Politix, April 5, 2013
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News stories in recent weeks have been filled with accounts of an economic pick-up. Many accounts even were asking whether the Federal Reserve Board would end its quantitative easing policy before the end of 2013.
This discussion was far removed from the economic reality, as the weak March jobs report clearly demonstrated. The economy created just 88,000 jobs in March according to the Labor Department's survey of businesses, less than the 100,000 monthly growth needed to keep the rate of unemployment constant.
The separate survey of households showed the unemployment rate dipping to 7.6 percent, but this was entirely due to 500,000 people reportedly leaving the labor market and giving up looking for work. Employment, as measured by this survey, actually fell by 206,000. It is hard to put a positive spin on the March numbers.
While the March numbers should silence the optimists, it is difficult to understand what they were thinking even before the new data was released. After all, the economy grew at just a 0.4 percent rate in the 4th quarter of 2012. While the weak quarter was driven was some erratic factors, even averaging in the prior quarter, the economy was only growing at a 1.6 percent annual rate in the second half of 2012.
And even before the weak March report the jobs data did not look especially strong. While job growth averaged a respectable 200,000 a month over the five months from October to February, it averaged 240,000 a month in the corresponding months the prior year. And there was little reason to expect the economy to improve in the months ahead.
The ending of the payroll tax cut will pull over $100 billion out of the pocket of consumers over the course of 2013. In addition, the sequester will be cutting federal payroll and payments by roughly $80 billion. Together these policies are likely to slow growth by more than a percentage point.
On the other side analysts could point to a continued pick-up in the housing market and stock market. The improvement in the housing market is leading to a healthy growth in construction, but this sector accounts for just 2.0 percent of the economy at present. Even if it were to expand by 20 percent in 2013, it would still add just 0.4 percentage points to GDP growth.
The rise in house prices is pulling many homeowners above water on their mortgages and adding to household wealth, but we have a very long way to go before we get back to the wealth levels of the bubble years. The impact of this additional housing wealth on consumption will be very modest.
The same can be said of the stock wealth that has been generated by the run-up in the market over the last two years. The market might be back to its pre-recession peaks, but it is still about 15 percent lower once we adjust for inflation. Here too, any wealth effect on consumption will be limited.
We know that the stock market is not having much of an impact on investment. The most recent data on orders for equipment and software show that it is virtually unchanged from year-ago level; hardly the boom that some people seem to be expecting.
This leaves us with a slow growing economy that will be generating jobs at roughly the 100,000 monthly rate needed to keep the unemployment rate stable. In fact, the sharp decline in unemployment the last two months, from 7.9 percent in January to 7.6 percent in the March data, was accompanied by a sharp drop in labor force participation as more 600,000 people reported leaving the labor force.
Some of this decline was likely due to the shortening of the period of extended unemployment benefits. As long as workers collect benefits, they must be looking for work. When many people hit the end of their benefits due to the shortening of the period, they stopped looking for work.
However some of this fall in reported labor force participation was probably just the result of erratic movements in the data and will likely be reversed in the months ahead. The result is that we are more likely to see the unemployment rate rise than fall over the rest of 2013.
The bottom line is that we are looking at an economy that is at best growing a bit more rapidly than what is needed to keep pace with the growth of the labor force. Growth is nowhere near fast enough to fill the 9 million jobs shortfall that the economy is now seeing. At current growth rates we will not be getting back to a fully employed economy until somewhere around 2020.
Unless the government takes steps to boost growth, we will be seeing millions of people needlessly denied employment for over a decade. That should be the central focus of everyone in Washington.