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Economic News, Data and Analysis

Corporate Profits at Record Highs, While Labor Compensation at 38-year Lows

OMB Watch – Economy and Jobs Watch: Corporate Profits at Record Highs, While Labor Compensation at 38-year Lows

Recent data show a major shift in the balance between corporate
income and labor compensation. As a share of the economy labor
compensation has not been this low in almost 40 years (since 1966), and
after-tax corporate profits are at the highest levels ever recorded by the Bureau of Economic Analysis.

Since it’s peak in 2001, as a share of gross domestic product
(GDP), labor compensation has decreased by about 4 percent (from 67 to
63 percent) and corporate profits have increased by about 4 percent
(from 8 to 12 percent) see chart below. After taxes, corporate
profits reached 9.6 percent of GDP the highest level recorded dating
back to 1947.

(Components are percent of GDP; source: graphic adopted from National Economic Trends, St. Louis Federal reserve.)

Over the past year, the overall economy, as measured by GDP, has
grown consistently at a rate of about 5 percent, and is seen by many to
be a sign that the economy has, at long last, come out of the 2001
recession. The conventional wisdom is that increased overall production
will eventually make its way into the pocketbooks of ordinary
Americans. However, this recovery appears to be different in part
because of the dismal performance of employment in the postrecession
period but also because it appears that a lower proportion of
national income is going towards labor.

An economic recovery is not real unless there is widespread
participation in the economy, and the economic benefits accrue to a
broad base of Americans. The current recovery appears to be failing
that test.

Filed under: Data, Economics, Economy, Policy, Recession

Recession Dating Questions

Some very good questions from a reader.
FYI, the change in the methodology mentioned below, I assume, refers to the apparent de-emphasis of employment and the additional emphasis placed on monthly GDP estimates by Macroeconomic Advisors.
Also FYI, the political question should be raised since the Martin Feldstein, the head of the NBER and a member of the dating committee, was at the Whitehouse, meeting with G. Bush, the day before the committee released the announcement.
Name: Taxed
Email Address:
I, too, heard that news today, but have heard very little opinion as to whether others agree or disagree; especially considering that the NBER has apparently changed their methods of determining the business cycle. Most importantly, I haven’t heard the opinions of other economists on this determination.
So, my question for you is: Do you agree or disagree with the NBER’s assessment and does it concern you that they changed their methodology to make this determination? Also, is there any possibility that there was a political reason, rather than an academic reason, for the change in their methodology?

Filed under: Economics, Economy, Politics, Recession

Behind the Curve

We’ve had three tax cuts in the past three years, all of which were supposed to have stimulated the economy and added jobs.
So what policy do we need now? More stimulus! (or so says Madrickin the NY Times).

Stimulus Should Focus on Jobs

Many people criticized President Bush’s “growth” policies mostly tax cuts on income and dividends weighted toward the well-off for providing too little bang for a buck’s worth of stimulus. This seems ever truer.

Given the disturbing state of the economy, a jobs program is what the nation now needs. It might even be just what the electorate wants to hear.

Filed under: Economy, Fiscal Policy, Policy, Politics, Recession

Unemployment Up to 6.4%

The Bureau of Labor Statistics today released unemployment figures for June. The unemployment rate rose to 6.4% from 6.1% the previous month.
This (to me at least) was a surprisingly large jump.
In addition, employment levels fell by 30,000 – a further indication of the current weakness in the labor market.
Employment Situation, June 2003

Filed under: Data, Economy, Recession

Revising History

It seems that President Bush is running around claiming that he “inherited an economy in recession.” (See below.)
Just to be clear, the NBER declared the beginning of the recession to be in March 2001, AFTER the current administration took charge.
This isn’t to say that Bush somehow caused the initial recession (although it certainly didn’t help that VP Cheney was running around in the country in late 2000 and early 2001 telling everyone how the economy was in bad shape.)
It is also unlikely that the recession was caused by any Clinton policy – the recession was largely a result of decreases in business investment – and the federal government simply didn’t do anything in the late 1990s that would have had a significant impact on the short-run macroeconomic situation.
The important question is not whose fault is the recession, but rather what has been the response of the administration to the economic situation. We have seen 3 major tax cuts – one per year – totaling around $1.75 trillion over ten years (and this is a gross underestimate since the cost assumes that many of the provisions are allowed to sunset) each of which were sold as economic and job stimulus, but which in reality had very little to do with good counter-cyclical fiscal policy, or with the current economic problems.
The result? Unemployment continued to increase and is up to 6.1%, and there have been 2.5 million jobs lost since March 2001. As a result of the revenue reductions from the tax cuts and the weak economy, the federal budget has gone from a record surplus to a record $400 billion deficit.
We are continually told that the Republican Party is a supporter of personal responsibility. The administration should not be playing the blame game when it comes to the economy, and should take responsibility, at the very least, for the ineffectual policy response and the current dismal budget situation.
The original NBER announcement
The latest update

As 2004 Nears, Bush Pins Slump on Clinton (
With the start of his reelection campaign in the past two weeks, President Bush has revived his pastime of blaming his predecessor, Bill Clinton, for the economic recession.
“Two-and-a-half years ago, we inherited an economy in recession,” he told donors at a Bush-Cheney ’04 reception yesterday in Miami. He has raised the same accusation in fundraising appearances since mid-June in Washington, Georgia, New York, Los Angeles and San Francisco.
It’s a good applause line for a crowd of red-meat political supporters. The trouble is it’s a case of what the president has called, in another context, revisionist history. The recession officially began in March of 2001 — two months after Bush was sworn in — according to the universally acknowledged arbiter of such things, the National Bureau of Economic Research. And the president, at other times, has said so himself.
The bad news came on Nov. 26, 2001. The NBER, led by an informal economic adviser to Bush, Martin Feldstein, pronounced that economic activity peaked in March 2001, “a determination that the expansion that began in March 1991 ended in March 2001 and a recession began.”
At the time, Bush accepted the verdict with perfect accuracy. “This week, the official announcement came that our economy has been in recession since March,” he said in his radio address the next weekend. “And unfortunately, to a lot of Americans, that news comes as no surprise. Many have lost jobs or seen their hours cut. Many have seen friends or family laid off. The long economic expansion that started 10 years ago, in 1991, began to slow last year. Many economists warned me when I took office that a recession was beginning, so we took quick action.”
Until the NBER’s official pronouncement, Bush had avoided the “R” word. He spoke earlier in 2001 of an “economic slowdown” as administration officials noted, correctly, that the pace of economic growth began to slow (but not contract) in 2000, under Clinton’s watch. “In terms of how you call it, what the numbers look like, we’ve got statisticians who will be crunching the numbers and let us know exactly where we stand,” Bush said in October 2001. “But we don’t need numbers to tell us people are hurting.”

Feldstein’s NBER, which earlier said it gives “relatively little weight” to the quarterly growth figures from Commerce, is not joining in the revision. Two weeks ago, it issued an updated report sticking by its assessment that the recession began in March 2001.

Filed under: Economics, Economy, Fiscal Policy, Policy, Politics, Recession

NBER Breaks its Silence

The National Bureau of Economic Research’s business cycle dating committee has broken it’s months of silence to say….
…nothing – except “we need more time…”

According to the most recent data, the U.S. economy continues to experience growth in income and output but employment continues to decline. Because of the divergent behavior of various indicators, the NBER’s Business Cycle Dating Committee believes that additional time is needed before interpreting the movements of the economy over the past two years.

Filed under: Economics, Economy, Recession


Is the NBER’s business cycle dating committee* AWOL?
*Note: the dating committee is not an economists’ “love connection,” but rather the group that follows recessions and announces the dates of the beginning and end of recessions.
They normally release a report once a month clarifying their thinking about the recession, and whether it has (or has not) come to an end.
The most recent report is dated April 10, so an update is over-due. Is the dating committee meeting? Are they ready to declare that the recession has already ended? (The likely date would be sometime in February *2002* as the trough.)
Inquiring minds want to know!
Here is the most recent news relase
Also, GDP has been revised up slighty to 1.9%… not recession, but not very good either. U.S. economic growth revised up in Q1
U.S. gross domestic product, the broadest measure of economic output within U.S. borders, grew at a revised 1.9 percent annual rate in the January-March quarter, in line with Wall Street economists’ forecasts and a revision upward from 1.6 percent estimated a month ago. The first-quarter expansion exceeded the slim 1.4 percent rate of growth posted in the fourth quarter of last year, but still reflects a slow crawl back to growth rates needed to generate more jobs.

Filed under: Data, Economics, Economy, Recession

Liquidity Trap

The recent FOMC statement by the Federal Reserve (Fed) included the line that “… the probability of an unwelcome substantial fall in inflation, though minor, exceeds that of a pickup in inflation from its already low level” (emphasis added.)
It occurred to me that this statement might be a little confusing – isn’t inflation supposed to be bad? Why would a fall in inflation be “unwelcome”?
The answer has to do with what economists call a “liquidity trap.” (Note: the full analysis of a liquidity trap is considerably more complicated than below, but this should convey the basic idea.)
Liquidity Trap
The basic argument is that the interest elasticity of money demand increases, and monetary policy becomes less effective, when the nominal interest rate approaches zero.
Ok, here’s the English version.
The way the Fed lowers interest rates is to expand the money supply by buying bonds from the public – in this way money moves from the Fed’s vaults to people’s pockets.
Suppose that the Fed wants to lower interest rates, say because there is a recession. Normally, people have to be enticed to give up their bonds because they pay interest. So, to increase the money supply, the Fed must offer people a higher price for the bonds the public owns – thus lowering the interest rate for new borrowers (all in order to make bonds less attractive for the public to hold.)
In a liquidity trap, however, people are willing to part easily with their bonds, since they pay little or no interest and are hence roughly equivalent to holding cash; and so only a very small change in price is needed to buy the bonds – even if the Fed is buying lots of them. As a result, there will be very little change in interest rates. In the extreme, the Fed may not be able to have any significant impact on interest rates, and hence may not be able to help stimulate the economy.
In short, the economy will be in a liquidity trap if/when the Federal Reserve cannot boost the economy because they have lowered interest rates as much as they can.
The liquidity trap is more than just a theoretical possibility; some have suggested that this may be what happened in Japan in the mid 1990’s (although there are different views on the topic). In any case, they still haven’t fully recovered.
There are, of course, opponents of the idea that a liquidity trap can really be important. An easy fix would seem to be to rapidly expand the money supply to generate inflationary expectations and hence drive the economy easily out of the so-called trap.
The open question is whether the US is in, or near, a liquidity trap. Paul Krugman has some textbook econ 101 (IS/LM AS/AD) analysis of the current economic situation and the possibility of a liquidity trap. He has a more detailed analysis… and with graphs too! See below.
Real Interest Rates
A second problem arises because the Fed can’t lower (nominal) rates below zero (try this thought experiment: how much money would you borrow if interest rates were -10%?). However, the Fed can lower real rates below zero provided there is some inflation.
If there is some inflation, then the “real” rate of interest can be less than zero. Think of the real rate of inflation as what determines the purchasing power of the money you would need to repay on a loan, rather than the numerical value. The nominal rate is simply the interest rate you see reported in the newspaper. So if there is some inflation, the real rate will be less than the nominal rate, since inflation will erode some of the purchasing power of the money you have to repay. It is this real rate of return that businesses and consumers really care about – not the nominal rate.
The relation between real and nominal rates is given by the equation, well approximation, real = nominal – inflation. Now, if the nominal rate is bounded by zero, then we know that the real rate is bounded by the negative of the inflation rate. So, when the inflation rate gets near zero, we have a greater lower bound on the real interest rate.
(Ok, I’ve glossed over the expected component of inflation in the above two paragraphs, but you get the idea.)
In other words, the Fed has less room to maneuver when inflation is exceptionally low. With very low interest rates and very low inflation, the Fed, therefore, will not be able to help get the economy moving again, simply because there is no room left to lower real rates.
For more see…
Elephant [poop] (5/5/03)
Zero is not enough (5/4/03)
Even more about jobs (4/29/03)
Fiscal policy and employment (4/28/03)
For a more detailed treatment in a more complicated intertemporal model see Thinking about the Liquidity Trap.
For a nice overview and ways to escape the trap see Svensson’s Escaping from a Liquidity trap and Deflation: The Foolproof Way and Others

Filed under: Economics, Economy, Fiscal Policy, Monetary Policy, Policy, Recession

FOMC: No change in interest rates

No change in rates, (no surprise), but the Fed indicates that the risk is “weighted towards weakness,” (a bit of a surprise).
It looks like this decision is due to the continued low rate of inflation. In addition, falling oil prices and a weak labor market should put additional downward pressure on prices. The greater risk would thus appear to be deflation, rather than an increase in the inflation rate.

FRB: Press Release — FOMC statement — May 6, 2003
Recent readings on production and employment, though mostly reflecting decisions made before the conclusion of hostilities, have proven disappointing. However, the ebbing of geopolitical tensions has rolled back oil prices, bolstered consumer confidence, and strengthened debt and equity markets. These developments, along with the accommodative stance of monetary policy and ongoing growth in productivity, should foster an improving economic climate over time.
Although the timing and extent of that improvement remain uncertain, the Committee perceives that over the next few quarters the upside and downside risks to the attainment of sustainable growth are roughly equal. In contrast, over the same period, the probability of an unwelcome substantial fall in inflation, though minor, exceeds that of a pickup in inflation from its already low level. The Committee believes that, taken together, the balance of risks to achieving its goals is weighted toward weakness over the foreseeable future.

Filed under: Economics, Economy, Monetary Policy, Policy, Recession

Recession: Two Year Anniversary

This past month (March) marked the two-year anniversary of the recession that began in 2001.
Some observations…
* If the economy were still in recession, April would be the 25th month of the contraction, making it the longest recession in 100 years (save for the great depression); and more than twice the average duration. See Recession dates and durations. The NBER has not yet made a determination as to whether the recession has ended, or, additionally, if a second one has started.
* Despite a stable 5.8% unemployment rate, employment is still very week. A recent data analysis by the Economic Policy Institute shows that the current recession has an unusually large the decline in private sector jobs two years after the recession began. (See graph below…)
* Overall, the recession is/was rather mild as measured by output reductions. GDP has been slow but positive over the past year. Industrial production has improved significantly from its trough, and real manufacturing and wholesale-retail sales has more than surpassed the March 2001 level. (See NBER’s memo.)
* People in the know are suggesting that the first quarter of this year was particularly weak. Industrial production fell by 0.6% in the past two months after a 0.8% gain in January. However, the relatively quick end of the Iraq war is likely to improve consumer and business confidence – and hopefully this will be reflected in increased consumer spending and higher businesses investment.
* One potentially significant drag on the economy is still the continuing fiscal crisis at the state level which, at the very least, is likely to further harm the employment situation.
* Turning points in the macroeconomic situation are notoriously hard to predict, but I think, despite the current weakness, there is a strong possibility that economy may start to improve in the near future. However, I am fully aware that the lovely spring weather might be biasing me in this regard!

(Click for large version)

How Deep Is the Current Recession?: Archive Entry From Brad DeLong’s Webjournal
The Economic Policy Institute has found a measure according to which the current recession is actually the deepest and most severe of post-WWII recessions. The measure? The percentage by which private employment is below its peak level two years after the recession began: “In the two years since the recession began in March 2001, total payrolls have fallen by 2.1 million and private sector payrolls are down by 2.6 million.”
This is, of course, only part of the story: the current recession is very shallow insofar as production is concerned (in large part because of the rapid underlying productivity growth trend), moderate as far as the unemployment rate is concerned (in part because lots of people have dropped out of the labor force during this recession), and deep as far as private-sector employment is concerned.
Which is the “right” measure? Well, it depends on what you are interested in, of course. A balanced picture of the perhaps-still-ongoing recession needs to comprehend all three…

Filed under: Data, Economics, Economy, Recession, State Economy