Barron's(1/11) Economic Beat: Upside, Downside: The Subpar Recovery
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Sat Jan 09 00:03:43 2010 EST
(From BARRON'S)
By Gene Epstein
The economic recovery continues, even though an upside surprise on Monday was
regrettably offset by a downside disappointment Friday.
The disappointment was the December employment data. Jobs on nonfarm payrolls
fell by 85,000, frustrating hopes of a marginal gain. The unemployment rate
held at 10%, frustrating hopes that it would tick back to the 9% region.
But temporary employment posted another solid gain of 47,000 for the third
month in a row. Since temps are generally the first to be fired in a downturn
but first to be hired in a recovery, temporary help is considered a leading
indicator of employment trends.
By any measure, the trend continues to improve, if only by a shrinking
negative. Payroll job losses in the private sector averaged 76,000 per month in
the fourth quarter, compared to 171,000 per month in the third quarter, 425,000
in the second, and 695,000 in the first.
As a measure of how far back we need to climb, the total number of jobs on
private-sector nonfarm payrolls stood at 108.443 million in December 2009, down
7.34 million from its December 2007 peak.
Such employment patterns are unfortunately par for the course, especially in
this subpar recovery. Economic growth occurs at this stage not because
employers add workers, but because hours per worker tend to increase, along
with output per worker hour, also called productivity.
The likelihood that economic growth ran at an annual rate of 4% in the fourth
quarter got confirmed by the upside surprise on Monday. The purchasing
manager's index of manufacturing ran 55.9 in December, up 2.3 points from the
month before, against consensus expectations that it would be unchanged. This
monthly index has averaged 55.1 in the fourth quarter, which historically has
signaled 4% on the annual rate of growth of real gross domestic product.
The inventory component of the PMI indicated that firms continued to
liquidate stocks, although at a slower pace than before. The slower liquidation
of inventories should have helped boost growth in the fourth quarter, thereby
confirming the subpar recovery.
If we get a GDP growth figure that's really explained by slower inventory
liquidation, more than one skeptical reader has demanded to know, would that
really be economic growth?
Yes, it would. To see why, consider the flip side of this dynamic: why faster
inventory liquidation causes GDP to contract. Gross domestic product measures
production. If sales of goods in the current calendar quarter aren't satisfied
by production, but are covered instead by a drawdown of stocks from past
production, then GDP takes a hit.
Now say that in the next calendar quarter, sales of goods remain the same,
while the number of units drawn from existing stocks gets cut in half. Since
the other half must come from new production, GDP is boosted.
The effect on GDP growth can be huge. Through the six calendar quarters of
the 2008-'09 recession, accelerated liquidation took more from GDP than the
contraction in consumer spending, even though consumption accounts for such a
large share of GDP. So by that reckoning alone, one might imagine the slower
liquidation of inventories, which made up 0.7% of the 2.2% of annualized growth
in the third quarter, has great potential to boost GDP even further.
There is even more to the inventory story. In a growing economy, production
not only satisfies all of final sales; some is used to rebuild stocks. So once
the inventory liquidation comes to an end, inventory rebuilding will make
further contributions to GDP growth.
Open letter to Federal Reserve Chairman Ben S. Bernanke: Before you defend
the Federal Reserve against the charge that its monetary policy helped cause
the housing bubble, you should get more familiar with key sources.
In last week's attempt at self-exculpation before the American Economic
Association ("Monetary Policy and the Housing Bubble"), you cited a study by
economists Marek Jarocinski and Frank R. Smets to back up your claim that "only
a small portion of the increase in house prices . . . can be attributed
to...monetary policy."
But the study found practically the opposite. Jarocinski and Smets actually
wrote in their conclusion ("House Prices and the Stance of Monetary Policy,"
July/August 2008), that "monetary policy has significant effects [italics mine]
on housing investment and house prices and that easy monetary policy designed
to stave off perceived risks of deflation in 2002-04 has contributed to the
boom in the housing market in 2004 and 2005."
It has since come to light that you were the Federal Reserve governor from
2002 through '05 who aggressively advocated the easy monetary policy. Why not
stop this defensive posturing and admit your egregious error, even if your
predecessor Alan Greenspan remains in denial? |
