The Domestic Macroeconomic Outlook: February 28, 2007

It looks like I'm not going to get to give my short talk on the domestic macroeconomic outlook up at Lake Tahoe this weekend:

That's too bad, because such talks quickly grow stale.

One of the major points of my schtick is that the macroeconomic outlook rarely changes suddenly, so that 90% of the time it is perfectly OK to say, "things are like they were, only three months ago." Nevertheless such talks have a very short half life: people like to know how the most recent news affects things, even if the usual answer is "not much"--except, of course, for those turning points where things do change a great deal, and which we usually see clearly only in retrospect.

I was going to hit three points:

The Great Moderation:

• The business cycle is smaller than it used to be
• Fewer recessions in industrial production
  • Largely good luck
  • But are there structural causes--better financial intermediation, et cetera?
  • We don't really know
• Shallower recessions in industrial production
  • The Federal Reserve is doing a much better job of responding to recessions in real time
  • In large part the Federal Reserve has not let itself get wedged into a situation where it feels it can't respond to recession because inflation is still uncomfortably high
  • Major but still low-probability risk: a steep fall in the dollar accompanied by substantial import price passthrough wedges the Federal Reserve
• Industrial production matters less for the economy as a whole
  • It used to be that fluctuations in the harvest were a really big deal for the macroeconomy
  • Someday, somebody will write: "it used to be that fluctuations in industrial production were a really big deal for the macroeconomy"--but not today, not quite yet

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Productivity and Its Contents

• The alarmingly large productivity gains of the early 2000s appear to have been one-off benefits from restructuring
• However, the Silicon Valley-driven productivity speedup of the 1990s is still with us, as strong as ever
  • In the late 1990s the gains went to established high-tech companies and to dot-commers and their VCs
  • Since 2000 the gains have gone to companies that use computers and communications, and as competition sets in to their customers
  • The productivity future looks like the recent past--and you don't have to say "biotech, nanotech" in order to reach that conclusion

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Factor Shares and the Strength of the Labor Market:

• Rising profit shares because the labor market has been weak
• The unemployment rate has been giving bad signals of labor market relative strength
  • Lots of people not in the labor force nevertheless appear to be pretty easy to hire
  • Unless the Federal Reserve allows the unemployment rate to fall further, wage picture looks grim--which means profit picture looks very bright
  • Political implications of still further increases in income inequality
• Any connection between globalization and labor market weakness?
  • Hard to build a sensible model in which there is
  • But that may reflect economists' limited imagination--lots of people out there in the world think they see it happening

Pictures from playing with Economagic: http://www.economagic.com/

Comments

[spencer]

One minor change that might make an interesting point is to compare the employment/population as a percent of trend to the unemployment rate. If you do that you see that the employment population ratio as a percent of trend has barely moved off its bottom while the unemployment rate is back to levels that suggest full employment. It is the biggest divergence in these two series I have seen.

[Matt]

The game is to discover a catastrophic trend not already hedged by financial instruments.

Here is one:

The pie is too high and may collapse.

Globalization requires, temporarily, a top management layer for risk arbitration during the transition. The time is coming soon when we no longer need that extra layer, and the shorter pie will come suddenly. We will have risk arbitration spinning out of control at the top.

[knzn]

"Lots of people not in the labor force nevertheless appear to be pretty easy to hire" This is an unconventional view at this point, and I have a slightly different unconventional view. I agree that the labor market is in some sense "weak", but I don't get the sense that it's easy to hire people. Rather, I think most businesses are not even trying to hire. If hiring were easy, you would think there would be more hiring going on. But most measures of new hires are extremely weak.

[knzn]

Just to clarify, I do think there is a large "reserve army of labor" from the reduced participation rate since 2000, but I don't think it is easy to call up those reserves. For example, there is my friend who joined the Peace Corps after being laid off by Nortel Networks. He reenlisted in July, and he's not going to be easy to hire for a couple of years. Same with people who went to school, had kids, or made substantial lifestyle changes.

[kharris]

Maybe we need to think of lots of little, rather discreet labor markets.

Some have plenty of workers available, but not much demand. Some have vastly more demand than can be met. Hiring managers who want ready-made workers - no training needed, fully experienced already - would be part of the mechanism that keeps these little labor markets discreet.

The JOLTs data show a big gain in openings, while hiring and firing appear to be running along in tandem. Assuming the openings series is not being inflated in some way that I don't understand, openings rising faster than hiring month after month suggests to me that there aren't enough workers qualified to fill the openings, even though there are plenty of workers not qualified. One qualification in these little labor markets would be a reservation wage within the employers upper limit.

[allenmn]

Well now, are you going to talk aobut the recession possibility and scare the naifs? 2.2 percent GDP doesn't exactly inspire much hope of blazing MEW propping retail?

What about the slowdown in commercial coming on the horizon as residential slides?

Your commenters seem to be too tame now brad- i will leave a few to liven things up;-}

[knzn]

My concern about the JOLTS series is that we really don't know what constitutes "a big gain in openings". The data only go back to Dec2000, as the US was going into a recession. Almost certainly, they had already dropped considerably from their peak, but we don't know how much. Whether the experience since the trough in Dec2002 constitutes a substantial gain, or whether it's just a slight bounce, we can't really say without a reference point (say Dec1999) where we know the series would have been strong.