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The Atlanta Fed's macroblog provides commentary on economic topics including monetary policy, macroeconomic developments, financial issues and Southeast regional trends.

Authors for macroblog are Dave Altig and other Atlanta Fed economists.


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January 08, 2005


A Different Take On The Jobless Recovery

The Economic Policy Institute takes a look at Friday's employment report and finds the glass half empty

That said, the rate of job growth continues to lag other recoveries. Over the year—December 2003 to December 2004—employment is up 2.2 million. While this is the best year for job growth since 1999, it still lags the 3.3 million jobs added at the analogous stage of the last recovery. On average over the past year, monthly employment grew by 186,000, compared to 272,000 at a similar stage of the 1990s recovery.

In fact, the average annual growth rate for payroll employment at this stage of a recovery is 2.8%, well above the 1.7% achieved this year. Had that average growth occurred this year, we would have added 3.6 million jobs since last December, 1.4 million more than the actual number. Thus, in historical context, the recent pace of job growth has been subpar.

Hard to argue with the facts, but the EPI then goes on to suggest that the historically low pace of job growth represents a significant failure of public (i.e. Bush) policy.

With the newly released payroll employment data for December 2004 it is now possible to assess whether the administration's tax cut strategy produced the employment growth that was projected (see table and figure below). The final verdict is grim.  Job growth over the last 18 months has fallen short by 1,703,000—more than one-third less than the number of jobs the administration said would be created without the tax cuts. Given that the economy failed to produce the number of jobs expected with no policy change, it seems hard to argue that the tax cuts were a successful strategy in adding any jobs—the promised 1.4 million additional jobs never materialized. The announced revisions (up 236,000 in March 2004) to the payroll employment series (see Data Note below) do not materially change this assessment.

Without implying any particular position on what the effects of the administration's tax policies might, or might not, have been, the counterfactual experiment implied by the EPI's statement is, shall we say, heroic.  Their interpretation clearly requires that tax policy has been the dominant difference between the recovery out of the 2001 recession and the early phases of previous U.S. expansions.

I'm not convinced.  I too, of course, have been watching the pace of net job creation over the past several years, and scratching my head.  But recently I've come to believe that the sluggish employment of this recovery may not be as anomalous as we have been thinking.

Here's a couple of observations that I find interesting.  First, the slow jobs growth out of the recession is just a piece of the broader observation that economic activity  has, in general, been less robust that historical experience would predict:  Real (inflation-adjusted) GDP growth, though not terrible, has also been slower than the average for the first several years following post WWII recessions in the U.S. (at least if we focus on the period prior to the 1990-91 downturn).

And then there is picture.

Energy_shocks

The shaded bars are NBER recessions, and the arrows represent episodes when the relative price of energy (measured by the CPI) spiked by at least 10%.  Although the timing, magnitude, and other details vary, the correlation of energy price jumps and economic contractions is striking.  No recession after 1970 lacks an energy shock, no energy shock -- up to the most recent one -- lacks a recession.

A closer gander at the recent shock is instructive.

Energy_shocks_2

It doesn't take too much imagination to conjure up the following narrative: The surprisingly weak performance of the economy in 2002 -- real GDP growth for the year was only about 2-1/2 percent -- was followed by an equally disappointing first quarter of 2003.  But maybe we shouldn't be surprised.  Relative energy prices (at the consumer level) rose by 24 percent over that period.

Then things got better.  Although still volatile, the average level of energy prices stabilized over the balance of the year.  At the same time, the pace of the expansion improved dramatically.  GDP growth was just over 4 percent in three of the next four quarters.  The exception was third-quarter 2003 -- GDP grew at over 7 percent (annualized) during those three months.

Employment finally began the much anticipated turnaround in the first half of 2004: On net, the economy created just over 200,000 jobs per month during that period.  Unfortunately, another sharp rise in energy prices had commenced -- the relative price rose by 15 percent through November -- and the momentum was not sustained in the second half of 2004.

Big surprise?  Not obviously.  It is very, very tempting  to conclude that the struggles of the U.S. economy over the past three years amount to little more than the effects of good old-fashioned energy shocks, shocks of a magnitude that, in every other instance over the past thirty years, have been associated with recessions. 

The case is not without its flaws, but the energy angle strikes me as a much stronger contender than the Bush tax cuts.

UPDATE: A clarification on this statement above: "Employment finally began the much anticipated turnaround in the first half of 2004: On net, the economy created just over 200,000 jobs per month during that period."  Actually that 200,000 jobs per month figure applies to the second quarter.  The figure was about 150,000 per month over the entire first half of 2004.

January 8, 2005 in Data Releases, Energy | Permalink

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Comments

Some great points here.

The job recovery is well underway.
- The unemployment rate is very reasonable
- The economic factors impact the US economy do not have historical precedents (9/11, global terrorism, war in Iraq, a huge current account deficit - spanning 20 years now, Oil shocks, technology bubble, Enron et al, Global outsourcing, Emergence of China and India as economic powers) over four years
- The tech bubble, and Enron et al are vestigages of the previous admininistration
- Consumer confidence through this all has been relatively strong and supportive ofthe President

The half full crowd are playing politics. Yes, many WISH for more, better paying jobs. Personally, I would wish that we all on the planet achieved critcial mass (financial independence) and enjoyed perfect health and happiness.

Let's be real, America is going great. Americans continue to show and lead the world with their commitement to hardwork, honesty, and humanity.

Posted by: p | January 09, 2005 at 10:20 AM

With the employment-population ratio stuck at 62.4% - I would suggest the jobs recovery is not that great after all. As far as blaming the effective (or lack thereof) of tax cuts, it seems both parties have been playing this game.

Posted by: pgl | January 09, 2005 at 06:56 PM

After Bush took office - energy prices fell. But employment continued to fall even as the White House told us their tax cuts would change that. OK, energy prices are up recently - even as employment has finally started to rise A BIT. David - without some sophisticated lag structure, this argument strikes me as missing a lot.

Posted by: pgl | January 09, 2005 at 09:26 PM

pgl --

Well, the 2001 recession -- which was led by a significant slowdown in the latter half of 2000 - was preceded by its own energy shocks (which I did not emphasize in the post because I was focusing on the "recovery" period). Nonetheless, I'd be the last to claim any magic bullet that explains it all. I just find the energy story a more plausible culprit than tax policy -- not least because I have spent enough time thinking about tax policy to be very humble about my abilities to say anything about the short-run impact legislated changes. (Especially ones with such complicated phase-in/phase-out properties.)

Nice to hear from you, as always. By the way take a look at two posts above -- I'm having a hard time reading your blog at the moment. Maybe you have the answer?

Posted by: Dave | January 10, 2005 at 02:09 AM

p, America IS great. We half-empty types love America as much as you. But it's going middling at best for almost everyone who isn't in the top 15-20% of household income. If you don't think that poses long term political problems, you are naive.

And thanks for the comic relief. "Enron is a vestige of the previous administration." Kenny Boy and Bush had no relationship whatsoever. No, sir. Everyone's just "playing politics."

Posted by: Buford P. Stinkleberry | January 10, 2005 at 01:13 PM

If memory serves, the 2 most recent energy shocks have been mostly demand-side shocks rather than supply-side shocks, what with the Indian and Chinese economies growing so briskly. I realize there have been some supply-side shocks too. Still, if my interpretation is correct, then perhaps this is one reason why the most recent oil shocks have not given way to recession

Posted by: Phil Miller | January 10, 2005 at 02:38 PM

David - I have trouble getting on the Net from home sometimes, so trying from China is not my forte. Your post got me thinking in terms of "transmission mechanism" and all that ala the late 1970's / early 1980's recessions. Back then, we claimed oil shocks led to inflation and tight money (Volcker policy choice). And yes, we had an investment-led recession as real interest rates went up. The 2001 recession was also investment-led. Greenspan did tighten monetary policy for a while and then did a very rapid about face. But business investment has remained weak even as short-term interest rates have been quite low. So what are the old geeks like myself missing in terms of the transmission mechanism?

Posted by: pgl | January 10, 2005 at 05:40 PM

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