Recent Economic Developments: Employment, Income, and GDP

Recovery Remains Weakest on Record & Job Creation Continues Slow Crawl

Feb 01 2013

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Private Sector Adds 166,000 Jobs in January; Unemployment Rate Up to 7.9%

Payroll Employment

The Bureau of Labor Statistics (BLS) reported that on a seasonally adjusted basis the economy added 157,000 nonfarm payroll jobs during the month of January with 166,000 jobs added in the private sector. The government sector shed 9,000 jobs.

After incorporating the annual benchmark revision, the economy has added 6.1 million jobs in the 35 months since private payrolls bottomed in February 2010. There are still 2.7 million fewer private sector jobs than in January 2008 when private sector employment peaked as the recession was getting under way. At the February 2010 bottom, the economy had lost 8.8 million private sector jobs.

As the following chart shows, using the White House metric of measuring the private jobs recovery from the cycle low in February 2010, this recovery continues to rank near the bottom. The blue shaded area represents the best and worst post-World War II recoveries that lasted longer than a year with the blue line representing the average recovery. Equivalent payroll levels were calculated using the percentage change over comparable time periods. The red line represents the current recovery.

If this recovery had been average, the economy would have produced 10.0 million jobs from the low point or 3.9 million more than the current recovery. In a strong recovery, like the 1980s recovery, the economy would have added more than 13 million private sector jobs.

If private payrolls continue to grow at the rate of growth since the February 2010 bottom, private sector payrolls will not regain the January 2008 level until April 2014.


Unemployment

The unemployment rate rose to 7.9% in January from 7.8% in December. The unemployment rate reached a peak of 10.0% in October 2009. While the decline to 7.8% represents an improvement in the headline number, the unemployment rate remains significantly above the 5.2% rate the administration argued would exist today with passage of the massive stimulus package early in 2009.

The unemployment rate decline is largely a mirage caused by the drop in the labor force participation rate. If the labor force participation rate had remained at its January 2009 level of 65.7% instead of declining to 63.6%, the unemployment rate would be 10.8% instead of 7.9%.

 

 

GDP Declines 0.1% in 4th-quarter: Behind the Numbers

The Basics

The Bureau of Economic Analysis estimated that real GDP declined at an annual rate of 0.1% during the 4th-quarter 2012, well below pre-release consensus estimates of 1.0%. Some forecasters were looking for smaller gains, but a decline was unexpected.

The unexpected decline was largely attributable to drops in federal government defense consumption and investment, which declined at an annual rate of 22.2% during the quarter. Exports declined at an annual rate of 5.7%, while imports (a subtraction from GDP) declined at a rate of 3.2%.

On the positive side of the ledger, personal consumption expenditures grew at an annual rate of 2.2%. Private Fixed Nonresidential Investment, or business investments in structures, equipment, and software, grew at an annual rate of 8.4% after declining at a rate of 1.8% during the 3rd quarter. Residential investment continued to expand in the quarter at a rate of 15.3%. This marks the 7th consecutive quarterly increase in residential investment.

The decline in defense consumption and investment subtracted 1.28 percentage points from the change in GDP for the quarter. Net exports subtracted 0.25 percentage point and the change in private inventories subtracted 1.27 percentage points.

Adding to the rate of change in GDP were personal consumption expenditures (1.52 percentage points), private fixed nonresidential investment (0.83 percentage point), and residential investment (0.36 percentage point).

Behind the Decline in Defense Spending

Commentators have focused on the effect of Sandy on the economy and the large drop in the federal government’s contribution to GDP during the 4th quarter. There is no doubt that Sandy had some impact on 4th-quarter GDP. The claims that a “real” decline in the federal government’s contribution are responsible for the poor quarter are more spurious. The numbers discussed below are real, or inflation-adjusted data. Dollar amounts are 2005 dollars.

The decline in defense consumption and investment drove the federal government component of GDP during the quarter. Nondefense consumption and investment actually increased at an annual rate of 1.4% during the quarter. The decline in defense was most likely the result of certain payments being made in September, the last month of the 3rd-quarter, instead of October (the first month of the 4th-quarter). This shift helped produced a pre-election GDP report showing the economy growing at a rate of 2.0% during the 3rd-quarter (subsequently revised up to 3.1%).

More specifically, the large decline in defense during the 4th-quarter was primarily based on a decline of $42.6 billion in purchases of services for such things as weapons support and personnel support. This same category was the main driver of the large defense increase in the third quarter. During the first two quarters of 2012, purchases of services amounted to $196 billion and $196 billion. The 3rd-quarter came in at $216.5 billion and the 4th-quarter is estimated at $173.9 billion. The average for the 3rd and 4th quarters was $195.2 billion, very close to the average $195.5 billion for the first two quarters. If this apparent time shift had not occurred, 3rd-quarter GDP would have grown at a rate of 2.5% instead of 3.1% and GDP would have advanced at a rate of 1.0% in the 4th-quarter.

Future Concern


Most analysts were pleased by the growth of private fixed nonresidential investment in the quarter. It will be April before we get the first look at 1st-quarter 2013 GDP. At that time, we will get a glimpse of how much of the 4th-quarter 2012 increase was the result of businesses shifting certain investments into 2012 because of concerns over potentially higher tax rates in 2013.

Some Perspective on the Recovery

Even before today’s report, it was crystal clear that economic growth has been insufficient during this recovery. As the following chart shows, real GDP has grown by a total of just 7.5% since the recession ended 3 ½ years ago. This is equivalent to an annual growth rate of 2.1%. This compares with average total growth of 17.5% in the other nine post-World War II recoveries (4.7% annual rate) over a comparable period. The substandard growth of this recovery has generated a $1.3 trillion (2005$) smaller economy than the average recovery would have produced – and if the Blue Chip Economic Indicators consensus forecast is correct that gap will widen over the next two years.

 

Economic growth has been so poor during this recovery that it ranks worst among post-World War II recoveries. The shaded blue area on the following chart represents the best and worst recoveries and the dark blue line represents the path of the average recovery.

In order to get economic growth back to the trend line of the average recovery over the next four years, real GDP would have to grow at an annual rate of 5.5%.

 

 

Personal Income Report Shows Taxes Do Affect Behavior

BEA reported on Thursday that nominal personal income increased by 2.6% in December, a level that exceeded expectations of private forecasters. The increase was on top of an upwardly revised 1.0% in November. Disposable personal income surged 2.7% in December following an increase of 1.0% in November.

BEA noted in its release that “Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments.” According to BEA, excluding these accelerated payments and other special factors (Sandy in October for example), disposable personal income would have increased by 0.4% in December and 0.6% in November. In other words, more than 80% of the December increase was the result of accelerated payments in advance of possible tax increases.

No Change in Fed Policy

There was no change in the monetary policy stance of the Federal Reserve’s Federal Open Market Committee (FOMC) at this week’s meeting. This was not unexpected since the FOMC had announced a major expansion of its quantitative easing program after its December meeting. At that meeting, the FOMC decided to purchase $45 billion of longer dated Treasury securities and $40 billion of Federal agency mortgage-backed securities each month for an undetermined period of time.

Following the FOMC meeting in December, the Fed also announced that it would hold interest rates at historically low levels “at least as long as the unemployment rate remains above 6 ½ percent.”

 

 

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