Economic Growth is Solid, Just Not as Strong as You Think

Posted May 7, 2019 by Brian Gottlob
Categories: employment, Employment Growth, job growth, U.S. economy, Workforce

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In July, the current U.S. economic expansion will become the longest on record and there have been a record 103 consecutive months of uninterrupted job growth.  Not counting the distorting effects of the hiring (and then letting go) of over 411,000 temporary workers on the U.S. Census back in 2009-2010 it would have been 110 consecutive months of job growth.  A similar effect will occur in 2019 and 2020 as the Census Bureau begins hiring temporary Census workers this year and will lay off the workers later in 2020.  You can look forward to a lot of misinterpretation of the job growth numbers in the presidential election year of 2020.

The U.S. economy is strong, but as I argued in my previous post, not as strong as the first estimate of QI GDP growth (3.2%) suggests.  In that post I noted the one-off contributors (inventory builds, lower imports, higher defense spending) to above potential GDP in the first quarter of 2019.  In this post I highlight two employment trends that indicate (to me at least) the U.S. economy is not growing as rapidly as recent reports suggest.

First, growth in aggregate hours worked in the economy is slowing, despite strong gains in job growth.  Aggregate hours worked is a function of both job growth and the number of hours worked each week and the latter has shrunk a bit, offsetting some of the gains in employment.  Aggregate hours worked is related to GDP growth because the more hours worked, the more output the U.S. economy produces.

The growth in aggregate hours worked plus productivity growth is a good surrogate measure of trends in GDP growth. Growth in aggregate hours worked plus growth in productivity (how much each worker produces), at a minimum, will tell you whether GDP growth is accelerating or decelerating.  When the average number of hours worked each week is factored into job growth, April job growth looks much more like 100,000 or less, than 263,000.  This makes sense because productivity growth in the first quarter was initially estimated at 3.4%, a remarkably high rate given that annual productivity growth has averaged about 1% for a decade and the combination of 263,000 job growth and 3.4% productivity growth would imply a very high GDP growth (higher than the 3.2% first quarter growth first reported but which I believe will be revised downward).  Productivity growth is notoriously difficult to calculate and count me skeptical of the 3.4% estimate for the first quarter. Still, the first estimate is the one that gets the headlines and later revisions garner less attention.

The rate of job growth is also slowing, not accelerating, as the initial April job growth estimate implies.  Again, the labor market is strong, there are more job openings than workers available to fill them.  Both of the  survey instruments used to measure employment tell a similar story of job growth that is solid but slowing.  Briefly, the payroll survey is a survey of employers in the country, it provides an estimate of the number of non-farm jobs, the average number of hours worked by employees, and the average hourly wages that they are paid.  The payroll survey does not count the self-employed or those not covered by the unemployment insurance program.  It also counts jobs, not people, so one employed person holding two jobs is counted as two jobs by the survey.  The household survey is used to calculate the unemployment rate and labor force participation.  It provides much more information about the characteristics of the employed and of job growth or job loss in a month than does the payroll (employer) survey.  The household survey counts the self-employed and those not covered by unemployment insurance and it counts an individual working more than one job as a single job for total employment purposes.

The household survey tends to be more volatile, as can be seen in the chart above, but the relevant point is that both surveys show employment growth slowing.  That does not necessarily mean a weaker U.S. economy, but rather than the economy is unable to growth because of labor constraints.  The monthly Job Growth and Labor Turnover Survey (JOLTS) highlights this fact.  Looking at the JOLTS data released today shows that the job openings rate continues to rise much faster than the hiring rate, highlighting the growing gap between labor demand and labor supply.  The chart below shows how the gap between openings and hires has grown in just the Northeast region of the country, where labor shortages are among the most acute.

In conclusion, the U.S. economy is solid and labor markets are strong, just not as strong as recent data points suggest, and at a time when there are more downside than upside risks to the outlook.

The Worst Best 1st Quarter GDP Report

Posted May 2, 2019 by Brian Gottlob
Categories: GDP, GDP Growth, U,S, Economy, U.S. economy

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It may be revised downward in the two revisions that will be made to last week’s first quarter U.S. GDP growth report but even if not, this was still a low-quality GDP report. Several one-time factors – lower imports, inventory buildup and higher Pentagon spending were key contributors to the surprising (well above consensus estimate) of first quarter GDP growth. Based on the one-offs, current quarter output is poised to slow. Arguably the single most important sub-component of GDP was soft in the 1st quarter and more consistent with 1 to 1.5% GDP growth. As the accompanying chart shows, final sales to private domestic purchasers rose only 1.3% on an annualized basis, the lowest in nearly a decade. Investment by businesses in equipment managed a meager 0.2% growth in QI. For my friends in the construction industry, fixed investment in private non-residential and residential structures each declined on an annualized basis. Despite the political cheering, I still hold to a sub 2% GDP growth in 2019.

Q1 2019 GDP

Why The Drop in Avg. Weekly Wages?

Posted April 11, 2019 by Brian Gottlob
Categories: job growth, Uncategorized, wages

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In a presentation I gave to the NH Senate Ways and Means Committee I noted two important wage trends. First, the average weekly wage of NH workers today is actually a bit lower than it was in June of 2017. This does not mean that no worker’s wages are increasing.  Rather, it reflects the mix of industry and occupational job growth in NH.  Lower productivity and wage industries have added more jobs in NH than have higher productivity/wage industries.average weekly wages

Second, the weighted average weekly wage in the industries that added jobs in 2018 was $946 while it was $1,163 in the industries that lost jobs.    But it is not accurate to suggest this implies the NH economy is somehow being “hollowed-out” of higher paying jobs.  Data from the end of 2018 showed that there where 50% more job openings in the state in occupations that require a college degree (9,522) compared to jobs that don’t require a degree (6,132) at the same time there were 60% fewer individuals looking for a job and who have a degree than those looking for a job who don’t have a degree (5,532 vs 13,380).

openings an ed

Labor shortages are significant in all industries but higher skill jobs are much harder to fill so more lower skill/wage jobs are being added while higher skill jobs go unfilled, skewing the job growth mix and lowering wage growth trends in the state.  Other contributing factors to slower average weekly wage growth in include a small decline in the average number of hours worked per week by employees in many industries.

Big Banks Big Tax Savings

Posted April 2, 2019 by Brian Gottlob
Categories: Banks, corporations, Federal Deficit, tax cuts, Uncategorized

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For the calendar year 2018, federal corporate tax revenues were about $91.4 billion lower than during calendar year 2017, a decline of about 32%. The federal corp. tax cuts that took effect in 2018 lowered the tax rate from 35% to 21% and are the primary reason that federal revenues were 0.4% lower in calendar year 2018 compared to 2017 (in a strong economy). All banks are required to file detailed financial reports to regulators on a quarterly basis. Examining that data provides an estimate of how banks were affected by the recent federal tax cuts. Comparing the average effective tax rate of banks between 2013 and 2016 (in 2017 banks paid an an anomalously high rate) to the rate in 2018 and applying the difference to the pretax income of banks provides an estimate of the savings banks received from the corp. tax cut. The table below shows that collectively, banks accounted for $31.7 billion or about 1/3rd of the total corp. tax cut savings, with the 9 largest banks saving almost $15 billion or 16% of the total corporate tax savings in 2018 – an average $1.64 billion per bank.  I expect banks, and big banks in particular to have an issue with this estimate so I encourage them to point out errors in my simple methodology.Tax cuts

Not So Fast on NH’s Job Growth

Posted March 14, 2019 by Brian Gottlob
Categories: Employment Growth, job growth, Labor Force, NH Economy, Uncategorized

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The monthly payroll employment report gets a lot of attention. The monthly estimates are based on a survey sample of employers (differing from the monthly survey of households that is the source of unemployment and labor force estimates). Prior year monthly payroll estimates are revised early each year as more complete data (than the sample survey) are analyzed.  For a number of reasons (including the fact that newer firms are slow to get included in the survey) NH’s employment estimates more often than not have shown stronger (than first reported) job growth rates. Not this year. The new benchmark numbers have cut the state’s annualized job growth by more than half (to below 1%). The chart below shows the year-over-year growth rate in private sector employment in NH is about 1% (including government employment shows a slightly slower rate of job growth 0.8%).

Benchmark revisions

Early in 2018 I forecast NH’s job growth for 2018 would be about 0.6% (based on labor force constraints – not a weaker economy) and for several months I have been issuing a mea culpa for what looked like a significantly inaccurate employment growth forecast. While my sagacity is less challenged than I originally thought, I was more comfortable with NH’s employment trends when it was.

Frequently in Error But Rarely in Doubt

Posted January 2, 2019 by Brian Gottlob
Categories: Federal Deficit, Federal Spending, Fiscal Policy, Tax Revenue, Uncategorized

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In my economic presentations I often say that I am ‘frequently in error but rarely in doubt.”  Still, when in error I admit it, it’s a sign that I am willing to ask myself “why” in order to improve my methodologies.  I was wrong when I predicted NH’s job growth would be under 1% in 2018 (it is double that), largely because the labor force was able to grow more than I had forecast (see my previous post on net in-migration to the state).  In a letter to Congress over 100 economists asserted that “the macroeconomic feedback generated by the “Tax Cuts and Jobs Act” would be “more than enough to compensate for the static revenue loss,” implying that the bill would be deficit-neutral over time. Federal revenues have a seasonal (monthly) variation, with some months bringing in more revenue than the government spends and vice versa.  Comparing similar months over time thus offers some insights into the deficit trends over time and in different economic conditions.  As the chart below shows, the November 2018 monthly deficit (the most recent data available) show that during a period of solid economic growth the U.S. ran the highest November monthly deficit in its history.

november deficits

 

Proponents of the bill also claimed that we would see enough additional investment to boost growth by 4% per year. That implies an increase in annual investment of roughly $800 billion.   But, as this post noted, investment has not jumped to that level, nor does it show signs of doing so anytime soon.  The economists who predicted that tax cuts would spur a rapid increase in investment and higher revenues have been proven wrong.   They have also remained silent, which suggests that they are not at all surprised to see revenues and investment fall far short of what they promised.  Many, if not most, will dismiss the rising deficit (see below) during times of solid economic growth as a function of rising spending.

Deficit nov 2018

Rising spending is, in fact, a major but not unexpected contributor to the deficit problem.   Stagnant or declining revenues in a strong economy are not the norm, and are the kind of pro-cyclical fiscal policy (cutting taxes in a strong economy instead of filling coffers during a strong economy so that taxes can be cut to stimulate the economy when it is weak) that is going to make the next economic downturn much more difficult to combat.

NH Never Really Lost its Attractiveness

Posted December 28, 2018 by Brian Gottlob
Categories: Demographics, in-migration, migration, NH, Uncategorized

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There is no more overblown or misunderstood issue in NH than its demographic trends. There are challenges to be sure but almost all of the popular memes don’t withstand solid empirical analysis.  NH’s extremely low birthrates among women 15-44 (first or second lowest in the nation over the past many years – again a sign of NH’s successes not failures as it is a result of women in NH having with high levels of educational attainment and who have a high level of participation in the labor force) means the state must rely on net in-migration for labor force and population growth.  I have argued for more than a decade that there is nothing that has fundamentally altered NH’s attractiveness as a place to live, despite a number of years recently where more individuals moved out of the state than moved into NH. During times of recession NH tends to lose educated and talented people to places with more opportunity, while the housing crash that prompted the last recession made it especially difficult for NH’s core in-migration demographic (two wage earner, married couple families, ages 30-44, with children) to move into NH because they likely would have had to sell a house with an underwater mortgage and they would also have wanted to buy a house in NH (both of which were much more difficult between 2007 and 2013). Like all rural states, NH also sees a high percentage of young people leave and that has not changed in decades.  The good news is that net in-migration to NH is resuming and gaining steam, NH had the 6th highest rate as a % of its population of any state and the demographics of in migrants were a bit younger than prior years.  In addition, about 55% of in-migrants to NH over the past five years have a post-secondary degree, adding to the overall skill level of NH’s population.

2017 State to state

Still, net in-migration tends to be concentrated in a few areas of the state, the Seacoast, Strafford  and Rockingham Counties in particular, and in several communities. While state policymakers worry about statewide demographic trends it is most important to remember that the state and its communities are not monolithic.  Trends vary greatly across communities and it is the decisions and policies of local communities that most affect demographic trends.  It would be wise for policymakers and local officials to look to the characteristics of communities that are bucking the trends about which policymakers are most concerned (aging, out-migration, etc.) for prescriptions to address their concerns.


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