Employment Growth: Better, but Still Too Slow

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US employment, December 2005 to July 2012, monthly change, private sector and government

The Bureau of Labor Statistics released yesterday its initial estimates for unemployment and for employment growth in July (along with the normal updated estimates for earlier figures).  While generally an improvement over the numbers for the last few months, the results were still not as good as they need to be.

The unemployment rate was essentially unchanged, even though the headline number rose from 8.2% in June to 8.3% in July.  This appearance of a rise was largely due to the way the rounding off worked.  In the raw, unrounded, numbers, the calculated unemployment rate would have been 8.217% in June and 8.254% in July.  But such accuracy is spurious.  The figures come from surveys, and it is generally taken that changes of 0.1% points are not statistically significant in any case, even aside from round-off.

The growth in total net employment was 163,000.  This is a good deal better than the figures of 68,000, 87,000, and 64,000 of the previous three months (April, May, and June, respectively).  But while better than the previous abysmal numbers, growth of 163,000 jobs per month is still not sufficient to bring down unemployment on a sustainable basis.  As has been noted previously in this blog, the US needs to add between 200,000 and 250,000 jobs per month for the unemployment rate to start to fall on a consistent basis, given the US population and growth of its labor force.  At 163,000, we are short of that.

Still, it is positive growth, and is all due to growth in private employment as government continues to cut back.  The graph above shows the monthly figures on employment growth in the private sector and in government, going back to December 2005.  Private employment began to fall with the bursting of the housing bubble in early 2006, and was plummeting in 2008 at the end of the Bush Administration as the economy collapsed.  This turned around quickly under Obama, soon after the passage of the fiscal stimulus package (and supported as well by an aggressive response by the US Fed and by other actions).  The monthly loss of private jobs at first slowed and then turned to net gains by early 2010.  Since then the private sector has been consistently adding jobs.

But the growth in jobs have not been enough to bring down unemployment by enough.  While the unemployment rate has come down from its peak of 10.0% to its current 8.3%, the unemployment rate at what is considered full employment would be between 5 and 6% (5 to 6% as there is always job turnover, with some people out of jobs even at what is considered full employment).

As has been noted before in this blog, this disappointing growth in total jobs can be attributed to fiscal drag, as government has been steadily cutting back the number of government workers during the term Obama has been in office.  Most of this has been at the state and local level (as state and local government accounts for 87% of government employment in the US), but has happened at the federal level as well.

This cut back in government employment during the Obama term is in sharp contrast to the growth in government employment during the Bush terms.  We are now close enough to the end of Obama’s first term that a reasonable projection for his full first term is possible.  Using the actual numbers through July 2012, and then projecting August 2012 to January 2013 to continue at the same pace as that observed so far in 2012, one can arrive at the following estimates:

Net Job Growth Government Private
Bush:   January 2001 to January 2005 +900,000 -913,000
Obama:  January 2009 to January 2013* -711,000 +1,179,000
* August 2012 to January 2013 projected at monthly pace of January 2012 to July 2012

Government employment grew by 900,000 during Bush’s first term (it grew by a similar and further 841,000 in his second term).  In sharp contrast, at the current pace government employment will have been cut back by 711,000 in Obama’s first term.  Yet Mitt Romney and other Republicans repeatedly assert that government exploded under Obama, while they avow support for the small government conservatism of Bush.

Romney and his follow Republicans also repeatedly assert that the tax cut and deregulation policies of Bush are what is needed to restore private job growth.  Yet private jobs fell by 913,000 during Bush’s first term, while on the current pace, they will have risen by 1,179,000 during Obama’s first term.

Had government been allowed to grow during Obama’s first term at the same pace as it had during Bush’s, there would be an additional 1.6 million (900,000 + about 700,000) school teachers, policemen, firemen, and others directly employed.  The country could certainly use their services.  And by itself, employing 1.6 million more would bring down the unemployment rate to 7.2%.  With a conservative multiplier of two, the unemployment rate would be brought down to 6.2%, or close to full employment.

Obama may well lose the election due to the still high unemployment.  Romney and his fellow Republicans have repeatedly and loudly charged that this has been due to an explosion of government during Obama’s term in office.  But the truth is that government has been cut back sharply during Obama’s term.  And the great irony is that had government been allowed to grow as it had under the previous Republican administration of Bush, Obama would now be certain of re-election.

The Impact of the Fiscal Austerity Program in the UK: A Comparison to the US and to the Great Depression

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UK and US real GDP, comparison of growth since 2008 downturn by quarter

Both the US and the UK released last week (on July 25 by the UK Office for National Statistics, and on July 27 by the US Bureau of Economic Analysis) their initial estimates for GDP growth in the second quarter of 2012.  Both were disappointing:  The estimated US growth was a positive 1.5% at an annual rate, down from growth of 2.0% in the first quarter and a now estimated 4.1% in the last quarter of 2011.  But the UK figure was abysmal, showing growth at a negative 2.8% at an annual rate.   (The headline figure commonly quoted in the UK was a negative 0.7%, but the tradition in the UK is to express this on a quarter on quarter basis.  It comes to four times this, or a negative 2.8%, when annualized.  In the US, the figures are traditionally expressed on an annualized basis.)

The US growth figures were discussed in a post on this blog yesterday.  The focus in this post will be on the UK numbers, and in particular the path followed by the UK in the downturn that was sparked by the US financial collapse in 2008, in the last year of the Bush administration.  Comparison to the path followed in the US economy is especially interesting as both countries have followed similar aggressive monetary policies (with independent Central Banks pushing short term interest rates essentially to zero, plus the use of quantitative easing to provide ample liquidity to the economy), both have independent floating currencies (unlike the economies tied together with a common currency in the Eurozone), and both moved aggressively at the onset of the crisis to keep large banks from failing through official loans which were later repaid.

But there is one important difference, and this sets up a natural experiment which is rarely possible in economics.  Following elections in May 2010, a Conservative Party led government in the UK (in coalition with the Liberal Democrats as a minority partner) moved to an aggressive austerity focused fiscal policy, with major cut-backs in government spending.  With other policy factors being similar, one can see what the impact of such a fiscal austerity program will be, not only in comparison to what was happening immediately before in the UK, but also in comparison to a US economy which was otherwise following similar policies.

In the UK parliamentary system, the fiscal austerity program was passed via an Emergency Budget in late June 2010.  Such a dramatic change in policy is possible in a parliamentary system as the ruling government will always enjoy a majority in Parliament (perhaps in coalition with other parties), so Parliament will not hold up the program of the government as it can in the US congressional system.  Indeed, in the US now a minority of 40% of Senators will veto any measure they wish due to abuse of Senate rules (rules which are not reflected in any way in the US Constitution, which does not call for a super-majority of 60% to pass such measures).  These Senate rules have been in place for a century and a half, but until recently were used only in rare exceptional circumstances.  This use of these Senate rules have blocked Obama from implementing many, although not all, of the programs he has sought.

The graph above shows the path of GDP growth in the UK and in the US by calendar quarters from the pre-recession peaks in GDP (set equal to 100).  This peak was in the fourth quarter of 2007 for the US, and in the first quarter of 2008 for the UK.  The downturn started in the US.  The UK economy then dropped further and faster, as the financial sector was at the center of the collapse and the financial sector (with London as the most important international center) is a larger share of the UK economy than it is in the larger and more diversified US economy.

The US economy began to recover soon after Obama was elected and was able to pass and start to implement the fiscal stimulus package (along with aggressive measures by the US Fed and other actions).  The UK economy also began to turn around at about the same time.  The Labor Party Government under Gordon Brown was following similar measures as were being implemented under Obama in the US.  Both economies then began to grow, at roughly similar rates.

But then the UK held the May 2010 elections, which the Labor Party lost.  The Conservatives (in coalition with the Liberal Democrats) took control of the Parliament and of the government.  David Cameron became Prime Minister.  He immediately announced that an aggressive austerity budget would be drawn up and implemented, and it was, starting in the summer of 2010.  This was the tenth quarter from the pre-recession peak for the UK of the first quarter of 2008.

The impact has been clear and stark, as shown in the diagram above.  The economy reached a peak in its recovery in the tenth quarter, but then the recovery stopped.  The UK economy has now fallen for three straight quarters, going into a double-dip recession.  The US economy, in contrast, has continued to grow.

The UK fiscal austerity package has clearly been a failure.  The economy stopped growing when that program began.  The Conservative Party argument in favor of their austerity package was that it would induce “confidence” among investors, and that their increased investment would off-set the cut-backs in government.  This has not happened, despite ample liquidity in the markets and interest rates that are at historical lows.  The alternative view, which I share, is that investors will invest to expand capacity only if they see a market for what they would then be able to produce, and only if they do not have an existing excess of capacity to produce it without further investment.  Fiscal austerity will reduce that market, not expand it.  To argue that contractionary fiscal policies will be expansionary is just wrong and is inconsistent with the facts.  Contractionary policies are contractionary.

The austerity program has also failed in its announced aim of rapidly bringing down the fiscal deficit at a faster pace than was forecast before.  With the economy flattening out and then declining, tax revenues have fallen below what was anticipated.  After close to a year and a half of experience under their fiscal austerity program, the Conservative Government had to admit last November that their plan to bring down the budget deficit to zero would require two more years than they had originally said.  Since then the economy has deteriorated even further, with GDP falling for three calendar quarters now rather than merely remaining flat.  The date by which their avowed aim of budget balance will be achieved will have receded even further.  The austerity program has failed even by its own objective of seeking to bring down the deficit rapidly.

These results are important for the US.  Mitt Romney and the Republican Party in the US have argued for a fiscal austerity program similar in nature to what the Conservative Party is implementing in the UK.  But the UK results have been abysmal.  Even business leaders gathered in London for meetings surrounding the Olympics now underway, have called for David Cameron and his Conservative Party to reconsider his fiscal program, according to a report in today’s Financial Times.  The Cameron Government has argued that the 2.8% decline in GDP in the second quarter was in part a consequence of special factors (the celebration of the Queen’s Diamond Jubilee and unusually wet weather; but celebrations normally spark growth, and one would have thought that the UK knows how to cope with wet weather).  It also may well be the case that the Olympic Games now underway in London will lead to growth in the third quarter due to high tourist and other expenditures linked to the games.  But even discounting such special factors, one cannot hide the abrupt flattening out and then decline in the economy since the fiscal austerity program was initiated.  The contrast to the US path is stark.

Finally, it is of interest to compare the 2008 downturn and aborted recovery in the UK to the path the UK economy followed in the 1930s, during the world-wide Great Depression.  As seen in the graph below, the UK path is now well below where it was at the same point during the recovery from the 1930 downturn.  Economic performance in the UK is worse now than it was during the Great Depression.  The record of the austerity program in the UK, a program that the Repubicans want to duplicate in the US, has been truly terrible.

UK real GDP, comparison of growth since 2008 and during Great Depression, by quarter

GDP Growth in the Second Quarter of 2012: Even Slower

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BEA release of 7/27/12. Seasonally adjusted annualized rates       Percent Growth Contribution to GDP      Growth
2011Q4 2012Q1 2012Q2 2011Q4 2012Q1 2012Q2
Total GDP 4.1 2.0 1.5 4.1 2.0 1.5
A.  Personal Consumption Expenditure 2.0 2.4 1.5 1.45 1.72 1.05
B.  Gross Private Fixed Investment 10.0 9.8 6.1 1.19 1.18 0.76
 1.  Non-Residential Fixed Investment 9.5 7.5 5.3 0.93 0.74 0.54
 2.  Residential Fixed Investment 12.1 20.5 9.7 0.26 0.43 0.22
C.  Change in Private Inventories nm* nm* nm* 2.53 -0.39 0.32
D.  Net Exports nm* nm* nm* -0.64 0.06 -0.31
E.  Government -2.2 -3.0 -1.4 -0.43 -0.60 -0.28
Memo:  Final Sales 1.5 2.4 1.2 1.52 2.38 1.23
    nm* = not meaningful
$ Value of Change in Private Inventories (2005 prices) $70.5b $56.9b $66.3b

The initial estimates for US GDP growth in the second quarter of 2012 were released by the BEA of the US Department of Commerce on July 27, and indicated that a slowly growing economy was growing even more slowly than before.  GDP growth of 4.1% in the last quarter of 2011 (based on revised figures issued on July 27 as well), had slowed to just 2.0% growth in the first quarter of 2012, and then to an estimated 1.5% growth in the second quarter.  The figures are subject to revision, but it is unlikely that the basic story will change significantly.

This slowdown in growth in 2012 had in fact been predicted on this blog in a posting on January 27, when the initial estimates for growth in the last quarter of 2011 were issued.  While growth at the end of 2011 was relatively robust, it was noted there that much of this had occurred due to an increase in private inventory accumulation.  As has been explained in an Econ 101 posting on this blog, it is the change in the change in private inventories which contributes to GDP growth, and that change in the change in private inventories had been large in the fourth quarter of 2011.  Using the figures from the current BEA estimates, the change in private inventories was essentially zero in the third quarter of 2011 (a fall of just $4.3 billion at 2005 prices), but then rose by $70.5 billion in the fourth quarter.  This increase by a net $74.8 billion added 2.53% points to GDP in the fourth quarter, accounting for over 60% of the now estimated 4.1% growth in that period.  Without this (that is, if inventory accumulation had been at the same pace as before), GDP growth would not have been 4.1% but only 1.5% in that period (the growth of final sales).  Since over time the pace of inventory accumulation is relatively steady on average, even though there can be significant swings in any given quarter, it was predicted that GDP growth could well slow in 2012.

That is what happened.  GDP growth slowed to a pace of just 2.0% in the first quarter of 2012 and to an initial estimate of just 1.5% in the second quarter.  There are many other changes going on of course, but the swings in the change in change in inventory accumulation can have a significant impact in any given quarter.  In the first quarter of 2012, the pace of inventory accumulation slowed to $56.9 billion.  This was still positive (inventories grew), but was a slower pace than the $70.5 billion accumulation in the fourth quarter of 2011.  That is, inventories were still growing at a fairly high rate in the first quarter of 2012, but by not as rapid a rate as they had in the last quarter of 2011, so this subtracted from GDP growth.  It subtracted 0.39% points from what GDP growth otherwise would have been (see the figure on Contribution to GDP Growth in the table above).  The initial estimate for the second quarter of 2012 is that private inventories grew by $66.3 billion, which was an increase from the $56.9 billion pace of the first quarter, and so contributed 0.32% points to GDP growth.  But will this continue?

Inventories are held only because of an expectation that the goods will be sold, and businesses do not wish to hold too much in inventories.  Inventory accumulation must be financed, and goods can deteriorate in value if not soon sold (this is especially the case for anything where technology changes rapidly, such as the latest electronic gadgets).  Rapid accumulation of inventories is indeed normally a sign that goods are not being sold as rapidly as the producers of these goods had expected, so a rapid rise in inventories is often a disturbing sign.  Production is still going on, and hence GDP is being generated, but a rapid accumulation of inventories will often then lead producers to cut back on production, and GDP growth will slow or even become negative.

This could happen now.  Private inventories have grown by a total of almost $200 billion in the last three quarters together (at constant prices of 2005), and have not grown by so much over a three quarter period since 2006.  Should producers decide to limit production so that total inventories stay where they are now in the next quarter (and succeed in doing this, as there is unpredictability in what sales will be), inventory accumulation will drop back to zero.  This is not unusual:  As noted above, inventory accumulation was essentially zero (in fact slightly negative) in the third quarter of 2011.  But if this happens, GDP growth would fall by 2.0% points (given the current pace of inventory accumulation) below what it would otherwise be, and could easily push GDP growth into negative territory.

Because of these swings in inventory accumulation from quarter to quarter, it is wise to look at what is happening to final sales.  This will often provide a better picture of what is happening in the basic underpinnings to short run growth.  As seen in the table above, final sales have grown at rates of 1.5%, 2.4%, and 1.2% in the most recent three quarters, respectively.  On average, GDP growth will tend to match these rates over time.  They show that the economy has been fundamentally weak over this period.

And the concerns are not just with what may happen to inventories.  Aside from inventory accumulation, the other elements making up GDP growth all show a weakening in the second quarter of 2012 compared to what their growth had been in the first quarter.  Private consumption expenditure only rose by 1.5% (at annualized rates) in the second quarter, compared to growth at a rate of 2.4% in the first quarter.  Private fixed investment only grew at a 6.1% rate, vs. a 9.8% rate in the first quarter.  Of this, non-residential fixed investment grew at a 5.3% rate vs 7.5% before, and residential fixed investment (a bright spot in the first quarter) slowed to a 9.7% rate of growth vs. 20.5% before.  Net exports (the net between exports and imports) subtracted from growth, and once again, government expenditure contracted and acted as a drag on growth.  As has been discussed before in this blog, if government expenditure had been allowed to grow during the Obama term by as much as it had during the same period under Reagan, the economy would likely now be at full employment.

There is therefore little to be encouraged by in these initial estimates for growth in the second quarter of 2012.  With Europe already in a double-dip recession, as they have foolishly pushed fiscal austerity policies despite their high unemployment, there is a good chance that US growth will slow to below 1%, and quite possibly even to something negative, in the second half of 2012.  Regardless of who should be blamed for this, it is likely that Obama will be the one blamed.