The economy is improving, but very slowly. There are reasons for optimism in 2014 as things are picking up, but this is nothing like a typical postwar “recovery”.
News about the the economy has been mostly positive lately. The official Bureau of Labor Statistics jobs report showed an impressive gain of 288,000 in April, an annual rate of 3.4 million if it were to continue. The headline unemployment rate fell to 6.3%, and the more comprehensive U6 measure of unemployment fell to 12.3%, its lowest level since 2008. But this hasn’t boosted consumer confidence all that much — though its still higher than this time last year. Why are people so slow to respond to the good news?
The short answer is that it’s been a long time coming and it’s completely understandable that the mood of the nation is less than enthusiastic. The most comprehensive measure of unemployment, U6, remains at 12.3% or one working in eight, counting those who have given up looking for work or are not working as many hours as they want.
But there are reasons for optimism as the slow, steady progress continues.
The Focus on Jobs
Federal Reserve Board Chair Janet Yellen states very clearly the challenges the country faces even as jobs are being created. “The past six years have been difficult for many Americans, but the hardships faced by some have shattered lives and families,” she said in a speech to a Community Reinvestment Conference in Chicago on March 31.
“Too many people know firsthand how devastating it is to lose a job at which you had succeeded and be unable to find another; to run through your savings and even lose your home, as months and sometimes years pass trying to find work.”
While the Federal Reserve has made its focus on jobs as plain as possible, it will take more than a few months of good news to turn around the devastation that she notes. A web tool by the Federal Reserve of Minneapolis allows a comparison between this “recovery” period, after the official recession of 2008, in the net percentage gain in jobs versus every other recovery since 1948. The only one that was slower to regain jobs was the previous official recession of 2001, which ran at least 3 months behind this one.
The pain for American workers has been felt for a long time and has done lasting damage. According to a study by David Blanchflower of Dartmouth and Adam Posen, recently of the Bank of England, the slow recovery and people abandoning the search for a job is the main reason that workers wages are barely keeping up with inflation. “Our results clearly demonstrate that a higher inactivity rate is linked to downward pressure on wages in the US, and that effect is increasing as inactivity rises,” they conclude.
But what they see coming is an improvement in the labor force participation rate (LFPR), or the percentage of potential workers that will find jobs. “Our findings therefore argue against the growing sense of pessimism that the post-2007 decline in LFPR is largely irreversible.”
As hard as the last few years have been, there is reason for hope.
Optimism comes largely in the form of the recent gains in employment. The total jobs lost from 2008-2010 were finally regained in March, even before the solid increase in work reported in April. “As the speed of improvement in the labor market continues, all the things (Federal Reserve Board Chair Yellen is) looking at are going to get better,” said Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC. “Economic conditions continue to improve.”
The case for optimism has to be built on continuing gains in employment through the spring and summer and that is the most important news item to watch for in coming months.
Where Will The Jobs Come From?
In order to create jobs, companies have to be thriving and looking to expand. There is certainly no doubt that corporate profits are at record levels by any measure, as shown in this chart from Provided by the Federal Reserve of St Louis:
Corporate profits typically rise six months to a year before there is a substantial increase in hiring. But, as shown, profits have been increasing rapidly for three years without a substantial increase in jobs.
“Corporations have more market power than workers have and have kept wage growth to subdued levels,” said Dean Maki, an economist at Barclays. “That’s left more for corporate profits.”
Many reasons can be cited for the lack of new jobs, but it at least part of it is a lack of faith that the profits are going to continue. “Corporations have been extremely cautious in their spending in this recovery,” concludes Maki.
The most recent increase in jobs may be the first sign that a stronger wave of hiring is about to start. It’s difficult to separate the two forces that drive corporate decision making, greed and fear, when they both point to being cautious about hiring. That may be finally changing.
The case for optimism includes more competitive and social pressure on corporations to turn the profits they have been banking into jobs.
While there may not seem to be many reasons to be confident in this slow recovery, confidence itself is rebounding, if slowly, to levels not seen before the most recent downturn. The Conference Board index of consumer confidence hit a six year high in March before pulling back slightly in April within the margin of error. An alternative measure created by Reuters showed another increase in April.
“Signs of spring might be evident and might be getting people a little more optimistic that the future is going to be better,” said Joe LaVorgna, chief U.S. economist at Deutsche Bank Securities. “(As) these weather effects dissipate and we get payback, you’ll see confidence improve even more.”
While there may be money flowing into corporate profits part of what might be holding them back is the belief that their business isn’t worth investing in until there is a strong rebound in consumer spending. That can’t happen until there are more jobs to go around.
It comes down to confidence that things are improving, meaning that the case for optimism is ultimately based on optimism itself. It’s the flipside of FDR’s famous pronouncement in the depths of the last depression, “The only thing we have to fear is fear itself.”
The case for optimism ultimately relies on consumer confidence. That has to increase in 2014 if there is going to be any progress.
Is 2014 the year that the economy finally shakes off the hard times that caused so much destruction over the last six years? There is reason to believe that it can and will, and there are specific pieces of economic data that are the most important in this turnaround. These are the things to watch as the year progresses.