It's Too Early To Blame It All On Billby
Bill-bashing is all the rage this spring, especially on the issue of the economy. To be sure, President Clinton has left himself wide open with his loss of focus in this crucial area. And the appearance of inaction as economic growth slows is fueling disappointment among both businesses and households.
The frustration level is particularly high in corporate boardrooms. U.S. business confidence in April fell to its lowest level since October, according to the Chamber of Commerce's bi-monthly survey of more than 11,000 executives. The Chamber reported declining optimism for sales, hiring, and the economic outlook generally.
Households, which are already bracing for new taxes, found no joy in the April jobs report. Nonfarm businesses added only 119,000 workers last month, below the first-quarter pace and far below that of a typical expansion (chart). The unemployment rate remained stuck at 7% for the third month in a row. Joblessness is down from 7.7% last June, but it's still higher than it was when the recession ended.
However, beating up on Bill over the recent slowdown is misplaced. Growth in the U.S. is slipping from the 4% pace of the second half of 1992 for three broad reasons: First, that growth rate is unsustainable. Consumers got ahead of themselves last year, and now they are catching their breath. Second, the winter storms are making the slowdown look worse than it really is.
Third and most important, the economy is still under the heel of structural problems born of the excesses of the 1980s. Dealing with heavy debt, especially household and government red ink, as well as with corporate restructuring, defense downsizing, and past overbuilding has made this the weakest expansion on record.
After the recovery's pitiful first year, though, the economy's annual growth rate now has accelerated to about 3%. By second-year recovery standards, that's an economically and politically acceptable clip. However, the growth has come more from productivity--making employees work harder--than from new jobs. That's why that 3% pace has been so unsatisfying.
For 1993, the mix of growth is tilting more toward jobs and away from productivity gains. Yet, this same speed-up-and-slow-down pattern along a 3% growth trend will continue as long as the economy keeps bumping into those stubborn structural barriers. Those obstacles to growth are the chief reasons why job gains are so tepid--not because of a bumbling White House.
The best that can be said about this year's job growth is that it is an improvement over last year's. April's payroll rise means that the economy generated 140,000 jobs per month, on average, during the first four months of 1993. In the second half of 1992, businesses added 55,000 per month. But at this stage in past expansions, the norm has been closer to 200,000.
Businesses remain intent on boosting productivity in an effort to cut costs, enhance their competitiveness, and lift profits. Still, productivity growth in 1993 is not likely to match last year's impressive 3.1% pace. In fact, employees' output per hour in nonfarm businesses dipped 0.1%, at an annual rate, in the first quarter.
However, that weak showing followed a robust gain of 4.1% in the fourth quarter. The annual trend in productivity growth is 2.2%, which is far above the long-term trend of about 1%. Output per hour will likely rebound in coming quarters, along with the economy.
Manufacturing continues to make stellar gains in productivity. A drop in service efficiency last quarter offset a sharp 4.8% advance in manufacturing. During the past year, factory productivity was up 5%, the best annual performance in 16 years.
One benefit of the healthy trend in productivity is its downward pressure on unit labor costs. During the past year, unit costs in nonfarm businesses have risen only 1.4%, well below the rate of inflation. And in manufacturing, the labor cost of producing a unit of output dropped at an annual rate of 4.5% last quarter. Factory unit labor costs are down 1.6% from a year ago.
Against that backdrop, the steep rise in the producer price index for finished goods for April hardly seems indicative of inflation's underlying trend. The PPI jumped 0.6% last month, including a sharp 0.4% rise in the core index, which excludes food and energy (chart).
Temporary price runups accounted for the surprisingly large April increase. Crop damage from the March storm caused a 45% surge in vegetable prices. Tobacco prices leaped 1.4%, despite announced price cuts for cigarettes that will show up later, and car prices rose 1.1%, although they are up only 2% from a year ago.
The best news from the April employment report is not what it says about jobs, but what it suggests about the second quarter. The workweek, especially in manufacturing, bounced back last month. Combined with the job gains, the longer workweek means that overall hours worked began the second quarter above the first-quarter average--a sign that second-quarter real gross domestic product is already in the plus column.
In addition, industrial production appears to have rebounded in April. Despite a loss of 65,000 jobs in manufacturing, the factory workweek jumped from 41.2 hours back up to 41.5 hours--a 26-year high (chart). Factory overtime rose from 3.9 hours to 4.3 hours--a record.
The job report also held good news for consumer spending. Personal income began the second quarter above its first-quarter level, and the workweek in retail trade recouped almost all of its record drop in March. That rebound suggests that March storms closed retail shops and depressed sales.
Total nonfarm wages were unchanged in April at $10.79 per hour because of declines in some service wages. But overtime pay boosted manufacturing wages by 0.6%, to $11.71 an hour. Moreover, the longer workweek means that nonfarm weekly earnings rose by 0.3% in April.
In fact, the slowdown in pay gains may be over. After falling for three years, wage growth seems to have bottomed out at a yearly pace of 2.5%. But that doesn't mean that wage gains are set to speed up just yet, given the ongoing slack in the labor markets. Even when pay does begin to pick up, stronger productivity growth will prevent faster wage growth from feeding inflation.
Still, the gains in payrolls and weekly earnings suggest a solid advance of about 0.4% in the wages-and-salaries component of personal income in April. Total personal income probably won't do as well, however, because the April data will lack the huge payout of farm subsidies that helped to lift March earnings by 0.6%.
Rising income also means that the Federal Reserve's large revisions to consumer installment credit are not that alarming. The Fed used new seasonal factors and updated data to show that credit jumped by $7.6 billion in 1992, instead of falling by $1.1 billion as first thought. The faster pace is continuing into 1993. Credit has already mushroomed by $11.1 billion so far this year, including a $3.44 billion rise in March.
Higher installment IOUs, in addition to mortgages and home-equity loans, mean that consumers still face a huge debt burden. But because income is growing about twice as fast as installment credit, the rise in this kind of debt is still less of a problem for household finances. Even with the revisions, debt as a percentage of disposable income remained at 16.3% in March, the lowest rate in 71 2 years (chart).
A bigger hitch for consumers--and the economy--may well be the tax talk filtering out of Washington. That's certainly a good reason for Bill-bashing. But right now, most of the frustration over slower growth has more to do with the intractability of the economy's long-standing problems than with anything the Administration has or has not done to correct them.