven�t quite maxed out on our national credit cards yet, but we�ve probably reached the peak of the current round of expansionary fiscal policy. Bush says he now wants to seriously rein in spending (though we'll see about that). For sure, the tax cuts have largely come and gone by now. If the budget deficit starts to shrink mid-way through 2004 as it�s projected to, that implies a fiscal drag on the US economy. So G and T will start slowing the economy after the summer of 2004.
2. Consumer spending (C): Consumer spending has been rising like gangbusters (relative to everything else) over the past couple of years. But consumer debt is now at record levels (even if you look at payments/income instead of the gross level of debt), credit card defaults are at record levels, people have mortgaged their houses up to the hilt and already spent the proceeds, and the tax rebates and cuts will have been largely spent by May. That leaves one source for possible increased consumer spending: current income. But since my prediction is for a slowdown in the economy this summer, that implies a slowdown in consumer spending, too. So C doesn�t help the economy, and probably starts hurting it later this year.
3. Business spending (I): Yes, there�s a bit of pent-up demand for business spending to replace old equipment, but not much. The things that worry me hear are 1) corporate debt, which is still historically very high (though not quite as high as in 2001); and 2) excess capacity. Firms are wallowing in tons of excess capacity. Until that starts to get used up, businesses will not undertake further major expansions. So I will not provide a sustainable source of economic growth in the next year.
4. Foreign trade (X and M): Here we have the one real possibility for help. Thanks to the falling dollar, we may see some pick-up in exports. However, I don�t expect it to be a big one, for a couple of reasons. 1) It takes a long time for a fall in the dollar to translate into a major change in trade � like 2 or 3 years; 2) US exports depend not only on prices, but also on how much income the rest of the world has. With pretty sluggish economic growth around the world, there�s a big question mark about that; 3) Fundamentally, the US is not going to have an improving trade balance until it starts saving more and spending less as a country. In the absence of the latter, the fall in the dollar will just be offset by an increase in export prices and a fall in import prices, keeping US trade about where it is now. So X and M will not provide a big stimulus to the US economy this year.
Add it all together, and what do you get? Continued growth for a few more months, perhaps, but tapering off in the second half of the year.
Kash
The Unemployment Rate Puzzle
This morning�s release of December�s unemployment data by the BLS contains the same puzzle that�s been dogging this economy for months. Why has the unemployment rate continued to fall over the past 6 months, even though jobs have not been created?
The answer is that people are dropping out of the labor force. The BLS conducts a survey every month and asks about 60,000 households whether they are working, and if not, whether they are actively looking for work. The number of people who have responded that they are not working but are actually looking for work (and thus are technically unemployed) has fallen from about 9.2 million in June to 8.4 million in December. That�s good. Unfortunately, they apparently haven�t stopped working because they�ve found jobs, since the number of jobs in the US economy is still below where it was a year ago. (See the graph in this post to see what I'm talking about.) They�ve stopped working for some other reason.
This makes me curious. Who is it that�s dropping out of the labor force and giving up on the search for work? And why are they no longer looking for work? The following graphs give some interesting information about this, though they don't provide the answer.
The first one shows the �labor force participation rate� (LFPR), which counts the percentage of the total population that is either employed or actively looking for work. As you can see from the brown line, it has fallen quite a bit over the past couple of years, and shows no sign of picking up yet. The blue line shows the LFPR for women only. It rose a lot during the 1990s, and interestingly, hasn�t fallen. That gives us one piece of information about who�s leaving the labor force: they're men, not women.

The second graph breaks the labor force into education categories. The brown line shows the LFPR for all people who are over 25 years old but never completed high school. The blue line shows people over 25 who have a college degree. The results really surprise me, but there they are: more poorly educated people are working, while more college educated people are dropping out of the labor force.

What's the explanation? I honestly don't know. Maybe this reflects a boom in low-skill jobs and a dearth of high-skill jobs in the US economy? Or maybe it's a reflection of the growing income inequality in the US -- well-educated (and thus wealthier) families have gotten so rich that can afford to have one member of the family stay home, while families who earn relatively little are being forced to work more to maintain their income. Or maybe it reflects a shift in preferences -- perhaps some well-educated people are deciding that their families are more important than finding a new job?
If anyone has another good theory to explain these facts, I�d love to hear it.
Kash

A Surprising Unemployment Report
The BLS reported this morning that the US economy created a net grand total of 1,000 jobs in December, according to the Department of Labor�s survey of businesses. That�s pretty bad. Surprisingly bad, in fact. According to the less reliable household survey, the US economy lost 54,000 jobs in December.
The good news is that the unemployment rate went down to 5.7%. That�s less bad. But since jobs aren�t being created, the only reason the unemployment rate is falling must be people dropping out of the labor force. Which is probably also bad.
Kash

UPDATE: It looks like Calpundit came up with the same theory, but a bit earlier.

Another Koufax Nomination!
Who knew that two constituted a "group"? Kash and I are now nominees in the "Best Group Blog" category in Wampum's ongoing Koufax Awards. Once again, we are being resoundingly trounced, but it's an honor just to be nominated (no, really, it is).
AB
Giant, Happy-Fun, Credit Card Party
Mark Kleiman points to and excerpts a piece, Sustained Budget Deficits: Longer-Run U.S. Economic Performance and the Risk of Financial and Fiscal Disarray, by Peter Orzag (Brookings), Robert Rubin (Citigroup), and Allen Sinai (Decision Economics). (Synopsis here; full paper here.) I could blather on about the importance of inflation expectations, as well as consumer and investor confidence, to the smooth functioning of financial markets and the economy in general. But instead I'll try an analogy.
If I were willing to max out my credit cards, I could have a really wild two or three week bender in Las Vegas. Not Dollar Bill Bennett style by any stretch, but a great time nonetheless. Until the supply of credit dwindles and the bills come due, at which point the good times cease.
If only there was some way I could pass the bills off to someone else, say my children and yours, and I didn't particularly care about the well-being of those children, then everything would be fine and I could have my Las Vegas bender. This plan, in a nutshell, is precisely the economic policy of Bush and the Congressional Republicans."
[ January 12, 2004: Message edited by: HS Thomas ]
 
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I used to worry about such things........
Back when I thought it might do some good.... It's too late now. The fact is that the system is going to continue to drain us until the kids cut it off - probably just before I retire.
The fact is that when the retirement age was set most people didn't make it that long. And if they did it was only for a year ot three beyond age 65. Now the SS taxes are up 10 times or more and are used to finance golfing retirements of 20 years or more. Right now I see no way for me to retire unless things change drastically. Most of us are going to revert to the human norm through the ages, retirement coming with death.
If you want to clean things up the standard retirement age needs to be set back to something like age 72 or so possibly with some subsidy for older workers to pay the difference in health insurance costs.
But things aren't painful enough yet, so we'll keep going along until they are. In the mean time we need jobs and economic growth and the current deficits we're running help with both of those.
 
HS Thomas
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Replacing old with new , and it's not just software.It's business models etc.
[ January 12, 2004: Message edited by: HS Thomas ]
 
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Originally posted by Bela Bardak:
I used to worry about such things........
Back when I thought it might do some good.... It's too late now. The fact is that the system is going to continue to drain us until the kids cut it off - probably just before I retire.
The fact is that when the retirement age was set most people didn't make it that long. And if they did it was only for a year ot three beyond age 65. Now the SS taxes are up 10 times or more and are used to finance golfing retirements of 20 years or more. Right now I see no way for me to retire unless things change drastically. Most of us are going to revert to the human norm through the ages, retirement coming with death.
If you want to clean things up the standard retirement age needs to be set back to something like age 72 or so possibly with some subsidy for older workers to pay the difference in health insurance costs.
But things aren't painful enough yet, so we'll keep going along until they are. In the mean time we need jobs and economic growth and the current deficits we're running help with both of those.


Actually the way things are going we may never be able to retire-- which makes me think of other creative solutions....There is an ant species that conducts mass-suicide when the colony is over-populated...who knows if the world will have to come to that...
 
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