The November Jobs Report Was Actually Quite Solid: One Should Not Expect More Going Forward

A.  Introduction

The Bureau of Labor Statistics (BLS) released its regular monthly “Employment Situation” report, for November 2021, on Friday, December 3.  The report is always eagerly awaited.  It provides estimates for the net number of new jobs created in the most recent month, as well as figures on the unemployment rate, certain wage measures, and much else.

The initial reaction to the report by the media was negative.  Net job growth, estimated at 210,000 in the month, was viewed as disappointing.  This was down from 546,000 net new jobs in October, and was well below Wall Street expectations (based on a survey of Wall Street firms by Dow Jones) that the figure for November would come to 573,000.  While it was noted that the unemployment rate also fell – to just 4.2% – the negative reaction contributed to a significant decline in the stock market that day, with the S&P 500 index, for example, down by over 2% at one point.

But the November jobs report was actually pretty solid.  In this post, we will look at what was reported and some factors to take into account when examining such figures.

B.  Monthly Job Gains in 2021

The chart at the top of this post shows the current BLS estimates of monthly net job growth this year, starting in February to cover the period of Biden’s presidency  The estimates are based on a survey of establishments by the BLS, that asks (along with much else) the number of employees on their payroll as of the middle week of each month.  Hence the January numbers would have been for before Biden’s January 20 inauguration.  The news reports following the release by the BLS of the November jobs report were often accompanied by charts such as this one, with the November figure showing a substantial reduction in the number of net new jobs compared to what was seen in earlier months.  The question of interest is whether this was significant.

A number of factors should be taken into account.  One is simply that there is substantial month to month variation, as seen in the chart.  This may be in part due to fluctuations in the economy, but may also be due to idiosyncratic factors (such as how the weather was in the week of the survey) and to statistical noise.  The figures are based on surveys, and surveys are never perfect.  Examined in context, the change in the November figure from the prior month is similar to the changes seen in other months this year.  Indeed, it was less than in several.

There will, however, always be limitations with any single estimate, and in part for this reason the BLS provides in its published document a few different estimates for employment growth. The measure shown in the chart at the top is rightly considered the best one.  It is based on a monthly survey (called the Current Employment Statistics, or CES, survey) of business and other establishments (including government entities as well as non-profits such as universities and hospitals) – whoever employs workers.  The sample size is huge:  144,000 different businesses and government entities, at almost 700,000 different worksites.   The BLS indicates this “sample” covers approximately one-third of all such jobs in the US.

The numbers are specifically for nonfarm payroll jobs, and hence exclude those employed on farms (which is now small in the US – about 1.4% of workers based on figures from other surveys) and more importantly the self-employed (about 6% of the labor force).  Given the large sample size, and also recognizing that those in the sample include not only small firms but also large entities employing thousands of workers, statistical noise is limited.  However, even with such a large sample size, the BLS states that the 90% confidence interval on the month to month changes in employment is +/- 110,000.  At the more commonly accepted 95% confidence interval it would be wider.

Finally, the figures for the prior two months in each report are preliminary and subject to change as more complete data comes in.  The November report, for example, indicated the estimate of net new jobs in October had been revised up by 15,000, and for September by 67,000.  And the October report last month indicated that its earlier estimate for September had been revised up by 118,000.  That is, the initial estimate for September had been 194,000 net new jobs, but this was revised up a month later to 312,000 net new jobs, and then revised again in the estimates published this month to 379,000.  Such revisions are routine, and one should expect that the initial estimate for November of 210,000 net new jobs will likely be revised in the coming months as more complete data becomes available.  While the revisions can in principle be positive or negative, in an expanding job market (as now) they are likely to be positive.  

The figures in the chart are also seasonally adjusted.  This is done via standard algorithms that estimate the normal annual pattern of employment changes in any given month based on historical data.  Employment growth is normally higher in certain months of the year (such as June, following the end of the school year) and normally lower in other months (such as January).  Analysts will therefore usually focus on the seasonally adjusted figures to see whether certain trends are developing outside of the normal seasonal fluctuations.

This is indeed appropriate.  However, it is also worth recognizing that due to Covid, with the resulting lockdowns, opening-ups, quite prudent changes in consumer behavior due to the health risks from Covid-19 even with all the protective measures taken that can be taken, and the truly historic fiscal relief measures provided through the government budget to support households in the light of all these disruptions, seasonal patterns this year (and last) are likely to be not at all similar to what they have been historically.  It is therefore of interest also to look at the underlying employment estimates, before the seasonal adjustment algorithms are run, to see what those numbers might be saying.

The next section will look at this, along with other measures of the change in employment.

C.  Alternative Measures, and Long-Term Limits on What Employment Growth Could Be

As noted, the BLS makes available in its monthly Employment Situation report several measures of how employment is estimated to have changed in the month, in addition to the one discussed above.  These additional measures should not be seen as better measures (at least in normal circumstances) than the seasonally adjusted measure based on the findings from the huge CES survey of establishments.  Rather, it is best to see them as supplementary measures, or alternative measures, that together help us understand what may be going on in terms of employment. There is always uncertainty in any individual measure, as they are all estimates.  It is better to look at several, to see what the overall story might be.

The estimated change in employment in November (or, more precisely, the change in nonfarm payroll), based on figures from the CES survey of establishments, was 210,000 after seasonal adjustment.  But three alternative estimates for employment growth in November were far higher, as depicted in this chart:

In the CES estimate before the normal seasonal adjustment, the growth in net new jobs in November was 778,000.  This difference between the seasonally adjusted and non-seasonally adjusted figures is substantially greater than what one has normally seen for November.  Seasonal adjustment is complicated, but a simple average of the difference between the seasonally adjusted figures for November and the non-seasonally adjusted figures over the 20 years from 2000 to 2019, is 205,000.  But in November 2021 it was 568,000, suggesting something unusual.  If the November 2021 increase in the number of jobs was adjusted by 205,000 rather than the 568,000 estimated by the algorithms, then the “seasonally adjusted” change in the number of jobs would have been 573,000 (= 778,000 – 205,000).  This is exactly what the pre-release expectation was on Wall Street (as noted at the start of this post).  That it was exactly the same as the Wall Street forecast is just a coincidence, but the fact it was close at all might be significant.  It may be suggesting that the standard seasonal adjustment calculations, built from patterns historically seen for the month, might not have captured well the circumstances in this highly unusual year.

Quite separately, the BLS also has an employment measure from the monthly survey of households conducted by the US Census Bureau (with BLS input on what is asked), called the Current Population Survey (CPS).  This survey of a sample of 60,000 households is used by the BLS to determine how many are in the labor force (i.e. are working or are looking for work), whether they are employed (including self-employed and on farms), and thus the number unemployed (those in the labor force but not employed).  The BLS uses this to determine the unemployment rate, but to get to that they have to first estimate, based on this survey, how many are employed.

The November estimates based on the CPS of net new employment were 1,136,000 for the seasonally adjusted figure and 831,000 for the figure before seasonal adjustment.  Why the seasonal adjustment led to a reduction in the job growth estimate from the CPS while it led to an increase in the job growth estimate from the CES is not clear (seasonal adjustment is complicated), but in any case, both figures are relatively close to the 778,000 estimate from the CES estimate before seasonal adjustment.  And all three are all well above the 210,000 seasonally adjusted estimate from the CES that we normally focus on.  Together they suggest that the 210,000 estimate, while usually the most reliable one, might in this case be on the low side.

I have also included in the chart four figures for what I have termed the “long-term limits” on what monthly job growth might be for an economy at full employment.  I included them on the same chart so that one can easily recognize the relative scale.

For an economy at full employment (with unemployment at frictional levels), employment growth cannot exceed the growth of the adult population.  And indeed it will be less, as not all adults (defined by the BLS as all those in the population at age 18 and above) will be in the labor force – some will be retired, some will be students in college, some will have voluntarily left the labor force to raise children or provide care for others, and for other reasons.  Examining what these limits are for the US will provide a sense of what monthly employment growth might be, on average, in the coming years.

First, on population:  Population growth is relatively steady and predictable.  For the ten-year period from November 2011 to November 2021, it averaged 180,000 per month in the US.  It will be similar to this in the coming years, and it sets a (very) crude upper limit on what job growth could be in a steady state.  But one can see even from this figure that it will not be possible to sustain forever monthly net new job growth of even 200,000.  There will not be that many new adults available each month.

But 100% of the adult population are not in the labor force.  As noted, some will be retired, some students, and so on.  The labor force participation rate (LFPR) is the ratio of those who choose to be in the labor force (employed or looking for employment) to the adult population.  In the November CPS figures, that LFPR was 61.8%.  If one assumes that it will remain at that rate, then the monthly growth in the labor force will not be 180,000 (the growth in the adult population) but 61.8% of this, or 111,000.  And if one assumes that unemployment will be something steady, at say 4% at full employment, then potential employment growth would be even less, at 107,000.

The implication is that if the labor force participation rate remains where it is now, one should not be surprised to see monthly figures on job growth of no more than roughly 100,000.  This follows by simple arithmetic.  It could be higher for some period (but not forever) if the labor force participation rate rises from the current 61.8%.  This is possible, and perhaps even likely in the very near term, but probably not for long.  The LFPR in fact rose in the November BLS report to 61.8% from 61.6% in the prior month.  It normally changes only slowly over time.  The disruption that followed from Covid-19 led to relatively wide swings at first, with the LFPR falling from 63.4% in January 2020 to 60.2% in April 2020 with the lockdowns.  But by June 2020 it was back to 61.4% and since has fluctuated in a relatively narrow range before rising the 61.8% of November 2021.

What no one knows is what will happen to the LFPR now.  It might rise a bit more, but the long term trend has been downward.  It peaked in the year 2000, with a steady increase up until then following from a rising participation rate of women in the labor force.  But since 2000 the participation rate for women has moved down, paralleling (but about 20% below) the slow downward trend seen for men since the mid-1950s.  (The factors behind this are discussed in some detail in this earlier blog post.)  It is due to this downward trend over the period of 2011 to 2021 that actual labor force growth over this period was just 67,000 per month (as depicted in the chart above) even though adult population growth was 180,000 per month over this same period.

The current 61.8% LFPR is in fact close to what a simple extrapolation of the trend since 2000 suggests it would be in November 2021.  While the LFPR has behaved unusually since 2016 (when it flattened out for several years and indeed then rose a bit until the start of 2020, before collapsing and then partially recovering in the spring of 2020 due to the Covid-19 crisis), it is now back roughly to what one would find by a simple extrapolation of the trend since the year 2000.

There may well be surprises in what now happens to labor force participation.  After the disruptions of the Covid-19 crisis, it may never revert to where it was just before the crisis.  Those who retired early may mostly choose to stay retired.  And many of those in low-paying jobs, particularly in cases of one spouse in a couple with young children, may have discovered during the Covid-19 crisis that one spouse dropping out of the labor force is not all that costly, and in a two-earner household they may be able to manage financially.

There is therefore a substantial degree of uncertainty on what will now happen to the LFPR.  If it goes up, with a substantial number of adults re-entering the labor force, there will be a transition period when the labor force (and hence the number employed) could rise by significantly more than the 107,000 per month that one would see at a constant LFPR.  Monthly changes in employment during this transition period could be substantial.  For example (and again, this is simple arithmetic), if the LFPR were to increase from the current 61.8% by one percentage point to 62.8% (which would put it back to where it was in much of 2016 through 2018), then the number in the labor force would increase by 2.5 million over what would follow from regular population growth.  Possible employment growth would be about the same 2.5 million if unemployment stays where it is now.  Thus there could be a transition period of five months during which employment could potentially grow by 600,000 per month (a fifth of the extra 2.5 million in the labor force under this scenario, on top of about 100,000 per month from natural population growth).  Or the transition period could be shorter or longer depending on the number of new jobs each month.

But the point is that even if the LFPR should rise, the impact would be a transitory one, after which one should expect employment growth each month of no more than 100,000 or so.  And as noted before, the trend over the last 20 years has been that the LFPR has been moving downward, not upward.

D.  Conclusion

The November jobs report was interpreted by many as disappointing, as the estimated number of net new jobs (based on the estimate normally used – and rightly so) was 210,000.  This was seen as low, and the stock market fell.  However, the report was in fact a pretty strong one, and analysts may have recognized this once they started to look at it more closely.  While one never knows with any certainty why the stock market moves as it does (and there will always be other factors as well), the S&P 500, after falling by over 2% at one point on December 3, started to recover partially by the end of the day.  And it then rose strongly on the next two trading days.

There are reasons to believe the estimate of 210,000 net new jobs in November may have been low.  Seasonal adjustment factors mattered more than normally, and other measures of job growth were significantly higher.  But even at 210,000, analysts need to recognize that as the economy returns to more normal conditions, monthly job growth will likely be a good deal less than that.  While monthly job growth during Biden’s presidency from February to November has so far averaged over a half-million per month (588,000 per month to be more precise), this was only possible because the unemployment rate could come down.  But unemployment is now low – it reached 4.2% in November – and cannot go much lower.  If the labor force participation rate stays where it is now, possible employment growth will only be around 107,000 per month.  If the LFPR rises, then this could go up for some transition period, but that transition period is limited in time and when it is over employment growth will then have to revert to something close to 100,000.

What is more likely is that the LFPR will now return to the longer-term trend seen since it reached its peak in the year 2000, and will fall slowly over time.  Monthly employment growth would then be less, at something less than 100,000 per month (where how much less depends on the pace at which the LFPR falls).

Expectations have to be reset.  Other than during a transition period should the labor force participation rate rise above where it is now, monthly net new jobs growth of 100,000 per month or so is likely to be the limit of what one will see.  But that would be a good performance in an economy that remains at full employment.  Only if unemployment shoots up due to some future downturn could one then see – during a recovery from that downturn – something more.

Trump’s Economic Record in Charts

A.  Introduction

Donald Trump has repeatedly asserted that he built “the greatest economy in history”.  A recent example is in his acceptance speech for the Republican nomination to run for a second term.  And it is not a surprise that Trump would want to claim this.  It would be nice, if true.  But what is surprising is that a number of election surveys have found that Trump polls well on economic issues, with voters rating Trump substantially above Biden on who would manage the economy better.

Yet any examination of Trump’s actual record, not just now following the unprecedented economic collapse this year resulting from the Covid-19 crisis, but also before, shows Trump’s repeated assertion to be plainly false.

The best that can be said is that Trump did not derail, in his first three years in office, the economic expansion that began with the turnaround Obama engineered within a half year of his taking office in 2009 (when Obama had inherited an economy that was, indeed, collapsing).  But the expansion that began under Obama has now been fully and spectacularly undone in Trump’s fourth year in office, with real GDP in the second quarter of 2020 plummeting at an annualized rate of 32% – to a level that is now even well below what it was when Trump took office.  The 32% rate of decline is by far the fastest decline recorded for the US since quarterly data on GDP began to be recorded in 1947 (the previous record was 10%, under Eisenhower, and the next worst was an 8.4% rate of decline in the last quarter of 2008 at the very end of the Bush administration.

This post will look at Trump’s record in comparison to that not just of Obama but also of all US presidents of the last almost 48 years (since the Nixon/Ford term).  For his first three years in office, that Trump record is nothing special.  It is certainly and obviously not the best in history.  And now in his fourth year in office, it is spectacularly bad.

The examination will be via a series of charts.  The discussion of each will be kept limited, but the interested reader may wish to study them more closely – there is a lot to the story of how the economy developed during each presidential administration.  But the primary objective of these “spaghetti” charts is to show how Trump’s record in his first three years in office fits squarely in the middle of what the presidents of the last half-century have achieved.  It was not the best nor the worst over those first three years – Trump inherited from Obama an expanding and stable economy.  But then in Trump’s fourth year, it has turned catastrophic.

Also, while there is a lot more that could be covered, the post will be limited to examination of the outcomes for growth in overall output (GDP), for the fiscal accounts (government spending, the fiscal deficit, and the resulting public debt), the labor market (employment, unemployment, productivity, and real wages), and the basic trade accounts (imports, exports, and the trade balance).

The figures for the charts were calculated based on data from a number of official US government sources.  Summarizing them all here for convenience (with their links):

a)  BEA:  Bureau of Economic Analysis of the US Department of Commerce, and in particular the National Income and Product Accounts (NIPA, also commonly referred to as the GDP accounts).

b)  BLS:  Bureau of Labor Statistics of the US Department of Labor.

c)  OMB Historical Tables:  Office of Management and Budget, of the White House.

d)  Census Bureau – Foreign Trade Data:  Of the US Department of Commerce.

It was generally most convenient to access the data via FRED, the Federal Reserve Economic Database of the St. Louis Fed.

B.  Real GDP

Trump likes to assert that he inherited an economy that was in terrible shape.  Larry Kudlow, the director of the National Economic Council and Trump’s principal economic advisor recently asserted, for example in his speech to the Republican National Convention, that the Trump administration inherited from Obama “a stagnant economy that was on the front end of a recession”.  While it is not fully clear what a “front end” of a recession is (it is not an economic term), the economy certainly was not stagnant and there was no indication whatsoever of a recession on the horizon.

The chart at the top of this post shows the path followed by real GDP during the course of Obama’s first and second terms in office, along with that of Trump’s term in office thus far.  Both are indexed to 100 in the first calendar quarter of their presidential terms.  Obama inherited from Bush an economy that was rapidly collapsing (with a banking system in ruin) and succeeded in turning it around within a half year of taking office.  Subsequent growth during the remainder of Obama’s first term was then similar to what it was in his second term (with the curve parallel but shifted down in the first term due to the initial downturn).

Growth in the first three years of Trump’s presidency was then almost exactly the same as during Obama’s second term.  There is a bit of a dip at the start of the second year in Obama’s second term (linked to cuts in government spending in the first year of Obama’s second term – see below), but then a full recovery back to the previous path.  At the three-year mark (the 12th quarter) they are almost exactly the same.  To term this stagnation under Obama and then a boom under Trump, as Kudlow asserted, is nonsensical – they are the same to that point.  But the economy has now clearly collapsed under Trump, while it continued on the same path as before under Obama.

Does Trump look better when examined in a broader context, using the record of presidents going back to the Nixon/Ford term that began almost 48 years ago?  No:

The best that can be said is that the growth of real GDP under Trump in his first three years in office is roughly in the middle of the pack.  Growth was worse in a few administrations – primarily those where the economy went into a recession not long after they took office (such as in the first Reagan term, the first Bush Jr. term, and the Nixon/Ford term).  But growth in most of the presidential terms was either similar or distinctly better than what we had under Trump in his first three years.

And now real GDP has collapsed in Trump’s fourth year to the absolute worst, and by a very significant margin.

One can speculate on what will happen to real GDP in the final two quarters of Trump’s presidency.  Far quicker than in earlier economic downturns, Congress responded in March and April with a series of relief bills to address the costs of the Covid-19 crisis, that in total amount to be spent far surpass anything that has ever been done before.  The Congressional Budget Office (CBO) estimates that the resulting spending increases, tax cuts, and new loan facilities of measures already approved will cost a total of $3.1 trillion.  This total approved would, by itself, come to 15% of GDP (where one should note that not all will be spent or used in tax cuts in the current fiscal year – some will carry over into future years).  Such spending can be compared to the $1.2 trillion, or 8.5% of the then GDP, approved in 2008/09 in response to that downturn (with most of the spending and tax cuts spread over three years).  Of this $1.2 trillion, $444 billion was spent under the TARP program approved under Bush and $787 billion for the Recovery Act under Obama).

And debate is currently underway on additional relief measures, where the Democratic-controlled Congress approved in May a further $3 trillion for relief, while leaders in the Republican-controlled Senate have discussed a possible $1 trillion measure.  What will happen now is not clear.  Some compromise in the middle may be possible, or nothing may be passed.

But the spending already approved will have a major stimulative effect.  With such a massive program supporting demand, plus the peculiar nature of the downturn (where many businesses and other centers of employment had to be temporarily closed as the measures taken by the Trump administration to limit the spread of the coronavirus proved to be far from adequate), the current expectation is that there will be a significant bounceback in GDP in the third quarter.  As I write this, the GDPNow model of the Atlanta Fed forecasts that real GDP in the quarter may grow at an annualized rate of 29.6%.  Keep in mind, however, that to make up for a fall of 32% one needs, by simple arithmetic, an increase of 47% from the now lower base.  (Remember that to make up for a fall of 50%, output would need to double – grow by 100% – to return to where one was before.)

Taking into account where the economy is now (where there was already a 5% annualized rate of decline in real GDP in the first quarter of this year), what would growth need to be to keep Trump’s record from being the worst of any president of at least the last half-century?  Assuming that growth in the third quarter does come to 29.6%, one can calculate that GDP would then need to grow by 5.0% (annualized) in the fourth quarter to match the currently worst record – of Bush Jr. in his second term.  And it would need to grow by 19% to get it back to where GDP was at the end of 2019.

C.  The Fiscal Accounts

Growth depends on many factors, only some of which are controlled by a president together with congress.  One such factor is government spending.  Cuts in government spending, particularly when unemployment is significant and businesses cannot sell all that they could and would produce due to a lack of overall demand, can lead to slower growth.  Do cuts in government spending perhaps explain the middling rate of growth observed in the first three years of Trump’s term in office?  Or did big increases in government spending spur growth under Obama?

Actually, quite the opposite:

Federal government spending on goods and services did rise in the first year and a half of Obama’s first term in office, with this critical in reversing the collapsing economy that Obama inherited.  But the Republican Congress elected in 2010 then forced through cuts in spending, with further cuts continuing until well into Obama’s second term (after which spending remained largely flat).  While the economy continued to expand at a modest pace, the cuts slowed the economy during a period when unemployment was still high.  (There is also government spending on transfers, where the two largest such programs are Social Security and Medicare, but spending on such programs depends on eligibility, not on annual appropriations.)

Under Trump, in contrast, government spending has grown, and consistently so.  And indeed government spending grew under Trump at a faster pace than it had almost any other president of the last half-century (with even faster growth only under Reagan and Bush, Jr., two presidents that spoke of themselves, as Trump has, as “small government conservatives”):

The acceleration in government spending growth under Trump did succeed, in his first three years in office, in applying additional pressure on the economy in a standard Keynesian fashion, which brought down unemployment (see below).  But this extra government spending did not lead to an acceleration in growth – it just kept it growing (in the first three years of Trump’s term) at the same pace as it had before, as was seen above.  That is, the economy required additional demand pressure to offset measures the Trump administration was taking which themselves would have reduced growth (such as his trade wars, or favoritism for industries such as steel and aluminum, which harmed the purchasers of steel and aluminum such as car companies and appliance makers).

Trump has also claimed credit for a major tax cut bill (as have Reagan and Bush, Jr.).  They all claimed this would spur growth (none did – see above and a more detailed analysis in this blog post), and indeed such sufficiently faster growth, they predicted, that tax revenue would increase despite the reductions in the tax rates.  Hence fiscal deficits would be reduced.  They weren’t:

Fiscal deficits were large and sustained throughout the Reagan/Bush Sr. years.  They then moved to a fiscal surplus under Clinton, following the major tax increase passed in 1993 and the subsequent years of steady and strong growth.  The surplus was then turned back again into a deficit under Bush Jr., with his major tax cuts of 2001 and 2003 coupled with his poor record for economic growth.  Obama then inherited a high fiscal deficit, which grew higher due to the economic downturn he faced on taking office and the measures that were necessary to address it.  But with the economic recovery, the deficit under Obama was then reduced (although at too fast a pace –  this held back the economy, especially in the early years of the recovery when unemployment was still high).

Under Trump, in contrast, the fiscal deficit rose in his first three years in office, at a time when unemployment was low.  This was the time when the US should have been strengthening rather than weakening the fiscal accounts.  As President Kennedy said in his 1962 State of the Union Address: “The time to repair the roof is when the sun is shining.”  Under Trump, in contrast, the fiscal deficit was reaching 5% of GDP even before the Covid-19 crisis.  The US has never before had such a high fiscal deficit when unemployment was low, with the sole exception of during World War II.

This left the fiscal accounts in a weak condition when government spending needed to increase with the onset of the Covid-19 crisis.  The result is that the fiscal deficit is expected to reach an unprecedented 16% of GDP this fiscal year, the highest it has ever been (other than during World War II) since at least 1930, when such records began to be kept.

The consequence is a public debt that is now shooting upwards:

As a share of GDP, federal government debt (held by the public) is expected to reach 100% of GDP by September 30 (the end of the fiscal year), based on a simple extrapolation of fiscal account and debt data currently available through July (see the US Treasury Monthly Statement for July, released August 12, 2020).  And with its momentum (as such fiscal deficits do not turn into surpluses in any short period of time), Trump will have left for coming generations a government debt that is the highest (as a share of GDP) it has ever been in US history, exceeding even what it was at the end of World War II.

When Trump campaigned for the presidency in 2016, he asserted he would balance the federal government fiscal accounts “fairly quickly”.  Instead the US will face this year, in the fourth year of his term in office, a fiscal deficit that is higher as a share of GDP than it ever was other than during World War II.  Trump also claimed that he would have the entire federal debt repaid within eight years.  This was always nonsense and reflected a basic lack of understanding.  But at least the federal debt to GDP ratio might have been put on a downward trajectory during years when unemployment was relatively low.  Instead, federal debt is on a trajectory that will soon bring it to the highest it has ever been.

D.  The Labor Market

Trump also likes to assert that he can be credited with the strongest growth in jobs in history.  That is simply not true:

Employment growth was higher in Obama’s second term than it ever was during Trump’s term in office.  The paths were broadly similar over the first three years of Trump’s term, but Trump was simply – and consistently – slower.  In Obama’s first term, employment was falling rapidly (by 800,000 jobs a month) when Obama took his oath of office, but once this was turned around the path showed a similar steady rise.

Employment then plummeted in Trump’s fourth year, and by a level that was unprecedented (at least since such statistics began to be gathered in 1947).  In part due to the truly gigantic relief bills passed by Congress in March and April (described above), there has now been a substantial bounceback.  But employment is still (as of August 2020) well below what it was when Trump took office in January 2017.

Even setting aside the collapse in employment this year, Trump’s record in his first three years does not compare favorably to that of other presidents:

A few presidents have done worse, primarily those who faced an economy going into a downturn as they took office (Obama) or where the economy was pushed into a downturn soon after they took office (Bush Jr., Reagan) or later in their term (Bush Sr., Nixon/Ford).  But the record of other presidents was significantly better, with the best (which some might find surprising) that of Carter.

Trump also claims credit for pushing unemployment down to record low levels.  The unemployment rate did, indeed, come down (although not to record low rates – the unemployment rate was lower in the early 1950s under Truman and then Eisenhower, and again in the late 1960s).  But one cannot see any significant change in the path on the day Trump was inaugurated compared to what it had been under Obama since 2010:

And of course now in 2020, unemployment has shot upwards to a record level (since at least 1948, when these records began to be kept systematically).  It has now come down with the bounceback of the economy, but remains high (8.4% as of August).

Over the long term, nothing is more important in raising living standards than higher productivity.  And this was the argument Trump and the Republicans in Congress made to rationalize their sharp cuts in corporate tax rates in the December 2017 tax bill.  The argument was that companies would then invest more in the capital assets that raise productivity (basically structures and equipment).  But this did not happen.  Even before the collapse this year, private non-residential investment in structures and equipment was no higher, and indeed a bit lower, as a share of GDP than what it was before the 2017 tax bill passed.

And it certainly has not led to a jump in productivity:

Productivity growth during Trump’s term in office has been substantially lower (by 3%) than what it was during Obama’s first term, although somewhat better than during Obama’s second term (by a cumulative 1% point at the same calendar quarter in their respective terms).

And compared to that of other presidents, Trump’s record on productivity gains is nothing special:

Finally, what happened to real wages?  While higher productivity growth is necessary in the long term for higher wages (workers cannot ultimately be paid more than what is produced), in the short term a number of other factors (such as relative bargaining strength) will dominate.  When unemployment is high, wage gains will typically be low as firms can hire others if a worker demands a higher wage.  And when unemployment is low, workers will typically be in a better bargaining position to demand higher wages.

How, then, does Trump’s record compare to that of Obama?:

During the first three years of Trump’s tenure in office, real wage gains were basically right in the middle of what they were over the similar periods in Obama’s two terms.  But then it looks like real wages shot upwards at precisely the time when the Covid-19 crisis hit.  How could this be?

One needs to look at what lies behind the numbers.  With the onset of the Covid-19 crisis, unemployment shot up to the highest it has been since the Great Depression.  But two issues were then important.  One is that when workers are laid off, it is usually the least senior, least experienced, workers who are laid off first.  And such workers will in general have a lower wage.  If a high share of lower-wage workers become unemployed, then the average wage of the workers who remain employed will go up.  This is a compositional effect.  No individual worker may have seen an increase in his or her wage, but the overall average will go up if fewer lower-wage workers remain employed.

Second, this downturn was different from others in that a high share of the jobs lost were precisely in low-wage jobs – workers in restaurants, cafeterias, and hotels, or in retail shops, or janitors for office buildings, and so on.  As the economy shut down, these particular businesses had to close.  Many, if not most, office workers could work from home, but not these, commonly low-wage, workers.  They were laid off.

The sharp jump in average real wages in the second quarter of 2020 (Trump’s 14th quarter in office) is therefore not something to be pleased about.  As the lower-wage workers who have lost their jobs return to being employed, one should expect this overall average wage to fall back towards where it was before.

But the path of real wages in the first three years of Trump’s presidency, when the economy continued to expand as it had under Obama, does provide a record that can be compared.  How does it look relative to that of other presidents of the last half-century?:

Again, Trump’s record over this period is in the middle of the range found for other presidents.  It was fairly good (unemployment was low, which as noted above would be expected to help), but real wages in the second terms of Clinton and Obama rose by more, and performance was similar in Reagan’s second term.

E.  International Trade Accounts

Finally, how does Trump’s record on international trade compare to that of other presidents?  Trump claimed he would slash the US trade deficit, seeing it in a mercantilistic way as if a trade deficit is a “loss” to the country.  At a 2018 press conference (following a G-7 summit in Canada), he said, for example, “Last year,… [the US] lost  … $817 billion on trade.  That’s ridiculous and it’s unacceptable.”  And “We’re like the piggybank that everybody is robbing.”

This view on the trade balance reflects a fundamental lack of understanding of basic economics.  Equally worrisome is Trump’s view that launching trade wars targeting specific goods (such as steel and aluminum) or specific countries (such as China) will lead to a reduction in the trade deficit.  As was discussed in an earlier post on this blog, the trade balance ultimately depends on the overall balance between domestic savings and domestic investment in an economy.  Trade wars may lead to reductions in imports, but then there will also be a reduction in exports.  If the trade wars do not lead to higher savings or lower investment, such trade interventions (with tariffs or quotas imposed by fiat) will simply shift the trade to other goods or other nations, leaving the overall balance where it would have been based on the savings/investment balance.

But we now have three and a half years of the Trump administration, and can see what his trade wars have led to.  In terms of imports and exports:

Imports did not go down under Trump – they rose until collapsing in the worldwide downturn of 2020.  Exports also at first rose, but more slowly than imports, and then leveled off before imports did.  They then also collapsed in 2020.  Going back a bit, both imports and exports had gone up sharply during the Bush administration.  Then, after the disruption surrounding the economic collapse of 2008/9 (with a fall then a recovery), they roughly stabilized at high levels during the last five years of the Obama administration.

In terms of the overall trade balance:

The trade deficit more than doubled during Bush’s term in office.  While both imports and exports rose (as was seen above), imports rose by more.  The cause of this was the housing credit bubble of the period, which allowed households to borrow against home equity (which in turn drove house prices even higher) and spend that borrowing (leading to higher consumption as a share of current income, which means lower savings).  This ended, and ended abruptly, with the 2008/9 collapse, and the trade deficit was cut in half.  After some fluctuation, it then stabilized in Obama’s second term.

Under Trump, in contrast, the trade deficit grew compared to where it was under Obama.  It did not diminish, as Trump insisted his trade wars would achieve, but the opposite.  And with the growing fiscal deficit (as discussed above) due to the December 2017 tax cuts and the more rapid growth in government spending (where a government deficit is dis-saving that has to be funded by borrowing), this deterioration in the trade balance should not be a surprise.  And I also suspect that Trump does not have a clue as to why this has happened (nor an economic advisor willing to explain it to him).

F.  Conclusion

There is much more to Trump’s economic policies that could have been covered.  It is also not yet clear how much damage has been done to the economic structure from the crisis following the mismanagement of Covid-19 (with the early testing failures, the lack of serious contact tracing and isolation of those who may be sick, and importantly, Trump’s politicizing the wearing of simple masks).  Unemployment rose to record levels, and this can have a negative impact (both immediate and longer-term) on the productivity of those workers and on their subsequent earnings.  There has also been a jump in bankruptcies, which reduces competition.  And bankrupt firms, as well as stressed firms more generally, will not be able to repay their loans in full.  The consequent weakening of bank balance sheets will constrain how much banks will be able to lend to others, which will slow the pace of any recovery.

But these impacts are still uncertain.  The focus of this post has been on what we already know of Trump’s economic record.  It is not a good one. The best that can be said is that during his first three years in office he did not derail the expansion that had begun under Obama.  Growth continued (in GDP, employment, productivity, wages), at rates similar to what they were before.  Compared to paths followed in other presidencies of the last half-century, they were not special.

But this growth during Trump’s tenure in office was only achieved with rapid growth in federal government spending.  Together with the December 2017 tax cuts, this led to a growing, not a diminishing, fiscal deficit.  The deficit grew to close to 5% of GDP, which was indeed special:  Never before in US history has the fiscal deficit been so high in an economy at or close to full employment, with the sole exception of during World War II.

The result was a growing public debt as a share of GDP, when prudent fiscal policy would have been the reverse.  Times of low unemployment are when the country should be reducing its fiscal deficit so that the public debt to GDP ratio will fall.  Reducing public dis-saving would also lead to a reduction in the trade deficit (other things being equal).  But instead the trade deficit has grown.

As a consequence, when a crisis hits (as it did in 2020) and government needs to spend substantial sums for relief (as it had to this year), the public debt to GDP ratio will shoot upwards from already high levels.  Republicans in Congress asserted in 2011 that a public debt of 70% of GDP was excessive and needed to be brought down rapidly.  Thus they forced through spending cuts, which slowed the recovery at a time when unemployment was still high.

But now public debt under Trump will soon be over 100% of GDP.  Part of the legacy of Trump’s term in office, for whoever takes office this coming January 20, will therefore be a public debt that will soon be at a record high level, exceeding even that at the end of World War II.

This has certainly not been “the greatest economy in history”.

What Has Been Happening to Real Wages? Sadly, Not Much

A.  Introduction

There is little that is more important to a worker than his or her wages.  And as has been discussed in an earlier post on this blog, real wages in the US have stagnated since around 1980.  An important question is whether this has changed recently.  Trump has claimed that his policies (of lifting regulations, slashing corporate taxes, and imposing high tariffs on our trading partners) are already leading to higher wages for American workers.  Has that been the case?

The answer is no.  As the chart at the top of this post shows, real wages have been close to flat.  Nominal wages have grown with inflation, but once inflation is taken into account, real wages have barely moved.  And one does not see any sharp change in that trend after Trump took office in January 2017.

It is of course still early in Trump’s term, and the experience so far does not mean real wages will not soon rise.  We will have to see.  One should indeed expect that they would, as the unemployment rate is now low (continuing the path it has followed since 2010, first under Obama and now, at a similar pace, under Trump).  But the primary purpose of this blog post is to look at the numbers on what the experience has been in recent years, including since Trump took office.  We will see that the trend has not much changed.  And to the extent that it has changed, it has been for the worse.

We will first take an overall perspective, using the chart at the top of this post and covering the period since 2006.  This will tell us what the overall changes have been over the full twelve years.  For real wages, the answer (as noted above) is that not much has changed.

But the overall perspective can mask what the year to year changes have been.  So we will then examine what these have been, using 12 month moving averages for the changes in nominal wages, the consumer price index, and then the real wage.  And we will see that changes in the real wage have actually been trending down of late, and indeed that the average real wage in June 2018 was below where it had been in June 2017.

We will then conclude with a short discussion of whether labor market trends have changed since Trump took office.  They haven’t.  But those trends, in place since 2010 as the economy emerged from the 2008/09 downturn, have been positive.  At some point we should expect that, if sustained, they will lead to rising real wages.  But we just have not seen that yet.

B.  Nominal and Real Wages Since 2006

It is useful first to start with an overall perspective, before moving to an examination of the year to year changes.  The chart at the top of this post shows average nominal wages in the private sector, in dollars per hour, since March 2006, and the equivalent in real terms, as deflated by the consumer price index (CPI).  The current CPI takes the prices of 1982-84 (averaged over that period) as the base, and hence the real wages shown are in terms of the prices of 1982-84.  For June 2018, for example, average private sector wages were $26.98 per hour, equivalent to $10.76 per hour in terms of the prices of 1982-84.

The data series comes from the Current Employment Survey of the Bureau of Labor Statistics, which comes out each month and is the source of the closely watched figures on the net number of jobs created each month.  The report also provides figures on average private sector wages on a monthly basis, but this particular series only started being reported in March 2006.  That is part of the reason why I started the chart with that date, but it is in any case a reasonable starting point for this analysis as it provides figures starting a couple of years before the economic collapse of 2008, in the last year of Bush’s presidential term, through to June 2018.

The BLS report also only provides figures on average wages in the private sector.  While it would be of interest also to see the similar figures on government wages, they are not provided for some reason.  If they had been included, the overall average wage would likely have increased at an even slower pace than that shown for the private sector only, as government wages have been increasing at a slower pace than private wages over this period.  But government employment is only 15% of total employment in the US.  Private wages are still of interest, and will provide an indication of what the market pressures have (or have not) been.

The chart shows that nominal wages have increased at a remarkably steady pace over this period.  Many may find that lack of fluctuation surprising.  The economy in 2008 and early 2009 went through the sharpest economic downturn since the Great Depression, and unemployment eventually hit 10.0% (in October 2009).  Yet nominal private sector wages continued to rise.  As we will discuss in more detail below, nominal wages were increasing at about a 3% annual pace through 2008, and then continued to increase (but at about a 2% pace) even after unemployment jumped.

But while nominal wages rose at this steady pace, it was almost all just inflation.  After adjusting for inflation, average real wages were close to flat for the period as a whole.  They were not completely flat:  Average real wages over the period (March 2006 to June 2018) rose at an annual rate of 0.57% per year.  This is not much.  It is in fact remarkably similar to the 0.61% growth in the average real wage between 1979 and 2013 in the data that were discussed in my blog post from early 2015 that looked at the factors underlying the stagnation in real wages in the decades since 1980.

But as was discussed in that blog post, the average real wage is not the same as the median real wage.  The average wage is the average across all wage levels, including the wages of the relatively well off.  The median, in contrast, is the wage at the point where 50% of the workers earn less and 50% earn more.  Due to the sharp deterioration in the distribution of income since around 1980 (as discussed in that post), the median real wage rose by less than the average real wage, as the average was pulled up by the more rapid increase in wages of those who are relatively well off.  And indeed, the median real wage rose by almost nothing over that period (just 0.009% per year between 1979 and 2013) when the average real wage rose at the 0.61% per year pace.  If that same relationship has continued, there would have been no increase at all in the median real wage in the period since 2006.  But the median wage estimates only come out with a lag (they are estimated through a different set of surveys at the Census Bureau), are only worked out on an annual basis, and we do not yet have such estimates for 2018.

C.  12 Month Changes in Nominal Wages, the Consumer Price Index, and Real Wages Since 2006

While the chart at the top of this post tracks the cumulative changes in wages over this period, one can get a better understanding of the underlying dynamics by looking at how the changes track over time.  For this we will focus on percentage changes over 12 month periods, worked out month by month on a moving average basis.  Or another way of putting it, these will be the percentage changes in the wages or the CPI over what it had been one year earlier, worked out month by month in overlapping periods.

For average nominal wages (in the private sector) this is:

Note that the date labels are for the end of each period.  Thus the point labeled at the start of 2008 will cover the percentage change in the nominal wage between January 2007 and January 2008.  And the starting date label for the chart will be March 2007, which covers the period from March 2006 (when the data series begins) to March 2007.

Prior to the 2008/09 downturn, nominal wages were growing at roughly 3% a year.  Once the downturn struck they continued to increase, but at a slower pace of roughly 2% a year or a bit below.  And this rate then started slowly to rise over time, reaching 2.7% in the most recent twelve-month period ending in June 2017.  The changes are remarkably minor, as was also noted above, and cover a period where unemployment was as high as 10% and is now just 4%.  There has been very little year to year volatility.

[A side note:  There is a “bump” in late 2008/early 2009, with wage growth over the year earlier period rising from around 3% to around 3 1/2%.  This might be considered surprising, as the bump up is precisely in the period when jobs were plummeting and unemployment increasing, in the worst period of the economic collapse.  But while I do not have the detailed microdata from the BLS surveys to say with certainty, I suspect this is a compositional effect.  When businesses start to lay off workers, they will typically start with the least experienced, and lowest paid, workers.  That will leave them with a reduced labor force, but one whose wages are on average higher.]

There have been larger fluctuations in the consumer price index:

But note that “larger” should be interpreted in a relative sense.  The absolute changes were generally not all that large (with some exceptions), and can mostly be attributed to changes in the prices of a limited number of volatile commodities, namely for food items and energy (oil).  The prices of such commodities go up and down, but over time they even out.  Thus for understanding inflationary trends, analysts will often focus instead on the so-called “core CPI”, which excludes food and energy prices.  For the full period being examined here, the regular CPI rose at a 1.88% annual pace while the core CPI rose at a 1.90% pace.  Within round-off, these are essentially the same.

But what matters to wage earners is what their wages earn, including for food and energy.  Thus to examine the impact on real living standards, what matters is the real wage defined in terms of the regular CPI index.  And this was:

With the relatively steady changes in average nominal wages, year to year, the fluctuations will basically be the mirror image of what has been happening to inflation.  When prices fell, real wages rose, and when prices rose more than normal, real wages fell.

Prices are now again rising, although still within the norm of the last twelve years.  For the 12 months ending in June 2018, the CPI (using the seasonally adjusted series) rose at a 2.8% rate.  The average nominal wage rate rose at a rate of 2.74% and thus the real wage fell slightly by 0.05% (calculated before rounding).  Average real wages are basically the same as (and formally slightly below) where they were a year ago.

D.  Employment and Unemployment

There is thus no evidence that the measures Trump has trumpeted (of deregulation, slashing taxes for corporations, and launching a trade war) have led to a step up in real wages.  This should not be surprising.  Deregulation which spurs industry consolidation increases the power of firms to raise prices while holding down wages.  And there is no reason to believe that tax cuts will lead quickly to higher wages.  Corporations do not pay their workers out of generosity or out of some sense of charity.  In a market economy they pay their employees what they need to in order to get the workers in the number and quality they need.  And although there can be winners in a trade war, there will also certainly be losers, and overall there will be a loss.  Workers, on average, will lose.

But what is surprising is that wages are not now rising by more in an economy that has reached full employment.  Federal Reserve Chair Jerome Powell, for example, has called this “a puzzle”.  And indeed it is.

The labor market turned around in the first two years of the Obama administration, and since then employment has grown consistently:

This has continued (although at a slightly slower pace) since Trump took office in January 2017.  The same trend as before has continued.  And this trend growth in net jobs each month has meant a steady fall in the unemployment rate:

Again, the pace since Trump took office is similar to (but a bit slower than) the pace when Obama was still in office.  But the somewhat slower pace should not be surprising.  With the economy at close to full employment, one should expect the pace to slow.

Indeed, the unemployment rate cannot go much lower.  There is always a certain amount of “churn” in the job market, which means an unemployment rate of zero is impossible.  And many economists in fact have taken a somewhat higher rate of unemployment (or at least 5.0%) as the appropriate target for “full employment”, arguing that anything lower will lead to a wage and price spiral.

But we have not seen any sign of that so far.  Nominal wages are rising at only a modest pace, and indeed over the last year at a pace less than inflation.

E.  Conclusion

There has been no step up in real wages since Trump took office.  Indeed, over the past twelve months, they fell slightly.  But while there is no reason to believe there should have been a jump in real wages following from Trump’s economic policies (of deregulation, tax cuts for corporations, and trade war), it is surprising that the economy is not now well past the point where low unemployment should have been spurring more substantial wage gains.

This very well could change, and indeed I would expect it to.  There is good reason to believe that the news for the real wage will be a good deal more positive over the next year than it has been over the past year.  But we will have to wait and see.  So far it has not happened.