Ev Ehrlich's Everyday Economics

Jobs Are On The Way

                First off, I am told that one aspect of this blogging thing is to link your blog to the blogs of others.  OK, here goes – click yourself over to this blog and have a good time.  I know the guy who writes it pretty well, and he’s a piece of work.

                Now, back to business.

                I have a warm spot in my heart for Gross Domestic Product, or GDP, which is, as young school children are taught, the value of everything our economy produces.  Back when I was Undersecretaryin’ in the Clinton Administration, the Bureau of Economic Analysis, which estimates GDP, was under my purview.  Substantively, my major responsibility was to champion (within the Administration, the Congress, and the community of GDP information users, like investors) improvements in the measurements – maybe we’ll talk about that one day.  But the really cool part was that the people who calculated GDP would appear in my office an hour before the data were made public to explain the estimate to me.

                This was really a courtesy more than a necessity – if I looked at them and told them they were God’s own idiots and got the whole thing wrong, they’d have shrugged and made an effort not to laugh in my face.  Besides, back then – mid-1990’s – GDP was estimated by perhaps the greatest GDP estimator who ever rested a coffee cup on a CD of regional economic data, Bob Parker.  I remember once being shown a chart that showed the average error in GDP estimates, and there were two years when it suddenly rose and then returned to its previous level.  When I asked the reason, I was told “that was when Parker took another job.”  It reminded me of a story my wife, who has a Ph.D. in hydrological engineering, told me about rain gauge readings that changed suddenly when a new person started reading them, because that person was shorter and looked at the gauge from the wrong angle.  Measurements depend on the person doing the measuring.

                Back to GDP.  Friday’s announcement told us that the economy grew at an annual rate of 5.7 percent in the fourth quarter of the year.  To the churlish, this growth is the proverbial “dead cat bounce.”  After all, about 60 percent of the growth came from increases in inventories, which had been drawn down to unprecedented levels in many industries.  Once those inventories have been rebuilt, the pessimists argue, we can go back to a jobless, stagnant miasma.

                In fact, the GDP data tell us something different.  They tell us the economy is entering a recovery.  And while we have a very long way to go before we reach the levels of unemployment we enjoyed in recent years, jobs are about to follow.

                Invariably, companies stop producing things because there’s no demand for them.  So the restocking we’re seeing in the economy, in and of itself, is an indicator that businesses expect and are beginning to see an upturn in that demand.

                Moreover, this restocking means more production and, therefore, more income in the system, which means more demand down the line.

                But what’s even better about the new GDP information is the pattern it presents.

                Let’s start here – American consumers are going to consume less and save more in the years ahead.  No way around it.  Their jobs are less certain if they exist.  Their homes are worth less if they’re still in them and the stock market that supports their pensions – if they exist – is still over a quarter below its peak value.  And the GDP data show that household savings rose to 4.6 percent of total income in 2009, up from, for example, 1.7 percent two years ago.  So that’s happening.

                But if households are going to save more, something else has to pick up the slack to keep the economy going.  In the short-term, the answer is government, which is what the stimulus is all about – remember, companies make things because there’s the prospect of demand for them.  But you can’t prime a pump forever.  At some point the alternatives to consumer spending are really only two – investment and exports. 

               And that makes perfectly good sense.  If we’re going to be a society that saves more, then we’ll have more resources available for investment in stuff like software, computers, communications gear, machinery, new buildings – well, forget the new buildings for a while, we’ve got too many buildings lying around as is and no one wants to lend for new ones -- but the other stuff stays on the list.  

              The same is true for exports.  People and politicians love exports -- they get all chesty about sending our goods around the world, like they were scoring touchdowns or hitting home runs.  That’s fine, but the underlying reality is that exports are things you worked hard to make and then didn’t get to enjoy.   After all, if we shipped everything we produced off to Europe, China, and the like, would we be better off?  So rising exports aren’t an unequivocal blessing.  But if we’re going to save more, then we’ll have more stuff around to export.  There’s no avoiding that .

              Here’s the good news -- the hard evidence that this is all more than parable and footwork can be found in the GDP report.  After five consecutive negative quarters, business investment resurfaced in the fourth quarter, with rising investments in computers and automobiles – yes, automobiles! – overpowering continued declining investments in buildings. 

              And there’s every reason to expect more of the same.  Technological progress keeps producing more powerful and useful computers, communications systems, and other digital wonders, making the old ones more obsolescent.  Moreover, the wherewithal to pay for that investment – profits – are high and rising, particularly now that the economy is starting to grow.

               Exports are also growing – after four consecutive negative quarters, they grew at an annual rate of about 26 percent in the second half of the year. 

               But perhaps the biggest surprise is that the economy grew this substantially in the fourth quarter without government help.  Both the federal government and state and local governments were flat, although the stimulus probably let some states and localities avoid cutbacks.

               So the economy is giving off the right signals about growing again.  And if it does, then jobs are going to start coming back.

               In fact, there’s a pretty good argument that companies fired more people than you would have expected them to last year.  You can tell that by using an old saw economists call “Okun’s Law,” a rule of thumb developed by the late Arthur Okun that tells you how much unemployment to expect if the economy shrinks or grows.  If you use this rule, which has worked pretty well over the years, you’d expect the unemployment rate to be about 9.0 percent instead of 10.2 percent.  And in fact, the job picture is worse than 10.2 percent – if we accounted for the two million people that quit looking for jobs in the last year, the unemployment rate would be pushing 12.

                Why did businesses fire so many more people than you’d expect?  Part of it was panic – a year ago, the stock market was in free fall, big banks were failing, and the world was widely reported to be going to hell in a handbasket.   But there’s a more specific reason.  With banks failing and trying to cover their losses, they stopped lending to small and medium size businesses.  So if you were running a business and had to make a payroll or otherwise pay your bills, you had to raise the cash yourself.

                 And there are really only two ways to do that if you have to do it right now.  One is to fire everyone who isn’t hiding under a table in the coffee room – the more people you fire, the less cash you need.  And the other is to sell everything you have on the shelf already for whatever you can get for it, which is why inventories were drawn down to the lowest levels in some while, by some $125 billion in 2009. 

                  Lincoln one told a story about an ancient King who asked his wise men to write a sentence that would be true regardless of time and place.  Their answer was: “This, too, shall pass.”  The economists who predict no growth, no jobs, no nothing need to go back to that sentence.  Yes, the economy has been abused by tax cuts, wars fought but not paid for, and a financial free-for-all in the housing market.  But it’s about to come back.  Jobs are on the way.