The US Federal Reserve Board holds steady on asset purchases in the face of disappointing job growth as we continue to wait for the pickup in economic growth that remains stubbornly “just around the corner.” Unfortunately, not even the continuation of a highly accommodative monetary policy can overcome the drag inflicted by Congressional brinkmanship over the federal budget and financing the nation’ s debt.
When the Federal Open Market Committee (FOMC) of the Federal Reserve Board met in September, they shocked most economic pundits by deciding to keep the Fed’s rate of asset purchases steady at the $85 billion per month level set exactly a year earlier when they launched the current round of quantitative easing—QE3. They had concluded that the available data did not indicate the “substantial improvement in the outlook for the labor force” that they set as the standard that would let them begin ratcheting down the rate of purchases. Although financial markets reacted to the announcement by pushing stock indices to record or near-record levels, the FOMC analysis was correct: Notwithstanding recent declines in the unemployment rate, US labor market conditions are only improving at a moderate rate. So what will be the trigger that unleashes stronger job growth? One possibility can be found in the sector that triggered the crisis initially— residential construction.
The continuing lackluster recovery
Since the recovery began in June 2009, the US economy has been growing 2.2 percent on average with no emerging pattern of acceleration. In fact, growth over the first half of this year—at an annualized rate of only 1.8 percent—has been even slower than average. Given the severity of the 2007–2009 recession, this rate of growth has not been sufficient to recover the jobs lost during that period. Employment has increased by 6.8 million since the low point reached in early 2010, but the United States still has 1.8 million fewer jobs than it did prior to the downturn (see figure 1).
Figure 1. Total nonfarm employment
Unemployment has been steadily declining, but at 7.3 percent, it is well above pre-recession levels. In addition, several other factors point to a less-than-robust employment situation:
- Although labor force participation has been falling over most of the past 15 years, the pace of decline has been more rapid over the course of this recession and recovery, and at 63.2 percent, it is at levels not seen since the late 1970s. Some of the causes of declining labor force participation, including a growing number of retirees and increasing numbers of young people in college, are not negative, but at least some portion of the decline is due to people dropping out of the labor force because they do not think they can find a job.
- Long-term unemployment remains elevated. Those unemployed for 27 weeks or longer make up 38 percent of the total 11.3 million people who are currently unemployed—a high proportion by historical standards. The longer people are unemployed, the more difficult it is to find employment and the less likely it is to find employment with earnings comparable to their prior earnings.
- The broadest measure of unemployment—total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons as a percent of the civilian labor force, plus all persons marginally attached to the labor force—remains a very high 14.0 percent.
- Youth unemployment—young people between the ages of 16 and 19 who are looking for a job—is 22.7 percent.
Since the recovery began in June 2009, the US economy has been growing 2.2 percent on average with no emerging pattern of acceleration.
So where are the jobs being created?
Figure 2 shows a comparison of employment levels at the overall employment peak of January 2008 with the most recent estimates from August 2013. Health care is the most anomalous of the sectors as it is the only major sector that did not lose jobs during the recession. Its employment level is currently 1.7 million or 11.1 percent above its January 2008 level. Several sectors have overcome the losses they experienced during the recession and have passed their prerecession employment peaks. These include accommodation and food service (640,000 or 5.5 percent above the prior peak), private education services (340,000 or 13.3 percent), and professional and business services (571,000 or 3.4 percent). These sectors should continue to be drivers of employment growth in the economy as they continue on a trajectory consistent with their prerecession paths.
Other sectors remain substantially below their prior peaks, including manufacturing (−1.8 million or −12.8 percent) and construction (−1.7 million or −22.4 percent). Given the large size of these job losses, it is worth considering the potential of these sectors to contribute to employment growth going forward.
Manufacturing: Manufacturing employment peaked at 19.5 million in 1979, and during the 1980s and 1990s, it fluctuated around the 17 million mark. Leading into the 2001 recession, manufacturing employment began a deep slide that moderated rather than reversed in the recovery that followed. During the most recent recession, the decline in manufacturing employment was even steeper, and 12 million jobs were lost during the recession and its immediate aftermath. Since the February 2010 low point, the manufacturing sector has recovered 500,000 jobs. During the first eight months of 2013, manufacturing employment has remained flat (see figure 3).
When manufacturing employment first started rising in 2010, it was hailed by some observers as the beginning of a renaissance in US manufacturing. Indeed, manufacturing output has staged a remarkable recovery—after falling by just over 20 percent during the recession, output is now only 4 percent below its prerecession peak. However, as mentioned earlier, even with the recent recovery, manufacturing employment remains 12.8 percent below its prerecession level as productivity increases in the manufacturing sector are substantially higher than for the economy as a whole.
The recovery in autos and auto parts, a subset of manufacturing, is noteworthy, given the taxpayer investment and government-sponsored reorganization that turned around two of the big three US automakers. In 2011 and 2012, all three companies made profits for the first time since 2004. Even though employment in auto and auto parts accounts for less than 7 percent of manufacturing employment, this subsector accounted for 31 percent of the 503,000 manufacturing jobs created since manufacturing employment’s low point in February 2010.
As the manufacturing sector continues to recover and expand, it should be able to continue generating jobs; falling energy prices and a large consumer market make the US an attractive place to manufacture. However, high productivity will limit the size of employment growth in this sector.
Construction: The collapse of the housing market led the way into the 2007–2009 recession, and employment in this component of the construction sector peaked well in advance of the start of the recession in April of 2006 at almost 3.5 million workers (see figure 4). The low point for this series came in January 2011; a year and a half after the official end of the recession, employment in residential construction shed 1.5 million jobs or 42 percent of its prerecession peak. Employment recovery for all the construction components has been slow.
Figure 4. Construction employment type
Data on residential construction spending is following the same pattern of slow recovery, but this is a trend that should reverse soon and bring more construction jobs with it. Consider:
- Existing-home sales in August reached their highest level in 6.5 years, while the median price shows nine consecutive months of double-digit, year over year increases.1
- Inventories of houses for sale are very low—just 4.6 months’ worth of existing homes were available for sale in August. 2
- The population has kept growing, but the pace of household formation has lagged, indicating substantial pent-up demand for housing.
- Household net worth has passed its prerecession peak.
- Even though mortgage rates have increased (in part, due to the Fed signaling that the end of QE3 was closer than it now appears to be), they are still very low by historical standards.
- Although job creation has been slow, employment is still increasing—2.2 million jobs have been created in the last 12 months alone.
Since construction is the first step in a process that generates demand for many types of goods and services (appliances, furnishing, lawn care, etc.), a pickup in construction employment could quickly build employment momentum. We have worked through the housing overhang, reducing excess inventory from the system. When we finally see acceleration in construction employment, it should be viewed as the signal that the acceleration of the US growth rate that has been “just around the corner” for too long has finally arrived.
And now the bad news
We continue to expect stronger growth in 2014 than we will have in 2013—not an especially high bar given the damage that will be reflected in the fourth quarter from the 16-day government shutdown and the loss of consumer and business confidence from the threat of default. However, we cannot be completely sanguine about US growth prospects, particularly for the early part of next year, since the current budget agreement only funds the government through January 15 and extends the debt ceiling until February 7. Although we are hopeful that our elected leaders will act responsibily and put the US economy on a sustainable growth path rather than precipitating another crisis, recent events have given us reason to be skeptical.
Comprehensive revision to GDP
With the initial estimate of second quarter 2013 GDP in July, the Bureau of Economic Analysis (BEA) of the US Department of Commerce incorporated major changes in how business investment is reported and the way pensions are accounted for in the National Income and Product Accounts. These changes were made as part of a comprehensive revision that generally occurs every five years and are consistent with the 2008 update to the international guidelines for national economic accounts. In addition, the revisions incorporated the results of the 2007 economic census and the benchmark input-output accounts as well as other data improvements (including improved measures of banking services). The entire time span dating back to 1929 was open for revisions.
This benchmark revision includes major conceptual changes:
- Capitalization of research and development
- Capitalization of entertainment, literary, and artistic originals
- Change to accrual treatment of defined benefit pension plans
- Accrual accounting better reflects the retirement benefits an employee earns and thereby improves measures of compensation by more closely aligning the accrual of retirement benefits with the employee’s work. Accrual accounting is also consistent with business accounting standards.
- Under the prior current cash accounting approach, sporadic cash contributions made by employers to the pension funds result in volatility in the measure of compensation that did not accurately reflect the relatively smooth manner in which benefits are earned by the employee.
As a result of the changes to capitalize R&D and artistic efforts, BEA now publishes three categories of business fixed investment:
- Business fixed investment in structures
- Equipment (no longer including software)
- Intellectual property products
- Software (currently included with equipment)
- Research and development
- Entertainment, literary, and artistic originals
In real terms, business investment has almost returned to its prerecession peak, with equipment making up 46 percent of the total, followed by intellectual property at 32 percent and structures at 22 percent (see figure 5).
The results from the revision are shown in figure 6. The largest change in the recent history was an upward revision in 2012, where GDP growth is now estimated to have been 2.8 percent rather than 2.2 percent. The increase in the 2012 annual growth rate came from a significantly stronger Q1. The other quarters in 2012 were revised downward.
- National Association of Realtors, press release, September 19, 2013.