Friday, May 7, 2010

Thoughts on April Job Numbers and the Economy

The economy added 290,000 jobs in April, while the top-line unemployment rate went up from 9.7% to 9.9%. If that seems counterintuitive, that's only because it is. The top-line unemployment number, known as U3, is the number of unemployed persons actively seeking work divided by the total workforce. Presumably because of increasing optimism about the economy, discouraged workers are reentering the workforce. So while the economy added jobs, it also added people looking for work. That weirdness is one reason I always like to look at a different unemployment indicator, U6. I've talked about this before, but U6 has underemployed and discouraged workers included. It edged up from 16.9% to 17.1%. That's not a good sign of a healthy economy. Long-term unemployment edged upwards, as well.

I'm also worried about how much of our current economic growth is being propped up by the stimulus, which will run out fairly soon. Without more people employed and spending money, the recovery will be slow. Once the stimulus runs out, it will be even slower.

My other worry is best described in visual form. Basically, while GDP is growing, it's not growing fast enough. This is a chart of GDP from 2006 to now (statistics from the Burea of Economic Analysis):

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So we're back growing at the rate we were before the recession, so that's good. I continue to worry that the growth will slow when the stimulus runs out, but the point I want to make is different. Growing at the rate of before the recession isn't enough. We've gotten GDP back to the point it was before the recession, that's good, but not good enough. This chart is our actual GDP compared to what would have happened if GDP grew at the average rate of growth in 07 and 06, in the absence of a recession:

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The gap between the lines worries me. If we keep growing at this rate, we're really just adding enough jobs for the new workers entering the workforce. A more robust recovery would allow us to add more jobs, so that stubborn unemployment number can go down.

More stimulus and looser monetary policy would be very helpful. Unfortunately, the Fed is still more concerned about inflation than mass unemployment, and congress seems to have no appetite for further stimulus. On top of that, the dollar is strengthening against the Euro, due to the crisis in Greece, and worries about the other "PIIGS" economies (Portugal, Italy, Ireland, Greece, Spain). A stronger dollar is better for tourists, but it can hurt exports, as American products get comparatively more expensive.

Color me a pessimist.

(Disclaimor, it's been a while since I took Macroeconomics, so maybe some of this stuff is totally wrong. But I think I'm at least in the ballpark.)

EDIT: Krugman makes another point, and one that I didn't do a good job of making:

One month like this isn’t much. Second, on a reasonable estimate it would take something like 4 or 5 years of job growth at this rate to restore anything resembling full employment.

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