Economics & Research Blog
Beware the Economic Common Wisdom
Since I had no column this past Monday,
By Dr. Joe Webb
Published: May 13, 2009
Since I had no column this past Monday, I thought I'd catch up with a potpourri of economic and other items, including some of my usual whining about business reporting in the press.
First, an apology for not answering my e-mail. Many of the folks who read these notes and the columns send me e-mails and questions, and I am way behind in answering. Last month I had an overnight hospitalization for what ended up being a reaction to some (supposedly benign) medication I've been taking for the last four years or so. I'm just fine (and even ace'd the stress test; three nights a week of badly done karate actually improves your health!), but my work really got backlogged. I'm getting to things, but if you sent me a question, you may want to re-send it. I should be much better caught up by the first week of June. Sorry for the delays.
Now that the formalities are out of the way, I must say that the disparity in what economic data say and how they are reported is really quite interesting, if not frustrating. The press is reporting declines as great news just because they declined less. The ISM reports are good examples, and last week's employment rate is a prime one. The unemployment rate went up to 8.9%, but because the number of payroll employees who lost their jobs was lower than expected, it was reported as a relief. This was despite the Bureau of Labor Statistics saying “oops” when they said about 66,000 more people lost their jobs in February and March than they had originally thought. Overall, however, 120,000 more people had jobs in April, and about half of them were new jobs for the conduct of the 2010 U.S. Census. These workers will increase throughout 2009 before they start being let go sometime in mid- and late 2010. The employment report was nothing to be happy about. The unemployed and the “marginally attached to the workforce” rate is now at 15.8%. That's not good.
What was particularly annoying was the reporting of initial jobless claims and the number of workers who are collecting unemployment. The number grew, not surprisingly, but it was claimed to be at “record levels.” The Wall Street Journal said “...the total number of unemployed drawing jobless benefits hit its 14th-straight record high and now stands at over 6.3 million...” I complained on the article's web page that the jobless benefits data had not been adjusted for the changing size of the workforce over the decades. The record was actually set in May 1975 (we only have data going back to 1967, so it was probably worse in the Great Depression, but they did not have unemployment programs like they have today). In '75 the ratio of continuing claims to the employed workforce was 5.4%. That means it would have to be about 7.6 million continuing claims with today's workforce. We are at about 4.5% today. So we have to get 1.3 million more people to start collecting claims before it would get to that level. I don't think we'll get that bad, but there still is a chance that we might. The press has a great chance to convey some sense of wonder about the economy, and hope rather than panic, and an appreciation that these times are not like the 1970s or very early 1980s. It is a bit too much to ask, I guess.
Let's try this one. The productivity report for the first quarter came out, and it was up +0.8% compared to Q4-2008, and +1.8% compared to Q1-2008. That's not much, of course, but I did not see a single news story about what it means for unemployment. As long as productivity is greater GDP growth, unemployment will worsen. You need the economy growing faster than productivity for employers to start hiring workers. I expect productivity to keep improving this year, and to be better than GDP all year into next year.
The same report had some bad news for inflation. Even though worker pay is stagnant or declining (it has been for the past few years), “unit labor cost,” or the amount paid for labor for each unit of goods produced went up +2.4% on an annual basis, a rise from a +1.8% rate. That means the prices of the goods and services we buy will be going up. Here it is we're supposed to be worried about deflation, but we're getting inflation. One may wonder why unit labor costs could be going up, while wages are stagnating, and it's pretty simple. Taxes and benefits costs are rising. But the real reason is that demand is down and manufacturers are losing their economies of scale. It's a concept that printers are intimately familiar with: each additional unit produced costs less that the units before it. So, as you produce less, you move backwards along that curve, and the units cost more. So how can productivity be going up?
It's all about the costs of materials, labor, and selling prices. We really only have deflation in asset prices (like real estate) for goods that have already been produced a while ago. Prices of goods and services are not deflating, they are increasing. So far this year, the annualized CPI rate since December is almost at 5% when you leave out energy, and even that is rising again. Manufacturers are cutting back on production and keeping prices where they were or a little more. They are decreasing prices only to clear slow-moving inventories. Manufacturers have actually done a good job of cutting back in proportion to declines in demand. So the productivity is based on a new, lower level of production.
Productivity is very important because that is how workers are able to increase their wages. Unfortunately, other costs, such as benefits, regulatory compliance, and others, have crowded out any wage gains, leaving workers unrewarded. We're unfortunately in more more of the same.
Another pet peeve is the trade deficit. March's deficit increased by 5.5%, the first time it rose since July. Of course, this was reported negatively. It's actually a great contrarian indicator, and shows that we are bottoming out and things are getting somewhat better (or "less worse," more accurately). Has anyone noticed that as the deficit was shrinking, the economy was tanking? It's often reported that imports detract from GDP growth. Arithmetically, that is true: imports are deducted from GDP. The real question is what we do with those imports? A simple example: what happens when you buy coffee? You are sending your money overseas, correct? Not really. Raw coffee has to be imported, but the value added is here in the U.S. from the processing, packaging, transporting, marketing, and selling of that coffee. Those acts add to GDP and would not exist if the coffee had not been imported. You'll know when the economy is growing when the trade deficit rises consistently.
So remember: the economy will get better sooner than employment does because GDP growth has to exceed productivity growth, and we actually have to root for a growing trade deficit. Common wisdom is far more easy to believe than facts.