Joe Friday: Just the Facts M'am

As we come closer to Election Day in the USA we will hear and read a lot of things about the US economy. The blue team will brag about their victories over incomes, employment, and poverty. The red team will say the economy plods and weaves like a drunk on Kirkwood Avenue at 2 am. As you know I love data and so I decided to play around with some familiar information. It is impossible to summarize all economic data in a small space so I decided to focus on recent changes in real GDP and its components.

I stick to the facts today. I think the facts tell a clear story about slowing economic growth and one that deserves a policy discussion. But that discussion will have to wait. I already used up today's word count. 

GDP is a measure of the nation’s output of goods and services. Real GDP means that we are measuring output in constant prices –meaning that price change is not part of the change in real GDP. If real GDP increases it is totally because output or quantity produced changed. We like to analyze output because it usually has a strong association with things like employment, incomes, and sales of Jack Daniels.

GDP is output. It does not tell you about financial wealth. Of course if we are wealthier we often buy more goods and services but GDP does not directly measure wealth. It does not measure poverty and it does not measure distribution of income.

I wanted to examine near-term changes in real GDP so I did the following. For real GDP and each of its major components I looked at the annualized* percentage change over the past two quarters, past four quarters, and past eight quarters. By doing that I could get an idea as to whether things are improving, worsening, or staying the same.

For example, in the past two quarters real GDP grew by an annualized 1%. That was slower than the 1.2% it grew over the last four quarters and was less than half of the 2.1% annualized rate it grew in the last two years. These calculations suggest that things are clearly worsening. In 2016 the US economy is growing considerably slower than in the past year or two. And by the way – even the 2.1% rate two-year rate is not a strong growth rate for the USA.

Rather than speculate on a lot of causes of this slowdown, I decided to focus today on the components of real GDP. Recall that the Product Account approach to measuring real GDP focuses on the buyers of the output. The standard approach sees four buyers of US produced goods and services – domestic consumers, business firms, (federal, state, and local) governments, and foreign buyers. If real GDP is slowing it is because one or more of these buyers have slowed their purchases of US goods and services.

So I looked at consumers first. Households spent an annualized 4.5% more than two quarters ago on goods and services. Compared to the 1% overall GDP growth number for the past half-year, that’s a very strong rate. Way to go consumers! But even consumer spending has been slowing. Over the past two years it grew by an annualized 6.2%; it grew by 4.8% over the past year; and then 4.5% over the past half year.

Consumers desire for newly-built residences also flamed out. What we call Residential Construction declined by -0.2% in the past two quarters. Residential Construction grew by 5.7% in the past four quarters; by 8.5% over the past two years.

What about business spending? Business firms buy newly produced structures, equipment, and intellectual property. Here the news is ugly. Equipment spending was down by almost -7% in the last two quarters. That was a major decline from the -1.9% in the last year and the 0.7% annual rate of the past two years. Buying of new plant and other business structures shows a slightly different but dismal pattern of contraction. For example, spending on Structures was down by an annualized -4.3% in the past half year; -7.1% in four quarters; down -5.2% annualized in the past eight quarters.  The only positive story for business spending was for intellectual property purchases – growing at about 5% over the past two years.

If you like numbers instead of growth rates – business spending was up by about $30 billion dollars since the second quarter of 2014. During that same time period personal consumer spending was up $674 billion. Business spending on plant and equipment is the main way we expand both productivity and productive capacity. 

US exports are goods and services we sell to foreigners. The story there is not encouraging and falls in line with a slowdown theme -- declining by -0.2%/-1.3% in the last two/one years respectively. Exports leveled with 0.2% growth in the two past quarters.  

Let’s turn to some of the government buying numbers**. There is nothing particularly interesting coming out of federal versus state and local government spending. All government spending has slowed in the past year and past six months. More interesting is the breakdown of federal spending between defense and non-defense. In the past 6 months, defense spending slowed by -3.1% after contracting by -0.8% in the past year and by -1.5% in the past two years. Non-defense spending, in sharp contrast, grew by 2.3% over the past six months; 2.9% over the past year, and 3.3% annualized in the past two years.

I know there are a lot of things to discuss with respect to the economy and national policy. But the recent real GDP figures are very clear.

·       The economy is slowing.

·       The strongest growth sectors have been household spending on goods, services, and houses, – though even that strong growth is declining over the past two years.

·       Also contributing to positive economic growth was non-defense federal government spending on goods and services.

·       The weakest sectors showing significant contractions are business spending on plant and equipment and defense spending.

*All the figures in this post have been annualized. Whenever you compare different time periods you need to find a way to make them comparable. By annualizing, for example a half-year change, you are calculating how much real GDP would have grown in four quarters if it continued at the same pace as over the two quarters. When you annualize a two year change – you are showing how much it grew, on average, per year. 

** The government figures quoted here reflect only government purchases of goods and services. Much of what the government spends is for transfers and net interest. That information is found in the government budgeting figures but are not a direct part of the components of GDP. 

US Unemployment, Garter Belts, and Lemonade Stands

When the US unemployment number came out for September it was followed by a firestorm as hot as a kimchi pot in August. The Democrats were delighted that the unemployment rate had fallen below 8%. They were even more delighted that the number of people finding employment had increased by a whopping amount. Who could argue with that? The Republicans, of course! Digging deeper into the September number they found that much of that spectacular increase could be explained by part-time employment and by people moving into self-employment. One interpretation was that the reduction in the unemployment rate was a negative signal – revealing that desperate people had moved from unemployment to part-time work or had at last gasp started their own lemonade stands.

So which one is right about the implication of a falling unemployment rate in September? NEITHER IS RIGHT.  Both are wrong. Both are wrong for the simple reason that you cannot judge what is happening in the US economy from one month’s sample. The household employment survey is notoriously small and therefore it has a lot of variability from month to month. The huge increase in September, for example, followed weakness in the month before. It is possible that some of the employment that was reported for September actually came at the end of August and that the former was underestimated and the later overestimated. This happens all the time with monthly data. It is also possible that the sample was biased by unusual outcomes. For example, weather, holidays, timing of back-to-school sales, and other unusual factors may have made September 2012 different from past Septembers.  

So what we usually do is try to interpret monthly changes as best as we can but realize we need several months of outcomes before we can assign a new trend to the economy. September numbers say almost nothing about the direction of the economy.

We need to look at longer trends in this data. So I took a little digital trip to the Bureau of Labor Statistics (www.bls.gov). They are nice enough to have relevant data back to 1612 when Columbus discovered Plymouth Rock.  Because of my great respect for Great Britain and statistics, I decided to confine my hunt for data to years since 1990. And I found some interesting things.

First, let’s back-up and define what we are talking about. Each month the Labor Department surveys companies about payroll jobs. That number is reported to the public despite the fact that it does not enter into the calculation of the unemployment rate. The payroll jobs number was not in dispute in September.  It showed some modest employment growth at non-agricultural companies as it has been doing of late. This post is not about the payroll jobs number.

The Labor Department conducts a second survey each month. In this case they talk to a sample of households and ask the persons in that household about their status in the labor market. Do they have a job? Is it part-time or fulltime? Is it for a company or is it self-employment.  Does it involve Jack Daniels? Are they now looking for a job? Does the dress requirement of the job invovled high heels and garter belts? And so on. Based on the answers the government estimates the labor force, employment, unemployment, and the unemployment rate.

Second, rather than focus on month-to-month changes – let’s see how some of these key labor market indicators have behaved over more extended time periods. The largest employment category published is what they called Wage and Salary Employment in non-agricultural companies. In September of 2012 it was estimated to be 111,024. Yes, it leapt by a considerable amount compared to August of 2012. But what has it been doing over a longer time period? One benchmark is before the recession began when it was 113,298 in September of 2007. We can conclude, therefore, that household employment at firms remains lower in 2012 by 2.3 million employees.  So we are not back to where we were in 2007.  Employment in this category decreased to 106.5 million in 2009 and has been improving since the worst of the recession.  It increased in 2010, 2011, and 2012. This gradual growth is very compatible with what we have seen from the payroll survey employment figure – modest growth but so far we have not caught up to employment levels of the 2007.

Of considerable interest is the measure of part-time employment. Plotting it over time reveals that it is very counter-cyclical – meaning that it increases in recessions and then dramatically reverses in strong economic years. In the strong economic growth between 2004 to 2006 the number of part-time jobs held by household in the USA decreased by 18%. From 2006 until now part-time employment has increased by more than 100%! Now that is volatility.

But more than the volatility is the number. Between 2007 and 2009 the number of wage and salary workers decreased by 6.8 million. Part-time jobs rose during those two years by 4.5 million. Bringing us up to present, between 2006 and 2012, the number of wage and salary jobs decreased by 2.3 million persons. The number of part-time jobs increased by 4.1 million. Clearly from 2006 to 2012 there was a conversion away from full-time work to part-time.

But what about the changes occurring more recently? From 2009 to 2012 the number of W&S jobs increased by an impressive 4.4 million jobs. But we don’t know how many of those were fulltime positions. We do know that during that time the number of part-time jobs remained stubbornly high.

What we take from this analysis is a very different story than what we get from one-month changes. While things have improved for wage and salary workers in the last few years we still have about double the number of part-time workers we usually have. Progress is being made. But we are still not back to past benchmarks and that is why the unemployment rate is still much too high to satisfy anyone. Obama can gloat that employment does seem to have turned but clearly we are not back to levels of the past and we have many too many people working at part-time employment who don’t want to be there.

That leaves the issue of the self-employed. While this category of employment did increase in September 2012 there is no clear pattern in recent years. It did rise gradually between 1990 and 2007 and then has generally fallen. Since 2007 it is down by about 7%. It fell by about half a million jobs from September 2011 to September 2012. This deviation from the longer term trend suggests less confidence in self-employment.

In short, employment is growing but too slowly. Households are finding more opportunity at non-agricultural firms but many of these are part-time positions. Households have slowed their attempts to start their own businesses. The economy needs more growth to make a difference. The parties should argue about the best way to create sustainable growth – not about September or October’s employment number.

Note: this post is long enough without getting into the related issues of the ideal way to measure unemployment. The unemployment rate that gets the most attention each month considers a part-time job the same as a fulltime job. Alternative measures do not. Furthermore, other measures estimate how many people belong in the unemployed category who dropped out of the labor force. As a result there are measures of unemployment that range from 17% to more than 20%. That is the topic for a future blog.