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September 26, 2013
The New Normal? Slower R&D Spending
In case you need more to worry about, try this: the pace of research and development (R&D) spending has slowed. The National Science Foundation defines R&D as “creative work undertaken on a systematic basis in order to increase the stock of knowledge” and application of this knowledge toward new applications. (The Bureau of Economic Analysis (BEA) used to treat R&D as an intermediate input in current production. But the latest benchmark revision of the national accounts recorded R&D spending as business investment expenditure. See here for an interesting implication of this change.)
The following chart shows the BEA data on total real private R&D investment spending (purchased or performed on own-account) over the last 50 years, on a year-over-year percent change basis. (For a snapshot of R&D spending across states in 2007, see here.)
Notice the unusually slow pace of R&D spending in recent years. The 50-year average is 4.6 percent. The average over the last 5 years is 1.1 percent. This slower pace of spending has potentially important implications for overall productivity growth, which has also been below historic norms in recent years.
R&D spending is often cited as an important source of productivity growth within a firm, especially in terms of product innovation. But R&D is also an inherently risky endeavor, since the outcome is quite uncertain. So to the extent that economic and policy uncertainty has helped make businesses more cautious in recent years, a slow pace of R&D spending is not surprising. On top of that, the federal funding of R&D activity remains under significant budget pressure. See, for example, here.
So you can add R&D spending to the list of things that seem to be moving more slowly than normal. Or should we think of it as normal?
By John Robertson, vice president and senior economist in the Atlanta Fed’s research department
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August 16, 2013
GDP, Jobs, and Growth Accounting
The latest on productivity, from the Associated Press via USA Today:
U.S. worker productivity accelerated to a still-modest 0.9% annual pace between April and June after dropping the previous quarter.
The second-quarter gain...reversed a decline in the January-March quarter, when the Labor Department's revised numbers show productivity shrank at a 1.7% annual pace.
Labor costs rose at a 1.4% annual pace from April through June, reversing a revised 4.2% drop the previous quarter.
Productivity measures output per hour of work. Weak productivity suggests that companies may have to hire because they can't squeeze more work from their existing employees....
Productivity growth has been weaker recently, rising 1.5% in 2012 and 0.5% in 2011.
Annual productivity growth averaged 3.2% in 2009 and 3.3% in 2010. In records dating back to 1947, it's been about 2%.
Though not quite in the category of spectacular—and coming off revisions that if anything made things look weaker than previously thought—last quarter's uptick is a welcome development. Earlier this week, in a speech to the Atlanta Kiwanis club, Atlanta Fed President Dennis Lockhart laid out several scenarios with materially different implications for how the GDP and employment picture might play out over the next several years:
As a matter of arithmetic, healthy employment growth coupled with tepid GDP growth implies weak labor productivity growth. And in fact, productivity growth in recent quarters has been significantly below historical norms.
[I] believe that the recent low growth of productivity is probably just a temporary downdraft after the rather strong productivity growth when the economy emerged from recession.
If productivity growth rebounds to more typical levels, the coincidence of job gains at a pace of around 190,000 per month in recent months and GDP growth below 2 percent cannot persist. Again, it's a matter of arithmetic. Either GDP growth will rise to levels consistent with recent employment growth, or employment growth will fall to levels more consistent with the weak GDP data we've been witnessing.
I've got a working assumption on this question, and it is captured in the Atlanta Fed's baseline forecast for the second half of this year and 2014. This outlook calls for a pickup in real GDP growth over the balance of 2013, with a further step-up in economic activity as we move into 2014.
You can get a sense of this outlook by considering the output of one particular model that we use here at the Atlanta Fed. The model, which is purely statistical, gives us a view into how productivity, GDP, employment, and the unemployment rate might move together (along with other labor market variables like labor force participation and average hours worked). Here is the bottom line of an exercise that assumes GDP growth through 2015 comes in at about the central tendency of the projections from the Federal Reserve's June 2013 Summary of Economic Projections.
For this exercise, we have adjusted the 2013 growth forecast down slightly due to the weaker-than-expected growth in the first half of the year. Additionally, we have plugged in assumptions for productivity growth—1.5 percent per quarter (SAAR), the average gain over the past eight years—and nonfarm business output growth. We then let the model forecast the remaining variables, all of which are for the labor market:
The model forecasts employment gains in the neighborhood of what the economy has been generating over the past several years, and a steadily declining unemployment rate.
Now consider two "stall" scenarios in which GDP growth fails to get beyond 2.3 percent. The first of these scenarios is the one noted in the Lockhart Kiwanis speech, with productivity recovering but job growth falling off the pace:
From a policy perspective, this one may not cause too much handwringing about the appropriate course of action. The weak GDP growth is accompanied by a failure to make the type of progress on the unemployment rate that the FOMC has clearly articulated as the necessary condition for adjustments in policy rates:
[T]he Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.
Absent unforeseen issues with inflation, staying the course would seem to be in order.
But there is a second stall scenario in which productivity and GDP growth remain tepid, even as labor market indicators improve:
The difference in this experiment is that the expectations of those that President Lockhart referred to in his speech as the "innovation pessimists" are correct. Recent weakness in productivity growth reflects a fall in trend productivity growth. In this case, essentially identical labor market outcomes would nonetheless correspond to an economy that can't seem to hit "escape" velocity.
If it is clear that this configuration of outcomes is associated with a structural break in productivity growth, an argument against monetary policy stimulus would have some weight. After all, in most cases we don't expect the tools of monetary policy to fix structural efficiency problems.
But, alas, such clarity rarely arrives in real time. The experiments above give some sense of how difficult it can be to discover the right branch to follow on the policy decision tree.
By Dave Altig, executive vice president and research director of the Atlanta Fed
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February 01, 2013
Just in case you were inclined to drop the "dismal" from the "dismal science," Northwestern University professor Robert Gordon has been doing his best to talk you out of it. His most recent dose of glumness was offered up in a recent Wall Street Journal article that repeats an argument he has been making for a while now:
The growth of the past century wasn't built on manna from heaven. It resulted in large part from a remarkable set of inventions between 1875 and 1900...
This narrow time frame saw the introduction of running water and indoor plumbing, the greatest event in the history of female liberation, as women were freed from carrying literally tons of water each year. The telephone, phonograph, motion picture and radio also sprang into existence. The period after World War II saw another great spurt of invention, with the development of television, air conditioning, the jet plane and the interstate highway system…
Innovation continues apace today, and many of those developing and funding new technologies recoil with disbelief at my suggestion that we have left behind the era of truly important changes in our standard of living…
Gordon goes on to explain why he thinks potential growth-enhancing developments such as advances in healthcare, leaps in energy-production technologies, and 3-D printing are just not up to late-19th-century snuff in their capacity to better the lot of the average citizen. To paraphrase, your great-granddaddy's inventions beat the stuffing out of yours.
There has been a lot of commentary about Professor Gordon's body of work—just a few examples from the blogosphere include Paul Krugman, John Cochrane, Free Exchange (at The Economist), Gary Becker, and Thomas Edsall (who includes commentary from a collection of first-rate economists). Most of these posts note the current-day maladies that Gordon offers up to furrow the brow of the growth optimists. Among these are the following:
And inequality in America will continue to grow, driven by poor educational outcomes at the bottom and the rewards of globalization at the top, as American CEOs reap the benefits of multinational sales to emerging markets. From 1993 to 2008, income growth among the bottom 99% of earners was 0.5 points slower than the economy's overall growth rate.
Serious considerations, to be sure, but there is actually a chance that some of the "headwinds" that Gordon emphasizes are signs that something really big is afoot. In fact, Gordon's headwinds remind me of this passage, from a paper by economists Jeremy Greenwood and Mehmet Yorukoglu published about 15 years ago:
A simple story is told here that connects the rate of technological progress to the level of income inequality and productivity growth. The idea is this. Imagine that a leap in the state of technology occurs and that this jump is incarnated in new machines, such as information technologies. Suppose that the adoption of new technologies involves a significant cost in terms of learning and that skilled labor has an advantage at learning. Then the advance in technology will be associated with an increase in the demand for skill needed to implement it. Hence the skill premium will rise and income inequality will widen. In the early phases the new technologies may not be operated efficiently due to a dearth of experience. Productivity growth may appear to stall as the economy undertakes the (unmeasured) investment in knowledge needed to get the new technologies running closer to their full potential. The coincidence of rapid technological change, widening inequality, and a slowdown in productivity growth is not without precedence in economic history.
Greenwood and Yorukoglu go on to assess, in detail, how durable-goods prices, inequality, and productivity actually behaved in the first and second industrial revolutions. They conclude that game-changing technologies have, in history, been initially associated with falling capital prices, rising inequality, and falling productivity. Here is a representative chart, depicting the period (which was rich with technological advance) leading up to Gordon's (undeniably) golden age:
Source: "1974," Jeremy Greenwood and Mehmet Yorukoglu,
Carnegie-Rochester Conference Series on Public Policy, 46, 1997
Greenwood and Yorukoglu conclude their study with this pointed question:
Plunging prices for new technologies, a surge in wage inequality, and a slump in the advance of labor productivity - could all this be the hallmark of the dawn of an industrial revolution? Just as the steam engine shook 18th-century England, and electricity rattled 19th-century America, are information technologies now rocking the 20th-century economy?
I don't know (and nobody knows) if the dark-before-the-dawn possibility described by Greenwood and Yorukoglu is the apt analogy for where the U.S. (and global) economy sits today. (Update: Clark Nardinelli also discussed this notion.) But I will bet you there was some commentator writing in 1870 who sounded an awful lot like Professor Gordon.
By Dave Altig, executive vice president and research director of the Atlanta Fed
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March 04, 2011
Gaining perspective on the employment picture
The employment report released today indicated a moderate increase of 192,000 in nonfarm payrolls and a slight decline in the unemployment rate from 9 percent in January to 8.9 percent. While certainly an improvement over recent months, employment growth still has not reached a level needed to produce significant drops in the unemployment rate.
In a speech given yesterday, Atlanta Fed President Dennis Lockhart addressed some of the underlying issues that have potentially been holding back job growth. On the supply side, President Lockhart addressed three structural issues, including skill mismatch, house lock, and extended unemployment insurance.
"Skill mismatch exists when work skills of job seekers do not match the requirements of jobs that are available. For example, a construction worker is unlikely to have the particular skills needed in the healthcare industry."
This comment is motivated by the research of Federal Reserve economists (Valetta and Kuang and Barnichon and Figura, among others) that suggests while there is likely some evidence of skill mismatch, it's not materially different than what's been seen during past recessions.
Another possible explanation mentioned by President Lockhart for persistently high unemployment is the existence of what is sometimes referred to as "house lock."
"Currently many people owe more on their homes than their homes are worth. It's claimed that job seekers don't accept jobs available in other geographic locations because of the difficulty or cost of selling their homes."
Here too, President Lockhart says there is evidence indicating house lock is not a large contributor to the current high level of unemployment (For example, see Schulhofer-Wohl, Kaplan and Schulhofer-Wohl, and Molloy et al.)
More convincing is the argument pointing to the impact of extended unemployment insurance benefits. Research from the most recent recession and recovery—for example, see Valetta and Kuang and Aaronson et al.—suggests extended benefits have added to the unemployment rates, with estimates ranging from 0.4 percentage points to 1.7 percentage points. If that's the case, then President Lockhart says these extended benefits may be acting "as a disincentive to accept an offered job, especially if the job pays less than the one lost."
As President Lockhart indicates, however, standard skill mismatch, house lock, and unemployment insurance disincentives do not provide the full answer. So, he offers some additional factors:
"On the demand side, it's been argued that credit constraints affecting small businesses are holding back hiring. Banks are blamed for this situation and so are regulators. Getting credit at an affordable cost was a challenge during the recession. But credit conditions for established small businesses have been steadily improving for some time now. Recent surveys suggest that most small businesses are cautious about hiring more because of slow sales growth rather than lack of access to credit.
"Furthermore, a recent National Bureau of Economic Research study showed that job creation is more correlated to young businesses than the broad class of small businesses. Start-ups and young businesses are often financed in ways other than direct business loans. Difficulties getting home equity loans and other personal credit appear to have reduced formation of new businesses.
"Strong productivity growth is another much-discussed potential impediment to hiring. Stated simply, increases in productivity allow businesses to support a given level of sales with fewer people. In the longer term, rising productivity expands the economy's output, which in turn generates jobs. But in the short run, productivity investment can be the enemy of employment growth.
"Productivity growth was unusually high during the recession and in the early stages of the recovery, limiting the need for additional workers. Recently, however, productivity growth has slowed below the pace of business sales. If this trend continues, the need to hire additional workers will increase.
"Finally, in recent months, reluctance to hire has been attributed to heightened uncertainty, a common theme among my business contacts. A few weeks ago I argued that uncertainty has abated somewhat with the improving economy, the resolution of the November elections, the extension of tax cuts, and the apparent containment of the European sovereign debt crisis. I said that before Tunisia and before the fiscal struggle in Congress gathered steam. The restraining influence of uncertainty persists, to some extent."
Outside of productivity, it is difficult to measure the impact of these issues. (For example, it is difficult to survey people who did not start up a firm to determine if credit was an issue.) However, the theme of uncertainty has been a consistent factor in discussions on employment with our contacts here at the Atlanta Fed. If a simple explanation for persistent weakness in labor markets has proven elusive, there is little argument with President Lockhart's observation that "the recovery has brought little relief to the labor market."
Should today's employment release change any opinions about the strength of the labor market? In my mind, not really. There are still 7.5 million fewer jobs than at the start of the recession. There are also still over 8 million workers employed part time for economic reasons, and almost 6 million of the unemployed have been so for more than 26 weeks.
But the numbers released today did provide some additional evidence that the labor market is moving in the right direction with a level of growth consistent with at least a modest decline in unemployment. Furthermore, as consumer expenditures continue to rise, profitability increases, and the amount of uncertainty diminishes, hiring should increase. However, as President Lockhart alluded to in his speech, it will likely take time before the labor market recovery catches up to the overall economic recovery.
By Melinda Pitts
Research economist and associate policy adviser at the Atlanta Fed
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October 01, 2010
What does "structural" mean?
On Wednesday, Federal Reserve Bank of Atlanta President Dennis Lockhart summed up one of the hot policy questions of the moment this way:
"A necessary debate is jelling on the diagnosis of our economic troubles and the appropriate prescription. As I think about it, there are three lines of argument. One argument maintains there is not enough spending occurring—in economists' terms, a shortfall of aggregate demand—and that this shortfall can be reduced by further stimulus. A second argument is that the economy is undergoing deep structural adjustments in industry composition, labor markets, and household finances, especially the level of debt, and these adjustments will take considerable time to play out. Finally, it can be argued that much of the uncertainty has to be dealt with in other areas of government, and monetary policy can't do much about this kind of problem. This characterization doesn't do full justice to the complexity of the matter, but it lays out in broad strokes what questions are in play."
In some quarters, the opinion seems to be that the debate is effectively over. On the day of President Lockhart's speech, Mark Whitehouse wrote this piece in the Wall Street Journal:
"In recent months, policy makers have puzzled over the inadequate rate at which job searchers and job vacancies are coming together. By some estimates, if openings were turning into hires at the rate they typically do, the unemployment rate should be about three percentage points lower than the current 9.6%....
"A new paper, though, suggests employers themselves are at least part of the problem. The authors—Steven Davis of Chicago Booth School of Business, R. Jason Faberman of the Philadelphia Fed and John Haltiwanger of the University of Maryland—take a deep dive into Labor Department data and come up with an estimate of what they call 'recruiting intensity,' a measure of employers' vacancy-filling efforts including advertising, screening and wage offers.
"Their finding: Employers haven't been trying as hard as they usually do. Estimates provided by Mr. Davis suggest that over the three months ending July, recruiting intensity was about 12% below the average for the seven years leading up to the recession. Their lack of effort probably accounts for about a quarter of the shortfall in the hiring rate."
Paul Krugman made note of the same issue a few days earlier:
"Job openings have plunged in every major sector, while the number of workers forced into part-time employment in almost all industries has soared. Unemployment has surged in every major occupational category."
Whitehouse mentions a solution that comes from the Krugman (and many others') playbook:
"Depressing as it might seem, the finding is in some ways encouraging. It suggests that the trouble with hiring might be more a 'cyclical' function of low business confidence than a chronic, 'structural' ailment that will last for years to come."
The "low business confidence" part sounds right, but does that make the problem "cyclical"? I'm not so sure. Let's say an employer is reluctant to post a job opening because, just for example, the cost of the new employee potentially will expand by an amount that is unknowable until the details of healthcare reform legislation are clarified. Would you call that cyclical or structural? If "low confidence" reduces the search intensity of businesses, wouldn't it be reasonable to describe the resulting drop-off in job openings "structural"?
I think a reasonable answer comes down to whether the reluctance to create a job opening would be overcome by a pickup in business activity. But that may in turn depend on whether or not businesses think they can meet that demand by expanding productivity, something they have shown great aptitude for over the course of the past three years.
Maybe businesses have reached their capacity to grow through productivity gains rather than job creation. So maybe additional policy-induced demand will be enough to overcome the uncertainties that are clearly plaguing private decision makers. But I don't see that the evidence in hand so clearly tips the scales one way or the other.
By Dave Altig, senior vice president and research director at the Atlanta Fed
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July 16, 2010
A curious unemployment picture gets more curious
UPDATE: One of our eagle-eyed macroblog readers thought something was fishy-looking in the second chart of yesterday's (July 15) post. He was right—the chart was in error. This post is an updated, edited version with the erroneous chart replaced. There have also been some text revisions to better reflect the revised chart. The new text is bolded in this post.
At first blush, the second quarter statistics from the Job Openings and Labor Turnover Survey (commonly referred to as JOLTS and released Tuesday by the U.S. Bureau of Labor Statistics) suggest little has changed recently in U.S. labor markets:
"There were 3.2 million job openings on the last business day of May 2010, the U.S. Bureau of Labor Statistics reported today. The job openings rate was little changed over the month at 2.4 percent. The hires rate (3.4 percent) was little changed and the separations rate (3.1 percent) was unchanged."
Despite a slight step backward in May, the overall trend in job openings has been positive—Calculated Risk has the picture—but in a sense this fact has just deepened the puzzle of why the unemployment rate is so darn high. As we wrote in the first quarter issue of the Atlanta Fed's EconSouth:
"The disconnect between the supply of and demand for workers that is reflected in statistics such as the unemployment rate, the hiring rate, and the layoff rate can be dynamically expressed by the Beveridge curve. Named after British economist William Beveridge, the curve is a graphical representation of the relationship between unemployment (from the BLS's household survey) and job vacancies, reflected here through the JOLTS."
Since the second quarter of last year, the unemployment rate has far exceeded the level that would be predicted by the average correlation between unemployment and job vacancies over the past decade. Tuesday's report indicates that the anomaly only deepened in the first two months of the second quarter.
The dashed line in the chart above, which is estimated from the data from 2000–08, represents the predicted relationship between the number of unemployed persons in the United States and the number of job openings. That simple relationship would suggest that, given the average number of job openings in April and May, the unemployed would be expected to number about 10.4 million—not the nearly 15 million we actually saw.
Some analysts have suggested the unemployment benefits policies of the last couple of years may be responsible for abnormally high unemployment rates. Estimates generated by several researchers in the Federal Reserve—here and here, for example—suggest that extended unemployment benefits may have increased the unemployment rate by somewhere between 0.4 and 1.7 percentage points. But even if we accept those numbers and adjust the Beveridge curve by assuming that the number of unemployed would be correspondingly lower without the benefits policy, it's not clear that the puzzle is resolved:
If you tend to believe the higher end of the benefits-bias estimates, no puzzle emerges until the second quarter of 2010. And, of course, some estimates apparently deliver an even larger impact of the extended benefits policy. Let's call the question unsettled at this point.
The most tempting explanation for the seeming shift in the Beveridge curve relationship (to me, anyway) is a problem with the mismatch between skills required in the jobs that are available and skills possessed by the pool of workers available to take those jobs. The problem with this tempting explanation is that it is not so clear that the usual sort of structural shifts we might point to—for example, only nursing jobs being available to laid-off construction workers—are so obviously an explanation (an issue we explored in a previous macroblog post).
But these sorts of subplots may miss the truly big part of the story. I have noticed a recent spate of articles repeating a theme we hear anecdotally from many sources, in many industries. For example, this from a June USA Today article…
"…the [auto] industry is poised to add up to 15,000 this year and could need up to 100,000 new workers a year from 2011 through 2013.
"…Automakers need workers with more and different skills than in the past on the factory floor.… Among priorities: computer skills and the ability to work with less supervision than their predecessors. That likely means education beyond high school."
… or more recently, this one from the New York Times:
"Factory owners have been adding jobs slowly but steadily since the beginning of the year, giving a lift to the fragile economic recovery…
"Yet some of these employers complain that they cannot fill their openings.
"Plenty of people are applying for the jobs. The problem, the companies say, is a mismatch between the kind of skilled workers needed and the ranks of the unemployed."
Now I realize that a few anecdotes don't make facts, but I have been in more than a few conversations with businesspeople who have claimed that the productivity gains realized in the United States throughout the recession and early recovery reflect upgrades in business processes—bundled with a necessary upgrade in the skill set of the workers who will implement those processes. This dynamic suggests that the shift in required skills has been concentrated within individual industries and businesses, not across sectors or geographic areas that would be captured by our most straightforward measures of structural change.
The data necessary to test this proposition are not easy to come by. That challenge is unfortunate, because the return on figuring out what is beneath those Beveridge curve graphs is very high.
By Dave Altig, senior vice president and research director at the Atlanta Fed
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June 03, 2010
The recovery: Job rich or job poor?
Gross domestic product (GDP) is growing, supported by strong labor productivity numbers and modest employment growth. Even after today's downward revision to first quarter labor productivity measures, growth in labor productivity in the business sector has averaged 5.6 percent over the last three quarters—more than twice the long-run average. Okun's law has underpredicted the rise in unemployment, and some commentators call for a jobless recovery. Today, Federal Reserve Bank of Atlanta President Dennis Lockhart gave a speech on the prospects for the future of employment and labor productivity that posed the question:
"… how long can firms ride this productivity growth before having to yield to new hiring to support greater activity?"
To provide some context, below is a chart that shows a decomposition of GDP growth during post-WWII recessions. This decomposition does not explain growth, but it does show the relative contribution of various factors such as average labor productivity, average hours worked, the unemployment rate, and other labor market variables.
Note: The decomposition is based on the identity.
Where Y is GDP, H is total hours worked from nonfarm payrolls, E* is employment from the nonfarm payroll survey, E is employment based on the household survey, L is labor force, and N is working age population.
As this chart shows, relatively high labor productivity growth during a recession is not a phenomenon isolated to the 2007–09 and 2001 recessions (for present purposes, the end of the most recent recession is identified with the trough in GDP in the second quarter of 2009). All recessions from WWII through 1970 also featured sizable growth in labor productivity. Notice also that these recessions experienced large declines in the employment rate (rise in the unemployment rate). Hence, the productivity gains were attributable to outsized reductions in hours rather than gains in output. The same also holds true of the 2007–09 recession. As President Lockhart noted:
"Many employers reacted to the downturn by aggressively cutting their workforces, reorganizing remaining workers, and cutting other costs."
Of course, the big question centers on the recovery. Specifically, does the outsized contribution from labor productivity during the last recession portend continued outsized gains (and hence subdued employment prospects) during the recovery and expansion as well?
Perhaps history can provide a guide. The next chart provides the same GDP decomposition, but this time for the first three quarters of the recovery (we chose three quarters to allow a common comparison across recoveries). This chart reflects at least two salient features. First, the fastest way to employment growth is faster GDP growth—recessions that are immediately followed by very strong GDP growth also tend to have strong employment growth. Second, productivity remains an important contributor to growth, and that contribution has been especially large during the early phases of the past three recessions.
President Lockhart's interpretation of these observations is that many employers:
"… have reacted to the upswing by holding employment at or near recession levels, seeking efficiencies in supply chains, investing in labor-saving automation, and generally tweaking their business models to operate more efficiently than before the recession. We've heard this story frequently in anecdotal accounts of our directors and business contacts across the Southeast.
"As long as efficiency and productivity gains can be achieved in this way, employers may remain hesitant to hire."
Going forward, President Lockhart concludes that:
"I do not expect the recent outsized productivity growth to continue indefinitely and become a new, permanently higher trend rate. Some degree of 'wait and see' behavior is at work and is no doubt reflected in the productivity numbers. With growing economic momentum, deferral of hiring will become riskier.
"Some employment gains should result as labor productivity levels out and falls back over time to something resembling the historic trend rate. But the pace of hiring is likely to be gradual. Current data on the use of part-time workers suggest that businesses have some scope to increase hours without hiring new full-time employees. And there are other, more structural obstacles to the rapid reemployment of the jobless. Some jobs in the construction sector and certain manufacturing industries are likely permanently lost, requiring some amount of migration of workers to other sectors. And, for a time, skill and geographic mismatches may frustrate employers willing to hire.
"Also, the weight of uncertainty about the future business environment makes a gradual pace of employment progress a reasonable assumption. I hear often from members of the business community that uncertainty regarding federal, state and local fiscal fundamentals and regulatory rules-of-the-game are feeding reticence to pull the trigger on new ventures, new hires and new investments. The recent European sovereign debt and banking pressures have added to uncertainty in financial markets.
"Sizing all this up, I expect recovery in the medium term to be neither jobless nor job rich."
The current Blue Chip consensus for second quarter GDP is about a 3.2 percent annual rate. Payroll employment expanded by an estimated 290,000 in April, and with an employment report out Friday that will likely feature very sizable gains (some forecasts calling for an addition of more than 500,000 jobs), the relative contribution of labor productivity to GDP growth in the second quarter is almost certain to decline sharply. However, most of the surge in May's number will be temporary U.S. Census workers, and this increase will reverse itself in pretty short order. Hence, it will probably take awhile to see how President Lockhart's forecast of continued modest employment growth pans out.
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