The Longhorn provides a nice analytical ‘instrument’

The employment report, given the quantity thresholds is followed closely. Scott Sumner, for example, asks:

Given the recent strong numbers for jobs and GDP, where are we today in terms of the business cycle?

And follows up with somewhat upbeat comments. An example:

4.  The 3rd quarter GDP number was overstated, but the actual RGDP growth according to the Philly Fed is still running about 2.5% in 2013, above 2012 levels.  Ditto for employment. Growth is picking up.  The recent increase in growth was picked up by the markets faster than by the statisticians.  That’s one reason stocks have been strong, and its why 10 year yields remained 100 basis points above late 2012 levels, despite the Fed’s decision not to taper. Taper fears did raise rates slightly, but much less than people assumed at the time.  Interest rates are not always “the Fed.”  That’s really hard for many people to see, but important.  Indonesia should blame American growth, not the Fed.

5.  The “demand-side” view of the Great Recession looks better and better each month, as unemployment steadily falls.  We have steady 4% NGDP growth, and just over 2% RGDP growth.  Nominal hourly wages keep rising at about 2% and hence hours worked keeps rising as well.  The musical chairs model continues to explain the recession best.  The Keynesian model failed big time in 2013 when the fiscal austerity had no effect, and of course all our conservative competitors fell by the wayside much earlier.

My view is less sanguine. I cannot forget the levels aspect of the problem. True that the growth rate of the economy, as measured by the more stable Philly Fed measure of RGDP – RGDP plus – is keeping close to an average of 2.5% annualized since early 2010, exactly the average observed in 2003-07 as the chart indicates.

Longhorn Analytics_1

What is ‘missing’ is the ‘hole’ (the long face of the Longhorn). When the economy dropped into it, the Level was pulled down. By just growing what it was growing before the ‘accident’, the ‘hole’ is not being filled!

This comes out very clearly in the chart below, which shows the quarterly employment change and RGDP year on year growth. For the ‘hole’ to be filled the Longhorn would have to ‘tilt its head’ so that the more recent years showed higher growth.

Longhorn Analytics_2

The final chart is the best indicator of the size of the ‘hole’ – the distance to the trend level. It might be impossible to get back to the original trend, but the ‘choice space’ is quite wide, and we certainly could do much better.

Longhorn Analytics_3

PS This article provides a good analysis of the labor market. Just a short, but telling, quote:

Why, then, are the long-term unemployed finding it so hard to get a job? Simply put, the labor market has yet to heal. Aggregate demand is still weak.

One thought on “The Longhorn provides a nice analytical ‘instrument’

  1. The Fed is not asphyxiating the economy Bank of Japan-stye 1992-2012, but the noose has the economy’s face blue. To what end? Inflation at 1 percent and falling….

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