March employment report: slow but steady improvement

by: Zach Bethune, Thomas Cooley, Peter Rupert

The establishment survey reports total non-farm employment increased 192,000 with all of it attributed to the private sector as the government sector showed no change over the month. Evidently, after two cold months depressed the labor market, employment gains look much as they have over the past twelve months or so, averaging 184,000 since February, 2013. empchgm-2014-04-04 Total employment is now near its level of December, 2007, just when the economy went into recession; and, private employment is slightly above its pre-recession peak. emp-2014-04-04
Average weekly hours in the private sector also jumped up from 34.3 to 34.5.

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On the household side, both the number of unemployed (10.5 million) and the unemployment rate  (6.7%) remained essentially unchanged and have both moved little during 2014. The progress of the labor markets now seems highly dependent on the prospects for the long-term unemployed. Average unemployment duration remains remarkably high while initial claims have returned to pre-recession levels. The long term effects of the large number of long-term unemployed is a story that is yet to be told.  But, all of the initial research point to large permanent losses in income and mobility.

The household survey also revealed that labor force participation has begun to inch up, a sign that prospective workers see more opportunities than they have.

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As can be seen in the Beveridge Curve below, the number of job openings has nearly returned to its level in January, 2008, though the success of the labor market in filling those vacancies has not kept pace…but is continuing its “counter-clockwise” loop as per usual.
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In the end, then, what is the take-home message? The overall picture, while not stellar, shows a broad array of data that is mostly positive, but is it enough to change the pace or magnitude of Fed policy…seems unlikely for now.

Final Estimate for Q4 GDP

by Zach Bethune, Thomas Cooley and Peter Rupert

GDP Report

The BEA announced that real GDP increased at a saar of 2.6% for 2013 Q4 (advance estimate was 3.2% and the second estimate was 2.4%). The overall picture for the U.S. economy remains largely the same. The increase from the last estimate comes largely from personal consumption expenditures (PCE) and nonresidential fixed investment. Moreover, the increase in PCE was the largest increase since the end of 2010. The deceleration  comes mainly from a decline in inventories, a bigger decrease in government spending and residential fixed investment.

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Initial claims for unemployment fell to 311k, its lowest level since last Thanksgiving and the 4-week moving average hit 318k.

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February employment report: nothing to write home about

by: Zach Bethune, Thomas Cooley, Peter Rupert

The February employment report from the BLS provides little material to sway anyone’s prior beliefs, although the headline jobs number was slightly higher than many prognosticators prognosticated. The establishment survey reports total nonfarm employment increased 175,000 with 162,000 attributed to the private sector and the remaining 13,000 to an increase in government workers.

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Total employment has nearly reached its December 2007 level…some six years after the beginning of the recession.

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The service sector added 140,000 jobs, with professional and business services adding 79,000 jobs, 24,400 of which are temporary services. Average weekly hours fell slightly to 34.2 from 34.3…and a year ago in February average hours were 34.5.

The household survey shows the number of employed (145,266,000) and unemployed (10,459,000) persons both increasing slightly. The unemployment rate ticked up slightly from 6.6% to 6.7%. Since February 2013, the unemployment rate has declined 1.0 percentage point. The employment to population ratio and the labor force participation rate were unchanged. Fortunately or unfortunately the headline story of the US remains much the same as it has been since the beginning of the recovery in mid-2009.

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Europe’s Lost Decade?

by Zach Bethune, Thomas Cooley, Espen Henriksen, and Peter Rupert

Is Europe about to repeat Japan’s lost decade? Six years after the Great Recession began, the Euro area has shown little sign of sustained growth.  Japan’s so called lost decade began in 1991 after several decades of rapid economic progress and sustained increases in asset prices that were suddenly reversed.  The average growth rate of real GDP per-capita declined from about 3.5% per year in the 1980s to about 0.5% per year in the 1990s and was accompanied by  rapidly decreasing equity and real-estate valuations.  But, when we compare the performance of Japan’s economy with the European economy since the beginning of the Great Recession it is clear that Europe is in far worse shape than Japan ever was.

The following Snapshot-style comparative charts show the paths of key economic variables in Japan after the peak of its equity and real-estate valuations and contrasts these with the paths of these variables in the U.S. and Europe in the years since the onset of the Great Recession. For Europe and the U.S. we set time “0” at the peak before the Great Recession.  Judging from this and the charts that follow, halfway into the decade following the onset of the Great Recession, the performance of the U.S. and, in particular, the European economy are substantially weaker than Japan’s economy was halfway through its lost decade.

gdplostdec2014-02-26

Japan’s growth rate slowed dramatically at the beginning of their lost decade – GDP rose only 10% in the first six years and then flat-lined more or less completely.  Europe, by contrast fell by six percent in the first six quarters and then flat-lined at a level three percent below their peak.  The U.S. stands in contrast to both of these stories – after falling by nearly four percent in the first six quarters U.S. growth has been steady at a rate slightly less than before the collapse.

Consumption paints an even more dire picture for Europe. During the lost decade in Japan consumption expenditures never really slowed down. In the Great Recession, U.S. consumption fell initially for about 6 quarters and  has been rising ever since. Europe on the other hand started out similar to the U.S. for the first 6 quarters but then consumption growth stalled and has not improved since. It has not returned to its 2008 peak.

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The labor market picture for Europe is even more discouraging and strongly reinforces the message of a lost decade.  The unemployment rate in individual countries like Spain and Italy has been widely noted. But, here we focus on aggregate employment and the data are for the EU-28 which includes some countries, like Germany, where the labor market has not really declined. Japan, Europe and the U.S. showed remarkably similar paths of employment up until the inflection point following which there was a sharp contraction in both the U.S. and Europe. In Japan, employment like output, simply stagnated.  In terms of a recovery, the U.S. labor market, after a sharp decline, is showing slow growth while Europe looks to be stuck at a permanently lower level.

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While the declines in employment were steep in both the US and Europe, the path of labor productivity has been very different. In the US the recession had a negligible effect on labor productivity, which has only recently started to show signs of slowing down (see here for instance). Europe on the other hand experienced a sharp drop in productivity at the beginning of 2008, when it fell by nearly five percentage points. Data until 2010 suggest that European productivity hasn’t shown any signs of ‘catching up’ to its previous growth trend. Measuring labor productivity is particularly difficult for Europe because one needs a measure of total hours worked. Ohanian and Raffo (2011) do the heavy lifting by constructing this series for many European countries, although it is only available until 2010.

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Why the Lost Decade?

Economists have offered a range of different explanations for Japan’s lost decade: (i) the government failed to deal with undercapitalized banks that were allowed to carry “zombie” loans on their books and did not have the capacity to finance new investment, (ii) a sharp drop in productivity caused desired investment to be low, (iii) frictions caused by labor law amendments in the late 1980s resulted in declining work weeks, (iv) the monetary policy response was too timid (something Abenomics is finally trying to remedy), and (v) Japan’s prospects for recovering were seriously hampered by persistent deflation.  While it is not clear that there is one compelling account, all of these elements undoubtedly played some role and all of them loom large in the current European experience.

As in Japan, European banks are most likely under-capitalized and carrying loads of overvalued (“Zombie”?) sovereign debt on their balance sheets as well as other assets of dubious quality. The European Central Bank has only gingerly approached the problem of looking at asset quality in European banks, promising to deliver results later this year. But then what? There is no plan for dealing with under-capitalized banks. In contrast to Japan and the U.S., there is no common bank regulation or resolution mechanism and there has been only tentative progress toward creating it.

As the picture below shows, investment / capital formation stagnated in Japan, both consistent with the slower growth in total factor productivity and insolvent banks that deterred lending.  The picture also shows that investment in both the United States and Europe fell relatively more at the onset of the Great Recession than investment in Japan did at the onset of the “lost decade”. In contrast to both Japan and Europe, U.S. capital formation has rebounded after an initial collapse.  Again, the European situation looks more alarming than the situation in the United States and Japan.

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Whatever the reasons may have been for Japan’s ‘lost decade’, one thing is certain: more than halfway into the decade following the start of the global recession in 2008, the European economy is far worse and deteriorating. Even though economic growth in Japan stagnated in 1991, the economy continued to grow.  In contrast, the economy in Europe has contracted and is, according to all measures of economic activity surveyed in this post, at a lower level than they were five years ago.  Unless economic growth in Europe rebounds within the next couple of years, Europe is headed for a substantially worse decade than Japan’s. Surprisingly, there has been recent optimism about a European recovery, but the data do not seem to support it except for possibly Germany and the U.K.

Just as there were no quick fixes for Japan during its “lost decade”, most likely there are no quick fixes for Europe’s economy. The challenges lie in fostering economic institutions that create individual incentives and market structures that both discourage rent seeking and encourage and allow people to use their efforts to develop and produce goods and services other people value. On this score Europe has failed. They have not reformed institutions sufficiently to make their markets globally competitive and adaptable. Until they do, Europe will continue to face the possibility of an entire decade of lost income, consumption, and jobs.

Clanging in the New Year

by: Zach Bethune, Thomas Cooley, Peter Rupert

Following an unexpectedly weak report in December (now revised up only slightly from 74,000 to 75,000) the monthly employment report from the BLS today reveals another tepid increase of only 113,000 jobs in January.  The unemployment rate declined slightly from 6.7% to 6.6%, inching towards the Federal Reserve’s stated target of 6.5% in which they will consider changes in the federal funds rate. Since January 2013, the unemployment rate has declined 1.3 percentage points.  In all, the headline story of the US labor market remains much the same as it has been since the beginning of the recovery in mid-2009:

1.  slow, but positive job growth,

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 2. a steadily declining unemployment rate.

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You might think that even though the ‘recovery’ has taken longer than usual, the labor market seems to be finally reaching a healthy state. That story is consistent with the figures above. Both employment and unemployment are reaching pre-recession levels. However, there are many features of a healthy labor market that these two headline statistics cannot capture. For instance if the rate of job growth cannot keep up with population change or if  an unemployed worker becomes discouraged and leaves the labor market. Here are a few additional headlines of the current recovery:

3. A declining  labor force participation rate, currently at its 1980 level.lfp-level-2014-02-07

4. A persistently low (and unchanging) percentage of the population employed. 

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5. A consistently less efficient labor market

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6. Historically high unemployment duration

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Private employment was up 142,000 while the government sector shed another 29,000 jobs. Very little else stands out: average weekly hours remained the same at 34.4; average hourly earnings inched up to $24.21.

From the household survey the participation rate inched up to 63.0% from 62.8%, as did the employment to population ratio, 58.8 from 58.6.

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