Close

This page had been redirected to a new URL, please update any bookmarks.

Font Size: A A A

macroblog

« June 2011 | Main | August 2011 »

July 28, 2011

Lots of ground to cover

In my last post I noted that the pace of the recovery, now two years old, is in broad terms similar to that of the first two years of the previous two recoveries. The set-up included this observation:

"Though we have grown used to thinking of the rebound from the most recent recession as being spectacularly substandard, that impression (which I share) is driven more by the depth of the downturn than the actual speed of the recovery."

The context of the depth of the downturn is not, of course, irrelevant. One way of quantifying that context is to look at measures of the "output gap," that is, the difference between the level of real gross domestic product (GDP) and the economy's "potential." An informal way to think about whether or not a recovery is complete is to mark the time when the output gap returns to zero, or when the level of GDP returns to its potential.

There are several ways to estimate potential GDP, but for my money the one constructed by the Congressional Budget Office (CBO) is as good as any. And it does not tell a pretty story:

Real GDP-Real Potential GDP

It is worth noting that the CBO's measure is not a just a simple extrapolation of a constant trend, but a calculation based on historical relationships among labor hours, productivity growth, unemployment, and inflation. Their trend in potential GDP growth rates implied by this methodology, described here, is anything but linear:

Real Potential GDP

Note that the output gaps in the first chart are at historical lows (by a lot) despite the fact that potential GDP growth is at historical lows as well.

These estimates provide one way to assess the pace of the recovery. For example, the midpoints of the Federal Open Market Committee's (FOMC) most recent consensus forecasts for GDP growth are 2.8 percent (2011), 3.5 percent (2012), and 3.85 percent (2013). If those forecasts come to pass, approximately 60 percent of the CBO-implied gap will be closed. This would still leave, in real terms, more resource slack than existed at the lowest point in the past two recessions.

Put another way, if the economy grows at 4 percent from 2012 forward, the output gap won't be closed until sometime in 2015. At a growth rate of 3.5 percent—the lower end of FOMC participants' projections for the next two years—the "full recovery" date gets pushed back to 2016. If, however, the FOMC projections are too optimistic and the economy can only manage to grow at an annual pace of 3 percent (which is currently the consensus view of private forecasters for 2012) output gaps persist until 2020.

The conventional view of the macroeconomy that motivates the CBO estimates of potential GDP (and hence output gaps) at least implicitly embeds the assumption that time heals all wound. But the healing won't necessarily be fast.

David Altig By Dave Altig, senior vice president and research director at the Atlanta Fed

July 28, 2011 in Business Cycles, Economic Growth and Development, Employment, Forecasts, Saving, Capital, and Investment | Permalink

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c834f53ef0154340fa968970c

Listed below are links to blogs that reference Lots of ground to cover:

Comments

Post a comment

Comments are moderated and will not appear until the moderator has approved them.

If you have a TypeKey or TypePad account, please Sign in

July 20, 2011

Is consumer spending the problem?

In answer to the question posed in the title to this post, The New York Times's David Leonhardt says absolutely:

"There is no shortage of explanations for the economy's maddening inability to leave behind the Great Recession and start adding large numbers of jobs…

"But the real culprit—or at least the main one—has been hiding in plain sight. We are living through a tremendous bust. It isn't simply a housing bust. It's a fizzling of the great consumer bubble that was decades in the making…

"If you're looking for one overarching explanation for the still-terrible job market, it is this great consumer bust."

Tempting story, but is the explanation for "the still-terrible job market" that simple?

First, some perspective on the pace of the current recovery. Though we have grown used to thinking of the rebound from the most recent recession as being spectacularly substandard, that impression (which I share) is driven more by the depth of the downturn than the actual speed of the recovery. The following chart traces the path of real gross domestic product (GDP) from the trough of the last three recessions:


In the first two years following the 1990–91 and 2001 recessions, output grew by about 6 percent. Assuming that GDP grew at annual rate of 1.5 percent in the second quarter just ended—a not-unreasonable guess at this point—the economy will have expanded by about 5.3 percent since the end of the last recession in July 2009. That's not a difference that jumps off the page at me.

Directly to the point of consumption spending, it is certainly true that consumer spending has expanded at a slower pace in the expansion to this point than was the case at the same point in the recoveries following the previous two recessions. From the end of the recession in the second quarter of 2009 through the first quarter of this year (we won't have the first official look at this year's second quarter until next week), personal consumption expenditures grew in real terms by just under 4 percent. That growth compares to 4.8 percent in the first seven quarters following the end of the 2001 recession and 5.9 percent in the first seven quarters following the end of the 1990–91 recession.

That difference in the growth of consumption across the early quarters of recovery after the 1990–91 and 2001 recessions with little discernible difference in GDP growth across those episodes illustrates the pitfalls of mechanically focusing on specific categories of spending. In fact, the relatively slower pace of consumer spending in this expansion has in part been compensated by a relatively high pace of business spending on equipment and software:


If you throw consumer durables into the general notion of "investment" (investment in this case for home production) the story of this recovery is the relative boom in capital spending compared to recent recoveries:


And what about that "still-terrible job market"? You won't get much argument from me about that description, but here again the reality is complicated. Focusing once more on the period since the end of the recession, the pace of job creation is not out of sync in comparison to recent expansions (though job creation after the last two recessions was meager as well, and we are, of course, starting from a much bigger hole in terms of jobs lost):


So, relative to recent experience, at this point in the recovery GDP growth and employment growth are about average (if we ignore the size of the recession in both measures). The undeniable (and relevant) human toll aside, the current recovery seems so disappointing because we expect the pace of the recovery to bear some relationship to the depth of the downturn. That expectation, in turn, comes from a view of the world in which potential output proceeds in a more or less linear fashion, up and to the right. But what if that view is wrong and our potential is a sequence of more or less permanent "jumps" up and down, some of which are small and some of which are big?

In addition, investment growth to date has been strong relative to recent recoveries and, as Leonhardt suggests, consumption growth has been somewhat weak. So here's a question: Would we have had more job creation and stronger GDP growth had businesses been more inclined to add workers instead of capital? And if that had occurred, might the consumption numbers have been considerably stronger?

David Altig By Dave Altig, senior vice president and research director at the Atlanta Fed

 

July 20, 2011 in Business Cycles, Economic Growth and Development, Employment, Forecasts, Saving, Capital, and Investment | Permalink

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c834f53ef015433dff249970c

Listed below are links to blogs that reference Is consumer spending the problem?:

Comments

This is an excellent contribution to elevating the quality of commentary on the current expansion. It is time to recognize the cycles experienced in the 60s, 70s, and early 80s were fundamentally different from those since. Because of this, the earlier cycles are not part of the relevant benchmark for making comparisons to current behavior. Three cheers for taking them out of the baseline used for comparisons.

Posted by: Douglas Lee | July 21, 2011 at 10:22 AM

David,
Let me ask a supplemental question. Following the '91 recession, the US created something like 20mm jobs. Following the '01 recession, perhaps 8.5mm jobs were created. How many jobs will be created in this decade?
Stewart

Posted by: stewart sprague | July 21, 2011 at 10:40 AM

The payroll employment chart suggests that just looking at the path for the level of employment from the end of a recession is not the relevant metric. How about looking at net jobs lost during the recession versus net jobs regained during the recovery? Then, the metric captures the essence of what the graph should indicate -- and what the blog offers in words. That the immense job loss of the recent recession is the big difference, and the recent sluggish job creation is akin to recoveries in 1991 and 2001. From this perspective, we have a problem that has been around for a few business cycles.

Posted by: ET_OC | July 21, 2011 at 02:44 PM

The obvious deficiencies in GDP this time have been net exports and government spending.

While the Fed has done its best to promote both, the politicians in Washington have done their best in the opposite direction by promoting an over-valued dollar and reduced federal spending, despite interest rates on the federal debt that are universally lower than during the years of the federal budget surplus.

Posted by: Paul | July 21, 2011 at 04:19 PM

I find it highly annoying that the the obvious is invisible to everyone.

http://research.stlouisfed.org/fred2/series/CMDEBT

Households were pulling $1.2T/yr of new mortgage debt during the boom 2004-2006. This was all cut off in 2007-2008.

Corporate debt take-on was another $800B/yr during this time, for a $2T/yr stimulus to the economy.

THAT IS TWENTY MILLION $100k/yr jobs!

Previous recessions in my life were all prompted by the Fed raising interest rates to throttle debt growth. What killed debt growth this time was the collapse of the ponzi lending structure and the bubble machine it was powering.

Posted by: Troy | July 22, 2011 at 01:58 AM

If you look at percent job losses since peak employment (not only since end of recession), then you can see how bad this recession is. At this point of the cycle after all prior recessions since WWII, the employment has recovered to pre-recession levels. In this recession, we are still 5% down.
http://cr4re.com/charts/charts.html

Posted by: Nino | July 22, 2011 at 05:29 PM

I look at PAYEMS (see below) and what do I see ? I see PAYEMS moving sideways since 2000/2001 so that after a decade of nonsense we find ourselves with 29,502.4 (Thousands (!)) less jobs than we would have had had the pre-2000/2001 trend continued to date.

http://research.stlouisfed.org/fred2/graph/?chart_type=line&s[1][id]=PAYEMS&log_scales=Left

Posted by: In Hell's Kitchen (NYC) | July 23, 2011 at 09:04 AM

Of course the comparison matter. your comparison against the 1990-91 and 2001 make 2007 look average. When comparing against all post WWII recession/recoveries all three of those recoveries look below average (with all recoveries since 1990 looking very weak indeed). Even then the down-turn was the worst putting the starting point at a very, very low level.

Posted by: RangerHondo | July 26, 2011 at 08:48 AM

Post a comment

Comments are moderated and will not appear until the moderator has approved them.

If you have a TypeKey or TypePad account, please Sign in

July 13, 2011

One more sign of struggles on the job creation front

Hot on the heels of the bleak employment report for June, the U.S. Bureau of Labor Statistics yesterday released another important bit of labor market information: the May Job Openings and Labor Turnover Survey, commonly known as JOLTS. Calculated Risk accentuated the positive:

"In general job openings (yellow) has been trending up—and job openings increased slightly again in May—and are up about 7% year-over-year compared to May 2010.

"Overall turnover is increasing too, but remains low. Quits increased again and have been trending up—and quits are now up about 10% year-over-year (usually a sign of more confidence in the labor market)."

The hires and quits angle was noted at Modeled Behavior as well, but at Zero Hedge Tyler Durden isn't in the mood for even muted optimism:

"There was nothing to smile about in today's May JOLTS release from the BLS."

Durden focuses first on the job openings piece of JOLTS:

"Those expecting a pick up in job openings (traditionally the key requirement for an [sic] sustained increase in NFP) will have to wait some more, after the May number came at 3.0 million, the same as April."

Longtime readers of macroblog know that the job openings data are favorites of ours, which we like to view through the prism of the Beveridge curve. This curve plots the relationship between job openings and unemployment. In past posts—here and here, for example—I have noted that:

  • The Beveridge curve appears to have shifted out over time, meaning that the amount of unemployment relative to the number of job openings has increased over the past several years relative to the patterns of the decade or so prior to the beginning of this recovery.
  • This shift in the Beveridge curve is usually interpreted as representing a change in the efficiency with which workers looking for jobs are matched with employers looking to fill jobs (though the source of the inefficiency is not completely obvious).
  • There is a debate about whether the recent shift in the Beveridge curve is a normal cyclical feature of recoveries—in which case the pace at which the unemployed are placed in open jobs ought to pick up over time—or a symptom of deeper structural problems that are likely to persist for, forgive me, an extended period of time.


For most of this year, it did appear that the Beveridge curve was moving back in the direction of its 2000–9. That progress was interrupted in May:


I don't think that resolves the cyclical-versus-structural debate, but it certainly is not good news. And at this point it is awfully hard to believe that things are going to look better in the June version of JOLTS.

Update: Another way to view the problem, from Steve Davis.

David Altig By Dave Altig, senior vice president and research director at the Atlanta Fed

July 13, 2011 in Business Cycles, Labor Markets | Permalink

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c834f53ef01538fde6e24970b

Listed below are links to blogs that reference One more sign of struggles on the job creation front:

Comments

"The Beveridge curve appears to have shifted out over time, meaning that the amount of unemployment relative to the number of job openings has increased over the past several years relative to the patterns of the decade or so prior to the beginning of this recovery. "

"This shift in the Beveridge curve is usually interpreted as representing a change in the efficiency with which workers looking for jobs are matched with employers looking to fill jobs "

what ????

we have a huge imbalance
a horrid B ratio
and its not effective demand driving it ???

its inefficiency ???
and or
poor job to skill match ups ??


what's in the water cooler down there hoss ???
--------------------

"There is a debate about whether the recent shift in the Beveridge curve is a normal cyclical feature of recoveries"

debate ???

why the sentence makes no sense

are you saying over the employment cycle
the ratio oughta stay constant ???

simply bob up and down along some line ???

what is it about thses numbers
you find worthy of debate ???


now one might look at employment cycles versus employment cycles
to see how the change in the ratios over the cycle compare

cycle versus cycle

but you ain't got a cycle here yet pard

the hot house agonizing over
is this huge jobless army structural ??

pure misdirection
plain and simple
and
its hard to imagine you take it seriously

Posted by: paine | July 14, 2011 at 08:39 PM

Post a comment

Comments are moderated and will not appear until the moderator has approved them.

If you have a TypeKey or TypePad account, please Sign in

July 08, 2011

Is the employment report a game changer?

Well, that was an unpleasant surprise. Any way you cut it, the June employment report was a big disappointment. (If by chance you are inclined to doubt that, the Wall Street Journal's Real Time Economics blog rounds up representative commentary from the disappointed.) Last month's anemic pace of job creation will almost surely amplify growing concerns about the almost sure-to-be dour final count on gross domestic product (GDP) growth in the second quarter. More specifically, though expectations for June employment growth were pretty modest to begin with, the failure to yet see any sign of momentum in labor markets has to make you wonder about forecasts of a soon-to-be-seen pick-up in economic growth.

A pick-up in economic growth in the third quarter is important, as it would help to relieve the anxiety associated with this picture, a version of a chart I first saw in a Bloomberg Economics BRIEF by Richard Yamarone. (The full briefings, which are proprietary, can be accessed here.)

Real GDP Growth

The bottom line of this chart is that there has been a pretty reliable relationship between sustained bouts of sub-2 percent growth and U.S. recessions (indicated by the gray shaded areas). In fact, over the entire post-World War II era, periods in which year-over-year real GDP growth has been below 2 percent have been almost always associated with downturns in the economy.

A few notes to talk us back from the ledge. First, we unfortunately now have plenty of experience with advances in output that are accomplished without much progress on the jobs front. In other words, productivity-driven growth has been and may still be the story of the day:

U.S. Employment and Productivity

Second, it does seem that we have the misfortune to be attempting a steep climb from a deep trough precisely as demographic factors are conspiring to reduce the potential growth rate of the economy. From the summary of a new paper by David Bloom, David Canning, and Gunther Fink:

"If their population age structure between 1960 and 2005 had been what projections suggest it will be for the 2005 to 2050 period, the OECD countries would have grown by 2.1 percent per year rather than by 2.8 percent per year."

This is not to say that demographics give reason for expecting, and tacitly accepting, near 2 percent growth going forward. Bloom et al. are focusing on 45-year trends, which do not manifest themselves overnight. Furthermore, employment is so far below its prerecession level that it seems unreasonable to suppose that the economy can't or shouldn't be growing above its potential rate for some time to come. The point is, rather, that there are structural changes in play, which means that old rules of thumb—even those that appear as reliable as the "2 percent rule"—should be take with an even healthier dose of skepticism than usual.

Finally, in the end we are talking about a month's worth of data, yet to be revised. And though it is the latest in a persistent string of such disappointments, our own thinking here on the staff in Atlanta has been that real signs of improvement will only become apparent as the summer progresses—we have already conceded the second quarter. I was surprised by today's news but, in context, I would have been equally surprised with strong employment numbers that might have suggested strength in June.

Cold comfort, but better than no comfort at all.

David Altig By Dave Altig, senior vice president and research director at the Atlanta Fed

July 8, 2011 in Employment | Permalink

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c834f53ef014e89b4815c970d

Listed below are links to blogs that reference Is the employment report a game changer?:

Comments

Paul Krugman linked to an essay by George Orwell, which will ironically use to make a point opposite from what he intended (http://orwell.ru/library/articles/nose/english/e_nose)—

Lower employment by people of a more advanced age would mean lower GDP, if GDP were not already constrained by total consumption and through it unemployment. Supporting people who have reached the point where society agrees that they should no longer have to work is not the reason the Republican party is concerned with the present federal deficit; instead it is the people whom the government is supporting with spending who would be employed in a more efficient private sector job if it was available.

The only resource the US can possibly seen to be short on is energy (and the US already consumes far more than most other countries). Agreement on the efficient distribution of produced goods is the problem, which the free markets of the US are failing to address despite the belief that they should.

The reality is that these markets are distorted by the widespread misunderstanding of the effects of individual actions and the best way for the individual to benefit the nation. Signalling (http://zhongwe2.serverpros.com/cs/) of income and hours working causes an oversupply of labour and leads to clustering of correlated behavior regarding supply and demand of labour and goods, which prevents purchases by the rich from significantly affecting the level of unemployment. These problems can be addressed as described here: http://pastebin.com/Q86Zhgs9

Posted by: Misaki | July 09, 2011 at 12:28 AM

many commenters suggested that a healthy monthly increment in employment would be between 100,000 and 150,000. The current employment/population ratio is aproximately 58%. One should notice that only people of 16 years of age and over are counted in.
On avearge, this civilian population has been growing since January 2010 by 143,00 per month. With the rate of 0.58 one would expect 83,000 per month. Actually, the increment since January 2010 is 76,000 per month. This estimate is from the households employment data, i.e. the same source as for the civilian population. The difference of 6,000 can not be considered as a dramatic one

Posted by: kio | July 09, 2011 at 03:10 AM

Actually, we are talking about two month's worth of data, and May was revised down. The comments from the Street a month ago were exactly what you say here - just one month, supply disruptions from Japan, bad weather, rebound to come...

And here we are. The Fed has been revising down its forecast for 2011 all year. A skeptic might say that the Fed continues to tell a bullish forward-looking story because it doesn't want to face up to the political firestorm associated with any talk of QEIII. Wages fell last month and the unemployment rate reached to a new 2011 high. I dunno but from a risk-based approach are we more worried about the hyperinflation that will ensue if the balance sheet gets bigger or the prospects of an unemployment rate permanently above 8.5% if nothing is done? Seems like a no-brainer to me.

Posted by: Rich888 | July 09, 2011 at 10:28 AM

With all due respect, I think the Federal Reserve should be far more worried about this data than is conceded in this posting! ("Finally, in the end we are talking about a month's worth of data, yet to be revised.")

I'm afraid we are talking about at least two months' worth of very soft payrolls data, with the kicker being the 44,000 in downward revisions to the last two months, leaving May at +25,000 in particular. Including the -44,000 in April and May revisions, this month's +18,000 headline number really indicated negative payroll growth relative to the previously-reported baseline!

The household survey was even grimmer, and over a three-month timeframe, with this exact quote in the BLS report: "Since March, the number of unemployed persons has increased by 545,000, and the unemployment rate has risen by 0.4 percentage point."

That IS recessionary data, and while there's no reason to panic at any time, I think we shouldn't be downplaying it -- we should be pursuing appropriate policy changes! As the famous quote by Sun Tzu indicates, it's a far better doctor whose patients get better before their signs of illness are noticed, than those who go all the way to death's door before being cured. Though the latter may become more famous, the patient would prefer the former!

Posted by: Wisdom Seeker | July 11, 2011 at 12:53 AM

I'm past 60 and on a mission of sorts that 60 is the new 40. Idea that older is not as productive is ancient thinking. Quit trying to rebuild the old days. Not jobs but individual income streams. Quit trying to help get out of the way. We can identify and fill markets, think up cool stuff with lights and all really.
Seriously small business operation by what are reffered to as senior citizens could be very handy to G.N.P.Not just filling in either.

Posted by: Michael | July 12, 2011 at 04:37 PM

I think unemployment is definitely a gamechanger. But not in the way most people have thought about. It's the gamechanger that people need to see as an indication to take control of their income. Great post.

Posted by: George A. | September 09, 2011 at 01:33 AM

Post a comment

Comments are moderated and will not appear until the moderator has approved them.

If you have a TypeKey or TypePad account, please Sign in