Why Can’t Anyone Explain This Economy?
What went wrong? The U.S. economy seemed to have finally reached a cruising altitude, albeit a low one, almost three years after the end of the 2007-2009 recession. Growth was hardly strong at 2 percent, and monthly payroll increases of 250,000 during the winter were nothing to get excited about. Still, the idea that the U.S. economy might finally be able to walk on its own got tripped up by anemic job growth of 69,000 in May.
The usual suspects -- unseasonal weather, faulty seasonal- adjustment factors, Europe’s financial crisis, the year-end fiscal cliff and that staple, uncertainty -- showed up on cue to explain why the early-year momentum in the labor market was petering out once again, as it had in 2010 and 2011. None was satisfying.
Economies are buffeted by external events all the time. Financial markets react; often they overreact. I’m reminded of this every time I get together with friends from other professions and trades and realize that what seemed like a critical piece of news in my day is a non-event for them. Spain’s troubled banks? An ocean away, both literally and figuratively. What resonates is the quarterly 401(k) statement.
Economic statistics sometimes give the impression that a $15.5 trillion economy shifts course from one quarter or one month to the next. Data revisions tend to smooth out what originally looked like a trend shift. I suspect that May’s alarming employment report, complete with downward revisions to March and April, will turn out to be part of the ebb and flow in an otherwise lousy recovery, not a prelude to a new recession.
For starters, the pattern of early-year strength tapering off “has been much clearer in the employment data than in other statistics for a variety of reasons,” says Steven Wieting, U.S. economist at Citigroup Inc.
Last year, first-quarter job growth averaging almost 200,000 a month corresponded with growth in gross domestic product of 0.4 percent, the weakest since the recession ended.
This year, an unusually warm winter boosted employment in certain sectors, such as construction, other goods-producing industries and real estate, when the seasonal-adjustment factors anticipate softer hiring. The atypical weather and labor turnover at 80 percent of pre-crisis levels give “undue power to seasonal adjustment,” Wieting says.
A good way to eliminate the month-to-month volatility is to look at year-over-year changes. Using private payrolls to avoid the distortions from U.S. Census hiring in 2010, the year-over- year increase has fluctuated between 1.8 percent and 2 percent for 14 months. That was the range in 2005, as well, which was seen as a pretty good year. Compare these tepid figures with year-over-year employment growth of 5 percent to 6 percent in 1984, when a strong recovery followed a deep recession.
Remember, too, that the Bureau of Labor Statistics considers a monthly change in employment of plus or minus 100,000 statistically insignificant.
What else could explain the sudden shift in the pace of hiring?
High among the suspects are Europe, the year-end fiscal cliff and, when all else fails, uncertainty.
Ever since Greece’s debt problems came to light in October 2009, there have been many crises within a crisis, followed by a euro-zone summit and an array of Band-Aids to fix the inherent conflicts of 17 sovereign nations living with a single currency.
When Spain, the euro area’s fourth-largest economy, joined Greece on the very-troubled-country list, it sent stock markets plunging around the globe.
Europe’s crisis is neither new nor solved. With U.S. exports to the region amounting to less than 2 percent of GDP, it’s hard to understand why domestic employers would cut back all of a sudden, save for the fear that Europe’s problems would ricochet through the U.S. financial system.
That leaves the fiscal cliff and uncertainty. To the extent that “employment is a proxy for business confidence,” and business has no particular reason to have confidence in Washington, “it makes sense to sit on their hands until the November election,” says Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “It’s a crisis of confidence rather than a deterioration in the fundamentals.”
A lame-duck Congress will have to make decisions about the expiring Bush tax cuts and an array of tax-and-spending initiatives put in place under President Barack Obama. That was as true in February, when employment increased by 259,000, as it was in May. But it’s the best we’ve got: a fallback position, a default explanation.
Friday’s employment report sent the Dow Jones Industrial Average down 2.2 percent, its biggest decline in six months. It set off a PR storm in Washington, where Obama’s chances of re- election are directly tied to the state of the economy. And as far as the public is concerned, nothing reflects that state as succinctly as job growth and the unemployment rate, which has been above 8 percent for 40 months.
While economists are trying to understand what went wrong to reduce job growth in April and May, the president is faced with a more difficult task. Obama has to explain to voters what’s gone right these past four years to convince them he deserves another term.
(Caroline Baum, author of “Just What I Said,” is a Bloomberg View columnist. The opinions expressed are her own.)
Today’s highlights: the View editors on why Germany’s consideration of a deeper union is too late and medical-device taxes; Ezra Klein on the myth of election mandates; Michael Kinsley on banning Big Gulps; Susan Antilla on workplace discrimination; A. Gary Shilling on Japan’s current account; Anders Aslund on free-market Sweden.
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