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
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
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/
