There was nothing “solid” about the employment report. It´s the same old same!

Bill McBride at Calculated Risk shows an extended version of this chart:

Employ Report_March14_0

And writes:

This shows the depth of the recent employment recession – worse than any other post-war recession – and the relatively slow recovery due to the lingering effects of the housing bust and financial crisis.

The “housing bust and financial crisis” has become the ‘snake-oil’ of this recession in that it is used to explain both its depth and the (extremely) slow recovery.

But Bill says more:

This was a solid(!) employment report, and including revisions, in line with expectations.

Let´s narrow our focus to the last four cycles (1982, 1990, 2001 and 2007) and consider the 25 quarters from the start of the respective recessions.

The panel below gives some hints about what´s really holding back the recovery in the present cycle.

Employ Report_March14

First look at the ordering of the rise in nominal spending (NGDP). It´s quite a good “fit”. Left to be explained is the identical rise in NGDP in the 1990 and 2001 cycles associated with very different employment gains on the two occasions. An explanation can be gleaned from the stellar behavior of productivity in the 2001 cycle.

From the PCE-Core chart it appears inflation is an “animal at risk of extinction” and despite recent worries, nominal wages have been rising much less rapidly than in the previous cycles.

Bottom Line: It seems the Fed wants to wait for inflation to be “dead in the water” (a flat price line) before it considers actions that will speed spending and increase employment.

8 thoughts on “There was nothing “solid” about the employment report. It´s the same old same!

  1. I am surprised that Marcus Nunes would make such an elementary error.

    Marcus Nunes writes:
    Bottom Line: It seems the Fed wants to wait for inflation to be “dead in the water” (a flat price line) before it considers actions that will speed spending and increase employment.
    –30–

    You know, obviously Marcus Nunes has taken his eye of the ball, or has lost his ability to objectively view the world.

    Here is the corrected version:

    Bottom Line: It seems the Fed wants to wait for deflation to be gathering momentum (a declining price line) before it considers actions that will slow the slide in falling labor participation rates.

    😉

    –30–

    Somewhat seriously, a reader Travis points out that it appears for now that even the modest improvement in labor markets are drawing people off the sidelines and into the labor market…meaning the ever-feared bogeyman inflation is deader than ever…

  2. Cross posted:

    Travis, Marcus, Scott…

    Those charts are great, I mean nearly mind meld break thru bc they get to the VERY THING I keep talking about.

    DIGITAL DEFLATION is not being measured correctly.

    Look at the productivity chart:

    https://thefaintofheart.wordpress.com/2014/04/04/there-was-nothing-solid-about-the-employment-report-its-the-same-old-same/

    According to it, the productivity gains of 2001 are best by far, then 1982, then 2007 and 1990.

    Marcus even points to 2001′s massive effect on NGDP:

    “Left to be explained is the identical rise in NGDP in the 1990 and 2001 cycles associated with very different employment gains on the two occasions. An explanation can be gleaned from the stellar behavior of productivity in the 2001 cycle.”

    Look, 2007 IS MASSIVELY MORE PRODUCTIVE THAN 2001.

    It just is. I can do with 2 coders what I could do 20 back then. The smart phone has done exponentially more than the computer for productivity. AirBnB, Uber, Drones, not Jet Fighters, the list is forever. The joke amongst guys who’ve been here since day one online, is that all the ideas we had in 1999, are now all billion dollar plays proving we were right back then, but the tech couldn’t do all the stuff we dreamed up when we needed 20 coders instead of 2.

    This is the point: SOMEONE IS LYING or SOMONE IS TOO DUMB to be allowed to measure productivity gains.

    If that Purple line (2007) in Productivity was correctly drawn it would be way above the Green line of 2001, it would put 2001 to shame.

    And if my story is correct:

    We have even more stellar UNMEASURED productivity which gives us the super negative effect on employment.

    And my question is, in light of this Scott, HOW CAN WE BE SURE, that if we pushed the NGDP higher (via inflation), that it wouldn’t have brought our now correctly drawn awesome productivity line down?

  3. Quick intuitive answer to Morgan: when our factories run at 95% capacity, productivity growth should be substantially faster than when our factories run at 50% capacity.

  4. Longer response (also posted at themoneyillusion.com):

    Morgan Warstler,

    This is a fascinating topic! I like to think about it in terms of a factory. Right now, we have huge excess capacity. Therefore, there is a strong positive relationship between NGDP growth and productivity growth.

    There are huge economies of scale. If demand increases and factory capacity utilization increases from 80% to 95%, then factory owners achieve a far higher return on their fixed investment (a sunk cost).

    That’s the explanation for this graph:

    http://www.motherjones.com/kevin-drum/2011/02/why-investors-want-higher-inflation

    Here’s some more great stuff on technology and excess capacity:

    http://modeledbehavior.com/2010/09/07/rome-is-burning

    http://slate.me/1sj4K1V

    https://thefaintofheart.wordpress.com/2013/04/21/are-technology-shocks-contractionary-miles-kimballs-conjecture

  5. Marcus created a key graph here:

    Beginning in 1996, U.S. productivity started surging thanks to new technology. From 1996 to 2000, real growth exploded to an average of 4.4%. As real growth accelerated, the Fed should have reduced inflation to stop NGDP growth from overheating. But they were too slow to act and NGDP stayed well above the trend line for several years.

    Eventually, the Fed realized they had been asleep at the wheel and they aggressively tightened monetary policy in early 2000. Unfortunately, they overdid it. They didn’t get NGDP to return to the trend line. Instead, it fell way, way below the trend line. As a result, we had a recession and high unemployment during most of GWB’s first term.

    A couple things to note: first, in the graph above, notice that the positive NGDP gap from 1996 to 2000 is way smaller than the negative NGDP gap from 2000 to 2006. Clearly, the Fed really hated high NGDP growth (and thus inflation)!

    Second, central banks overreact like this all the time, resulting in more unemployment than is necessary. Which leads many people to the (understandable) conclusion that “new technology means fewer jobs.”

    But it doesn’t have to be that way. If the Fed would just keep NGDP growth more stable, then the Luddites (discussed here: http://slate.me/1sj4K1V) wouldn’t be correct anymore.

    • Travis, it´s worse. Between 1996 and 2000, inflation (PCE-Core) was mostly falling and anyway below the implicit 2% target. This continued all the way to 2003.It was the high (temporary) growth due to the productivity shock that put the fear of inflation in the minds of the inteligentsia!

      • This topic is a fascinating one and technology enthusiasts should think hard about it.

        I thought Yglesias made a great point: “Central Bank Incompetence Makes Luddites Correct” http://slate.me/1sj4K1V

        Inflation targeting doesn’t handle technology shocks or oil shocks well.

        When there’s a technology boom (6% real growth), then 2% inflation targeting results in 8% NGDP growth and an overheated economy.

        That’s the flip side of what happened in 2008. According to the perverse reasoning of 2% inflation targeting, if oil shortages create inflationary pressure of, say, 4%, then the Fed must tighten and reduce aggregate demand in order to bring inflation back down. Millions of people have to lose their jobs due to the oil shortage, in other words.

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