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‘Yes, but…’ economy

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Opinion pieces and speeches by EPI staff and associates.

[ THIS PIECE FIRST APPEARED IN SACRAMENTO BEE ON NOVEMBER 20, 2003 ]

‘Yes, but …’ economy

By  Jared Bernstein

The two-year-old recovery formerly known as “jobless” seems to finally be turning a corner. Yet for every new silver lining there’s a cloud worth considering.

Yes, every important economic report of late has come in better than expected, but right behind the positive signs are questions about the underlying strength of the economy. Still, you can’t reach your destination if you’re headed in the wrong direction, and the fact that most of the negative trends have reversed is an unequivocal plus.

Bottom line: It’s a “yes, but …” economy.

Yes, the overall growth rate is up, but it won’t stay that high.

Gross domestic product, our broadest measure of the economy’s health, grew 7.2 percent after adjusting for inflation in the third quarter, the best showing in almost two decades, and far above the 2.7 percent average growth rate that prevailed up to this point. What’s more, the growth came from each component of GDP. Consumption hit a six-year high, investment was solid, government added a small bit and even net exports contributed 0.8 percent of the growth. You’d have to go back to 1999 to find a quarter like this, where each component added something. With growth like this, jobs have to follow.

But it’s widely agreed that we won’t continue to grow this quickly because much of what drove the economy in the third quarter were one-time events. Tax cuts and mortgage refinancing did almost all the heavy lifting as far as income growth and consumption were concerned.

Wage and salary income were actually a drag, dropping about 0.1 percent from the growth of after-tax income. Will labor income gains make up for the loss, now and in future quarters, of the one-time stimuli that drove up third-quarter GDP? That depends on the job market.

Yes, jobs are finally growing again, but unemployment is still too high and won’t fall soon.

In the last three months, we’ve added almost 300,000 jobs, the best trend since before the recession began in March 2001. Like the GDP story above, these gains were widespread. Most service industries, including retail, businesses and health care, posted solid gains. Unemployment ticked down a bit too, from 6.1 percent to 6 percent, not because people dropped out of the labor force, but because they found jobs.

But there are myriad caveats. First, we should be doing a whole lot better by now. Remember the last jobless recovery of the early 1990s? By precisely this same point, we were generating 226,000 jobs, not 100,000 jobs, per month, and there are a lot more people now who need jobs — since then, the labor force has grown by about 17 million. Simply to absorb the growth in the population, it would take 150,000 new jobs per month.

Until we really pump up the monthly jobs numbers, don’t expect unemployment to fall much farther. In fact, the consensus among forecasters is that the jobless rate will remain in the high fives throughout next year.

Also, two of the hardest-hit sectors — manufacturing and information technology — continued to shed jobs last month, and it’s hard to imagine a truly robust jobs recovery without factory and tech jobs.

Putting these factors together, the lack of progress against unemployment means that rising earnings will remain a distant memory. And without considerably stronger wage growth, it’s unlikely that labor earnings will make up for the loss of tax cuts and mortgage borrowing.

There’s more. Yes, productivity is soaring, but until recently we haven’t been generating enough demand to absorb the efficiency gains; thus businesses could meet current demand with fewer workers. Yes, retailers did great in the third quarter, but growth there is already slowing as one-time income sources fade. Yes, the trade deficit shrank last quarter, but that was driven by dampened demand for imports brought on by the weakening dollar and inventory reductions, both of which could reverse. Yes, the Bush tax cut provided needed stimulus but it unnecessarily went much farther, creating stifling deficits down the road.

The most welcome of all the recent positive trends is the reversal of the job losses that gave the jobless recovery its name. And while the recent gains are clearly moderate in historical terms, we may well be approaching the virtuous cycle that has eluded us thus far, where strong demand begets jobs, which in turn generate income growth and more demand.

But we’re not there yet.

Jared Bernstein, a senior economist at the Economic Policy Institute, is co-author of The State of Working America.


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