Category Archives: Econ Data

Employment Growth Continues, But at Too Low a Rate

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The monthly change in employment figures continue to show growth in total employment, although at rates that remain too low for a reasonable recovery.  Total non-farm employment, both private sector and government, grew by 120,000 in November, based on the Establishment Survey conducted by the Bureau of Labor Statistics.  This total of 120,000 reflected an increase of 140,000 in private employment, offset by a decline in 20,000 in government employment (primarily state and local governments, which account for 87% of government employment in the US).

The 120,000 figure is too low.  Based on employment growth seen during recent periods of growth in the US, the figure would need to be roughly 200 to 250,000 per month for a sustained period for unemployment to decline on a sustainable basis.

The decline in government employment is hurting this.  If government employment were growing at a more historically normal rate of 20,000 per month rather than falling by 20,000 per month, total employment would growth in November would have been 160,000 by this direct effect alone.  That would by itself have accounted for about half the increase one would need to get to the lower end of the 200 to 250,000 band one needs (160,000 is half way between 120,000 and 200,000).  Furthermore, once one recognizes that there will be multiplier effects as well from such increased direct government employment in this economy (with its still very high unemployment), then with a multiplier of only just one (i.e. one additional private job for every additional government job, due to the resulting demand for goods and services from the new government workers), one would have gotten all the way to the 200 to 250,000 band.  And with a not unreasonable multiplier of two, one would be at 240,000, near the top end of this band.  That is, a major reason for the sluggish growth in employment in the US is the cut-backs being forced by conservative politicians on our government.  And they say they are forcing these cut-backs in the interest of “job creation”.

It is also of interest to look at the monthly employment figures in the longer term context.  Obama is being repeatedly blamed by Republican politicians for the high unemployment in the US, but the graph above clearly shows the turn-around that began precisely at his inauguration in January 2009.  At that point, the economy was in free-fall.  This first decelerated, and then, from the summer of 2009, the economy started to grow.  The turnaround and subsequent growth was a result of a large number of government programs rapidly put in place (including, to be fair, programs put in place at the end of the Bush Administration, such as TARP).  Note that the bump in government employment in the spring of 2010 was due to temporary workers hired for the decennial population census, where these jobs then were finished a few months later.  Indeed, the figures do not show a significant number of net new government jobs created in 2009 or since as a result of the stimulus package of Obama.  Government employment has in fact declined since Obama took office.  At most, the stimulus programs reduced the number of government job losses that might otherwise have taken place.

In sum, employment turned around dramatically in January 2009, when Obama took office, and there has been positive overall job growth since early 2010.  But job growth needs to be higher for unemployment to decline to acceptable levels, and it has proven difficult to do this in the face of a contracting government sector.

New Home Sales Remain Abysmal, But The Potential Should Be Recognized

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New home sale figures for October, recently released, remain abysmally low at just 307,000 sales at an annual rate.  They have fluctuated within only a narrow range over the past year, with no clear trend and no signs to be encouraged by.  What is more interesting is the longer term context.

New home sales in the US fluctuate a good deal, but around a rising trend of 1.0% a year (calculated from a regression over the 1980 to 2010 data).  They reached a fairly stable level of approximately 900,000 housing units a year between 1998 and 2001.  But there was then a bubble between 2002 and 2006, reaching a peak of almost 1,300,000 in 2005, and then crashing to a bit over 300,000 in 2010 and 2011, where it now seems to have leveled off.

Only 300,000 new home sales a year is abysmal and a major drag on the economy.  It is only one-third of the 900,000 level of the early part of the last decade, and less than one-quarter of the levels reached in the bubble years.  But it should also be noted that people need homes, and that that need grows over time due to population growth.  The trend 1.0% growth found in the data is consistent with this.  And with new home construction now far below trend, it will be a significant spur to the economy if and when housing construction recovers.  Brad DeLong has made a similar point in his blog a number of times.  Here is one such post.

Keeping things simple and conservative, let’s assume that new home sales will, for the purposes here and over periods of time, on average equal the number of new homes constructed.  All are eventually sold, with very few exceptions.  And while there are figures available for new housing starts, these are consistently higher than sales for reasons that are not clear, but may reflect homes never completed.  Using the 900,000 units sold a year between 1998 and 2001 as a reasonable norm, and for simplicity not even allow for a rising trend in this figure, one can calculate the excess over the bubble years 2002 to 2006 (the area in blue in the graph) and then the shortfall that has developed over 2007 to 2011 and continues (the area in red).  Based on the figures underlying the graph, the excess during the bubble was 1.1 million units, while the shortfall in the subsequent bust through 2011 was 2.2 million units.  There is therefore now a net shortfall in housing supply of 1.1 million, as the excess over 2002 to 2006 has been more than worked off.  And as long as new home sales and construction remain at only 300,000 a year, that shortfall (relative to a 900,000 per year norm) will be growing by 600,000 housing units a year.

This suggests that a major pent-up demand for homes has built up.  It has not been resolved due to continued problems in the housing market and especially in the housing finance market, with many mortgages underwater and hence do not move, mortgages that remain hard to get by potential new buyers, an overhang of houses not sold, and a foreclosure process that has not worked well.  The market remains close to frozen.

But if these housing market problems could be resolved, so that construction could revert to its previous norms, the stimulus to the economy would be huge.  Assuming simply a return to construction of 900,000 units a year (and hence ignoring what would likely be an overshooting of this for a few years to make up for the net shortfall of recent years), implies construction of an additional 600,000 units a year.  At the average new home price of $221,800 in 2010, the aggregate value of such homes would be $133 billion per year.  This is just short of 1% of GDP.  Most of this would add to GDP as there is some, but only limited, “leakage” through some inputs that are imported (housing lumber, fuel for trucks, etc.).

But there will also be indirect multiplier effects, especially in the current depressed economy.  A reasonable estimate of the multiplier on housing construction would be 2 to 3.  A return of new home construction to previous levels would therefore add 2 to 3% of GDP. With actual GDP currently about 5% below potential GDP (estimate for end 2011 by the Congressional Budget Office, page 12), such an addition from housing construction would bring the economy about half-way back to where it needs to be.  But this will not happen until the market for homes and for home mortgage financing begins to function reasonably well.

Profits Are Up, While Employee Compensation Stagnates

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Aggregate profits in the national economy, while volatile, have grown rapidly over the past decade, while employee compensation has been lackluster.  Profits (defined here as including corporate profits [the largest component], proprietor’s income, rental income, net interest income and business transfers) plus Compensation of Employees (along with a smaller third category, for taxes on production and imports less subsidies, plus the net surplus or deficit on government enterprises such as the Post Office), sum up to National Income.  Note that Compensation of Employees is the total compensation for all workers as a group, and is not per worker.  The Bureau of Economic Analysis of the US Department of Commerce provides estimates as part of the National Income and Product Accounts, and the most recent figures were released on November 22.  The graphs and figures shown here come from analysis of that underlying data.

Profits, Employee Compensation, and overall National Income grew at similar (and slow) rates between 2001 and the third quarter of 2003.  Profits then took off, rising rapidly until mid-2006, after which they pulled back some (but with levels relative to 2001 still well above the levels for Employee Compensation; overall National Income will be in between).  Profits then fell rapidly with the 2008 economic collapse, as did Employee Compensation and hence overall National Income, so that by early 2009 they were each only 8% above (in real terms) their level in early 2001, eight years before.  But from that trough, Profits bounced back rapidly, so that by late 2010 they had surpassed their previous mid-2006 peak, and then continued to grow strongly in 2011.  Total Compensation of Employees, in contrast, has grown only modestly from its 2009 trough.  Overall National Income is now almost back to its previous peak, but Compensation of Employees is well below, while Profits are well above, their previous peaks.

One can also look at the changes over the cycle:  from 2001 to the peak in National Income in the first quarter of 2008, from that peak to the trough in the second quarter of 2009, and then from that trough to now (the third quarter of 2011).  In the table below, “Growth” is the growth of that component of National Income (in real terms) over the full period, while “Change” is the change over the period in the aggregate income of that group, in real (2005) dollars, in billions:

change in National Income Components

2001Q1 to Peak

 Peak to Trough

Trough to 2011Q3
2005 prices, % growth and billions of US$ Growth Change Growth Change Growth Change
Employee Compensation 12.6% $839b -5.5% -$415b 1.4% $98b
Profits 20.2% $562b -11.2% -$377b 21.6% $646b
Taxes + Gov’t Firms 19.7% $148b -4.9% -$44b 4.2% $36b
National Income 15.1% $1,549b -7.1% -$836b 7.1% $780b

The contrast in the truly abysmal growth in total Compensation of Employees in the recovery (of just 1.4% in real terms from the mid-2009 trough to now), with the rapid growth in Profits (of 21.6% in real terms over this same period), is stark.  Put another way, Profits obtained 83% of the growth in National Income from the trough in the second quarter of 2009 to now (83% = $646b/$780b), even though it only accounted for 27% of National Income at the trough (and 31% now).  Obama has been loudly blamed by Republican politicians for hurting business profits.  There is no evidence of that here.  There has been a strong growth in Profits in this recovery.  While the data analyzed here cannot allow us to determine the causes of these trends, they do allow us to see whether Profits are depressed in the economic recovery.  They clearly are not.

Finally, the data can be used to calculate the share of National Income going to Profits.  This is shown below.  The Profits share has grown strongly over the past decade, and while it fell in the economic collapse in the last year of the Bush Presidency, it has now bounced back to above its previous peak.