Job Numbers Spark Questions of Economic Growth
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RAY SUAREZ: Today’s jobs report is the latest of a series of indicators sending mixed signals about the strength of the economy, and whether it has hit a so-called "soft patch." Growth of the GDP, the Gross Domestic Product, was slower from April through June. It grew by a rate of 3 percent. That was down from 4.5 percent earlier in the year.
Consumer spending slowed as well, growing at just 1 percent for the second quarter of the year. But consumer confidence remains high and today’s report marked the 11th straight month that the economy has added jobs.
A closer look now at this latest report and the overall picture as seen by two economists: They are Jared Bernstein of the Economic Policy Institute, and Kevin Hassett of the American Enterprise Institute.
Jared Bernstein, how do you read the numbers? How do you interpret today’s job growth figure?
JARED BERNSTEIN: I think you can connect the dots very directly from that slowdown in GDP growth, the fact that Gross Domestic Product grew 3 percent in the second quarter, off from a 4.5 percent growth in the first quarter, and a slower quarter than we’ve had in recent periods. The punch line in that report was that consumer spending grew only 1 percent after growing 4 percent in the first quarter. The labor market story therein is that we have not been creating enough jobs to generate the income growth needed to stimulate this economy, especially given that we are no longer benefiting that much from the stimulative boost of the monetary and fiscal policies. Those two stimuli that really gave this economy some boosting in the early part of the recovery, they’re on their way out of the system. So what we really need to see is a much more robust labor market generating enough job and income growth to generate more consumer spending and a more robust recovery.
RAY SUAREZ: Kevin Hassett, when you look at today’s numbers, what do you see?
KEVIN HASSETT: Well, I think I agree with what President Bush said, that we should not be satisfied with job growth of 32,000 jobs in a month. And I disagree, though, with Sen. Kerry who says that we’ve made a u-turn. I think that we probably haven’t made a u-turn. The fact is we started with, what, three weeks ago, the Associated Press called the best economy in 20 years. And, you know, subsequently we’ve had – you know, starting to see the effects of Federal Reserve interest rate increases, starting to see the effects of higher oil prices and all of that together is saying that the economy is not going to be the best in 20 years. It is just going to be a typical strong positive economy. So I don’t think we are headed for recession or anything like that despite the rhetoric that you might hear on the campaign trail. The fact is the job numbers are disappointing. We can do better but there is no sign that the economy is really turning significantly down.
RAY SUAREZ: Earlier this week economists said that they were looking for 150,000 to 200,000 new jobs. Not only did the new job figure come in well short of that but the last two months previous were revised downward for a net loss of another 60,000. When you’ve got three months together, does that constitute a trend?
KEVIN HASSETT: Well, you know, three months of starting to be a trend. But the fact is that the reason why all the economists were saying that this job report was going to be a lot better than what we actually saw is that there are a number of other things, as you mentioned, Ray, the consumer confidence and so on, that suggested that the economy is doing very, very well. And so right now would I say that economists are still, I think, pretty unanimous that the economy is growing, it is growing at a rate that’s consistent with a typical boom year. And I think with respect to jobs, they’re scratching their heads a little bit right now.
RAY SUAREZ: What did the restatement of the May and June figures tell you?
JARED BERNSTEIN: Well, I think you have to separate what the economy is doing in the sense that Kevin was speaking about and how the labor market is plodding along. In June and July, average employment growth — and it’s useful to average over a couple of months to take out some of the bips and bops — was 55,000 jobs per month. Thus far this year between January and May, you were looking at 225,000 jobs a month, so a very sharp deceleration and possibly the beginning of a new trend.
Now, as Kevin points out, many economic indicators are quite positive right now although that second quarter GDP, as it goes, is probably not one of them. The point is that the labor market has been weak throughout this recovery, with the exception of a few strong months earlier this year. We had a couple of months with job growth over 300,000, but this was the most protracted jobless recovery on record. Here we are over two and a half years into this recovery and we are still over a million jobs down from our prior employment peak. That’s the first time on record that we’ve yet to make up the jobs lost in the recession. So this jobless recover recovery has done some damage.
I think where the damage shows up most now is the continuing slack in the labor market, slack that isn’t helped when you have a month like this, and the wage trends. We haven’t talked about those yet. The slack in the labor market is slowing down wage growth such that over the past four months, wages have grown consecutively slower year over year, month by month and now are falling behind inflation for many workers.
You have got wage growth decelerating, growing more slowly; you’ve got inflation accelerating — energy prices that Kevin mentioned. That means that consumer buying power is actually on the wane, and that absolutely hurts the sustainability of a recovery.
RAY SUAREZ: When you add in those other numbers that Jared mentioned and others that are out there, how does that fill in the picture, for instance, the wage growth lagging inflation, the hours, the average hours worked per week? That went down as well, meaning the average full-time work as many hours last week, how does that jibe with all the other numbers that are coming out?
KEVIN HASSETT: Right. Well, I think that it’s definitely the case that, you know, top line GDP is increasing like we see in a typical boom year. And it’s also true that the jobs numbers have been disappointing if we go back from the beginning of the recovery and run them forward compared to past recoveries. I think most economists think that the problem really with regard to the job recovery was that the unemployment rate was very, very low at the end of the 1990s and into early 2000. It was about the lowest that we’d ever seen. It was almost 3 percentage points below what the Federal Reserve Board thought was the natural rate of unemployment when I started working there about a decade ago. And so I think most economists expected that jobs were going to have to sort of plateau for a while so that the growth could sort of catch up again before the — really the job market would lift up, and so I don’t really think it is surprising to labor market economists that we’ve had a slower liftoff this recovery than we had other ones.
But I think you could get carried away thinking about the political implications of that. For example, if you go back and look at the recovery in the first term of President Clinton’s reign, then you’ll see that it looked very, very similar to what we have now. In fact wage growth was actually more disappointing when President Clinton was running for office than in it is now. You know, we wish it could be better. It has been positive in the last three years but it’s been worse before or after a recession. And so it is not a reason to really panic.
RAY SUAREZ: You need more quarters of sustained growth before people finally figure, okay, it’s safe to start hiring new people?
JARED BERNSTEIN: Oh, yeah, I think that employers have yet to really trust that this recovery has enough legs to commit to sustained permanent hires. Let me just take up something Kevin mentioned. We probably talk to different economists but the folks that I talk to, and especially when you think of some of the benefits of the full employment economy of the latter 90s, look at 4 percent unemployment not as an aberration but as a benchmark. Unemployment right now is 5 1/2 percent. That sounds pretty low in historical terms but look at the job growth over the past couple of months. It has been pretty dismal. Look at the wage growth. Wages have lagged inflation six out of the past seven months. That doesn’t sound like a very robust labor market, certainly not one you’d expect with such a historically low unemployment rate.
This economy can sustain full employment at 4 percent unemployment and in fact not only can it sustain it, what we found in the 1990s is that the benefits of growth are not going to be broadly shared until we hit those low unemployment rates. I mean, right now in this recovery, we’ve had corporate income growing at a decent clip as Kevin mentioned. This is not a bad recovery in historical terms. About 80 percent of the benefits of growth, corporate income have flowed to capital, to profits, about 20 percent to compensation. Historically, that’s directly the opposite of the usual case. By this time in every other recovery, the growth was far more balanced. Much more of the growth was flowing to working families. But because of persistent weakness in the labor market, the growth has been channeled largely upward, so we have this distributional problem, this kind of inequality that creates social problems but also I think is dragging, helping this recovery to drag its feet.
RAY SUAREZ: Well, let me get your view of how that’s working. You mentioned earlier that the economy itself, the overall economy seen from what, 35,000 feet, is growing. Corporate profits are growing. So people are making money, goods and services are being created and sold. But new jobs aren’t being created; why is that? Where do things dam up so that new people aren’t needed to do the work of the American economy?
KEVIN HASSETT: You know, as always, you can say that Jared’s facts are absolutely correct and you know, the things that he listed. I think that we can add a couple more in it to make the picture a little bit clearer with regard to the wage-profit relation. If we look at the last recession, then we would have to say that it was one of the mildest on record the GDP decline was almost non-existent, might even be revised away and, you know, there wasn’t a kind of spike in unemployment like we’ve seen in past recessions.
But what was about the worst in record was the decline in profits during that recession. It was about the worst profit decline that we’ve had since the Second World War and about the worst investment decline for firms, so they stopped buying machines and building new plants and so on, and so they started out being hit very, very hard and they started to recover; they started to grow their way out of that. We are seeing it in the profit numbers. But they’ve got some recovering to do I think before we could expect them to be fully healthy again. And I think as was the case in the last recovery where it didn’t really take off until after President Clinton was reelected, you know, we should expect to see a similar job market in the next four years, perhaps, you know, if President Bush is elected and perhaps Sen. Kerry is elected, depending on their policies. But the fact is that it takes a while to get the job market going and it might take longer this time, given how hard firms were hit in the last recession.
RAY SUAREZ: Are there external factors that are pushing this? The oil prices you have already both mentioned but also the terror alert, perhaps, the continuing Iraq War, do people factor that into the calculations they make about whether things are going well or not going well?
JARED BERNSTEIN: I mean, there is no question that some external factors have dampened hiring activity. But certainly the most important, I think we both agree, is energy prices. You see the fingerprints of higher energy prices throughout today’s employment report and not just in directly energy sensitive sectors like in autos or something like that. You also see it in retail sales. Employment in retail trade fell 19,000 last month for the first time this year. This directly relates to some of the consumer problems I tied to weak wage growth. If you are spending more of your family budget on energy, you have less left for other consumption. That’s also a problem.
RAY SUAREZ: Quick final thoughts.
KEVIN HASSETT: I’d have to say that the one thing that we should also add is that these numbers are very, very volatile. And if you look at how the Clinton administration was spinning very similar numbers during the last election, you know, Secretary Reich was out telling people that look, these things are difficult to read from month to month. They had a May employment report where there were only 2,000 jobs gained, and they told everyone that they should, you know, hold back and not to panic just because that one month was a little bit low. I would say that that same advice is probably prudent counsel at this moment.
RAY SUAREZ: Kevin Hassett, Jared Bernstein, thank you both.
KEVIN HASSETT: Thank you, Ray.
JARED BERNSTEIN: Thank you, Ray.