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Friday, May 30, 2003

US Economy: Mind the Output Gap

Brad also draws our attention to this piece from the Wall Street Journal on the continuing problems of the US 'jobless recovery':

Payrolls in the electronics sector, and for producers of industrial equipment, have declined for 28 straight months. In communications, payrolls have fallen for 24 months. In the securities and airline industries, they have fallen in 16 of the past 24 months.

In some ways, this is the downside of a productivity boom that created much optimism about the economy during the 1990s. Productivity growth means that companies are squeezing more output from existing workers. Over the long run, most economists agree productivity growth is good for workers, because it tends to lead to higher wages. But in the short run, it is creating a problem. Worker productivity has been growing faster than the overall economy. That has allowed corporate executives to meet small increases in demand while still eliminating jobs.

"You end up with a jobless recovery," says Jared Bernstein, a labor economist with the Economic Policy Institute, a left-leaning think tank in Washington. "It is indistinguishable from recession for many working families."

A common definition for a recession is two consecutive quarters of contracting gross domestic product. The nation's GDP -- the broadest measure of economic output -- has expanded at an average annual rate of 2.7% since the fourth quarter of 2001. During the same period, the productivity of the nation's work force -- which is defined as its output per hour of work -- has expanded at a much faster rate of 4.2%. While worker productivity often increases in the early stages of a recovery, this time the mismatch between productivity and overall economic growth is unprecedented.

At the beginning of eight recoveries between 1948 and 1982, GDP grew faster than productivity. In those cases, companies had to add workers to meet demand for their goods and services. During the recovery of 1991, productivity grew slightly faster than output in the early stages, but the difference wasn't as stark as it is now.

"If you want people to have jobs, your demand-side growth has to be much stronger," says Harry Holzer, a labor economist at Georgetown University. The nation would need a 3.5% growth rate in GDP for the unemployment rate not to get worse, he says, but "3.5% is looking optimistic for this year. This might be quite a protracted downturn."
Source: Wall Street Journal

This continuing job market weakness is also reflected in yesterday's employment numbers:

New U.S. jobless claims fell last week but the number of people continuing to draw unemployment benefits rose to the highest level in about 18 months, signaling persistent difficulties in the job market, a government report showed on Thursday. Initial claims for state unemployment insurance benefits, an early reading on the resilience of the job market, fell to 424,000 in the week ended May 24 from a revised 433,000 in the prior week, the Labor Department said. Analysts were expecting 419,000 first-time claims in the latest week, compared with the 428,000 originally reported in the prior week.

The Memorial Day holiday on Monday, May 26, gave states one less day to report their numbers. The Labor Department said the decline in new jobless claims included estimated figures from several states, but there was no way to tell if this had any impact on the data. The decline in new claims nudged the four-week moving average down to 427,000 from 434,250 in the prior week. The average has remained above the key 400,000 mark for 13 weeks. Economists see the 400,000 mark as signaling a lackluster job market. "The claims numbers remained above the 400,000 level, which a lot of people watch," said Gary Thayer, chief U.S. economist for A.G. Edwards. "There's been no significant improvement over the last month. Claims are still elevated and it shows that the labor market is still soft," he said. More data on the labor market are due on June 6, when the government releases the monthly employment report for May, a broad look at labor market conditions throughout the economy.

Analysts are expecting the unemployment rate to be 6.1 percent, up from 6 percent in the April report. The May report is expected to show a loss of 26,000 jobs, compared with a loss of 48,000 jobs in April. For the first three months of the year, more than half a million jobs have been lost. Despite the drop in new jobless claims in the latest week, the still-high number showed that people continue to face a tough time getting back on payrolls. The number of people already receiving jobless benefits who remained on state rolls rose by 83,000 to 3.76 million in the week ended May 17, the latest week for which figures are available. The total was the highest since 3.8 million in the Nov. 17, 2001, week. Tennessee reported the highest number of new claims for the May 17 week, with 3,021 additional layoffs reported in industrial machinery, trade, service and fabricated metals industries, the department said.
Source: Yahoo News

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