A Closer Look at the Latest Jobs Figures -- Plenty of Stimulus, a Scarcity of Confidence
Jeff Lemieux
January 11, 2004
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Given the enormous amount of economic stimulus in place (large budget deficits and extremely low interest rates), why is the jobs market so weak? First, the numbers probably aren't as bad as the December jobs report implies. Rapid productivity growth is another explanation. However, the amazing thing about this economic recovery continues to be the apparent absence of confidence in future growth prospects.
The main reason for a lack of faith in the economy is probably the dreadful federal budget situation, and the apparent unconcern at the highest levels of the U.S. government with the medium- and long-term budgetary problems.
Friday, the Bureau of Labor Statistics (BLS) reported that only 1,000 new jobs were added in December 2003, capping off a year in which U.S. payrolls declined by 74,000. Since their peak in February 2001, the U.S. economy has lost about 2.4 million jobs (see Figure 1).
Figure 1.
How can the economy be growing so rapidly, while the job situation remains so poor? There are three basic explanations:
1. Job growth is probably a little better than the payroll numbers indicate.
2. U.S. businesses are obsessed with productivity growth and cost reductions, which hurts short-run hiring prospects, but will help the economy (and workers) in the long run.
3. Businesses seem to lack confidence that the recent, stimulus-driven economic growth will continue.
First, the U.S. labor market is probably not as bad as the headline payroll numbers imply. For one thing, households report that the number of people working is rising, even as the number of payroll jobs continues to stagnate (see Figure 2).
Figure 2.
There may be several reasons for the discrepancy. People who used to work two jobs may now only have one. (That would show up in the payroll statistics as a job loss, but the household numbers would still indicate the same number of people working.)
Also, people may be working at new start-up businesses not yet included in the payroll survey. (In that case, the payroll numbers will be revised upward as the statisticians catch up.)
Finally, the seasonal adjustments that BLS uses to smooth normal monthly fluctuations in hiring patterns may be a little out of date. For example, December 2002 payrolls fell by 200,000, only to jump up by 160,000 in January 2003. The year before, December 2001 payrolls fell by 240,000, but then fell by only 80,000 in January. Chances are, the seasonal adjustments are causing December payroll estimates to be too weak, while the January figures are overstated. (The reasons for this are technical -- the BLS computers seem to expect greater last-minute hiring around the holidays than businesses now need to make. Likewise, the BLS estimates seem to predict a surge of layoffs in January that is no longer appropriate.)
Second, U.S. companies seem determined to boost productivity before hiring new workers. In the third quarter, real (inflation adjusted) GDP grew by a stunning 8.2 percent (see Figure 3). But the surge in production was not accomplished by adding new workers. Instead, businesses increased labor productivity by an even-more-stunning 9.4 percent.
Figure 3.
Economic growth will probably remain decent in the 4th quarter. Layoffs have abated quite a bit -- the average number of new unemployment claims is down to about 350,000 a month (see Figure 4).
However, hiring remains weak, and new jobs are relatively scarce. Although the unemployment rate dropped to 5.7 percent in December (see Figure 5, at the bottom of this page), an estimated 309,000 people dropped out of the workforce during the month. (Usually, as the economy recovers and job prospects improve, workers re-enter the workforce in large numbers.)
Figure 4.
What is making businesses so reluctant to hire? No one knows for sure, but a lack of confidence in the future economy probably has something to do with it.
And why the lack of confidence in future economic growth? One reason may be poor prospects for the U.S. budget.
The President's Budget (due in February) will continue to paint a rosy picture of an improving federal deficit, but the reality seems quite different. The deficit continues to worsen, and the political climate (fostered to a large degree by the Administration) decidedly favors budgetary irresponsibility: spend more now, cut taxes now, and worry about the budgetary and economic consequences some other time.
The business community knows the economy is currently pumped up on steroids -- the enormous fiscal and monetary stimulus of the last three years has succeeded in creating demand.
But executives also know that economic stimulus -- tax cuts, spending increases, low interest rates -- can quickly be taken away. Congress will eventually cease enacting new tax cuts, and the Federal Reserve will gradually raise interest rates to support the U.S. dollar and maintain credibility in financial markets. With the baby boomers' retirement starting to pressure the federal budget in five short years, U.S. economic stature is at risk.
It's true that businesses know they must continue to invest to keep productivity growing and thereby remain competitive, and the economic statistics are starting to show higher investment levels. Along with strong government spending and continued high consumer demand, that investment will propel GDP growth ahead in the coming quarters.
But robust expansion is still not in many companies' plans. When the federal government starts to get its fiscal house in order, perhaps long-term confidence will solidify. Then, the economy will begin to create jobs at a healthier pace, even without the added stimulus of massive deficit spending.
Figure 5.
Links:
Centrist Policy Network When Treasury Secretaries Attack! (January 11, 2004)
Centrists.Org Preparing for CBO's Updated Baseline Projections and the President's New Budget
(January 10, 2004)
Centrist Policy Network It's the Confidence, Stupid. (November 5, 2003)
Centrists.Org Interpreting the Diverging Employment Statistics September 9, 2003)
Centrists.Org Issue Summary: Budget and Tax Policy (Basics)
