Show us the money

Why conservative economic reporting is dangerous and wrong

August 6, 2005

 

The economy is growing steadily—can’t you tell? Judging by recent surveys, most Americans do not believe the US economy is getting better. But the numbers don’t lie—or do they? They certainly do conceal what forces are truly pushing the US economy forward…

MYTH: The US economy is growing at record rates

Over the past two years, the U.S. economy has experienced sizable gains in employment on top of the productivity explosion. Specifically, the U.S. economy has generated a net gain of 3.7 million jobs in non farm payrolls since June 2003…

To be sure, not everything about the U.S. economy is good. As we have noted in the past, the U.S. economy continues to face several structural imbalances, including a budget deficit far too large for this stage of the business cycle; a personal savings rate that is much too low; and a record trade deficit, which is growing rather than declining, notwithstanding last quarter's welcome increase in exports…

Despite the structural imbalances that afflict the U.S. economy, its performance remains the envy of the developed world. Compared to the 4.1 percent average annual growth rate achieved in the United States over the past two years, the euro-zone economies have grown at less than 2 percent per year.

--Editorial, “The US Economic Picture,” Washington Times, 7/31/05

The federal government's strong economic report on second-quarter GDP growth is proof positive the Bush tax-rate reductions continue to fuel a robust economic expansion…

According to the BEA [Bureau of Economic Analysis], private businesses reduced their inventories, but there is no indication that this inventory draw-down resulted from a lack of confidence by businesses that is leading them to reduce production. Indeed, the best indicator of business confidence, business investment in plant and equipment, rose at an annual pace of 9 percent last quarter. The bottom line is that even while businesses drew down their inventories, output accelerated at a well-above-average annual rate. Depleted inventories will have to be rebuilt in the near future, and with business confidence high, that is a harbinger of healthy growth ahead.

--Jack Kemp, “Will Congress Undermine the Bush Economic Expansion?” Town Hall, 8/1/05

REALITY

Jack Kemp has been writing the same article over and over again since the halcyon days of the 1980s. Less government, tax cuts for the wealthy, and pie in the sky. But we digress.

Are we going to debate the accuracy of the BEA's economic statistics presented above? No. We are not here to quantify the numbers, but to qualify them. And qualify them we will….Before getting into the meat of our argument, it is interesting to note that not all indicators are showing a promise of long-term financial growth for the United States. The TD Bank Financial Group recently wrote:

Given the U.S. yield curve’s almost flawless record of predicting coming recessions, the continued flattening of the slope of the Treasury curve (measured as the difference between the 10-year rate and the three-month rate) has raised some concerns about a decisive weakening in U.S. economic growth, if not a recession, in the not-too-distant future. Indeed, historically the slope of the Treasury yield curve has turned negative, at least briefly, two to six quarters before every U.S. recession since 1964. It has given only one false signal, in 1966, when an economic slowdown—but not an official recession—followed the inversion of the yield curve.

While the TD Bank Financial Group’s article went on to question the legitimacy of anticipating an impending recession for the US economy based on the very small and recent flattening of the yield curve, this potential trend cannot be ignored.

Now on to conservative economic debunking. First, let’s consider what is actually driving the economic growth. If economic growth was growing as a result of a more traditional source, such as an expansion of manufacturing and productivity, this economic news would be easier to accept at face-value. But this is not the case. The hot housing market continues to drive a large portion of the United States’ relatively high economic growth. Housing prices continue to increase and people continue to refinance their mortgages in order to get capital to invest in their speculative real estate. A report put out by the US Embassy in London substantiated this fact, stating that:

it appears that a substantial part of the acceleration in turnover reflects the purchase of second homes -- either for investment or vacation purposes. Transactions in second homes, of course, are not restrained by the same forces that restrict the purchases or sales of primary residences -- an individual can sell without having to move. This suggests that speculative activity may have had a greater role in generating the recent price increases than it has customarily had in the past.

Unfortunately, many Americans are committing to interest-only variable rate loans now, in order to give themselves more purchasing power. However these mortgages will be subject to higher interest rates when they lock in their rates start paying down their principal in about 5 years. Of course, interest rates will be higher in 5 years… what will happen to these over-extended people then?

Getting back to the money, one oft-cited number, which is also repeated above, is that the number of jobs added to the economy is increasing. I should hope so. Need we remind anyone that W was the first president since Hoover to see the job market shrink? Not since the beginning of the Great Depression had an economy lost more jobs than it gained from the beginning of a presidential term to the end. This means W. had some catching up to do. Aside from the aggregate employment numbers, a very important question to ask is what kind of jobs have been added to the economy? Good paying middle class jobs? McJobs? The Bureau of Labor Statistics’ Economic Situation Survey report for May 2005 indicates that most of the new jobs come in the service sector, with the goods-producing sector (i.e. manufacturing and construction) showing a net loss. This report also shows that while jobs have been added and that unemployment has decreased, there is still a significant portion of the potential labor force who have dropped out of the labor force and are therefore not counted in the unemployment figures. Comparing 2001 to 2005, one interesting statistic emerges—the number of people who are not in the labor force has grown more than 10% from 2001, when W. took office, to 2005. What does this tell us? There are 10% more people sitting at home after giving up on finding a job. In a July 2005 article in The New York Times, Paul Krugman substantiated this fact, stating that:

“Economists who argue that there's something wrong with the unemployment numbers are buzzing about a new study by Katharine Bradbury, an economist at the Federal Reserve Bank of Boston, which suggests that millions of Americans who should be in the labor force aren't. "The addition of these hypothetical participants," she writes, "would raise the unemployment rate by one to three-plus percentage points." Some background: the unemployment rate is only one of several numbers economists use to assess the jobs picture. When the economy is generating an abundance of jobs, economists expect to see strong growth in the payrolls reported by employers and in the number of people who say they have jobs, together with a rise in the length of the average workweek. They also expect to see wage gains well in excess of inflation, as employers compete to attract workers. In fact, we see none of these things. As Berkeley's J. Bradford DeLong writes on his influential economics blog, "We have four of five indicators telling us that the state of the job market is not that good and only one - the unemployment rate - reading green."”

Combine of this with the problems that the columnists cited above, including the US’ huge, record budget deficits, the US’ growing trade deficit, and the overall debt level of the country (currently clocking in at about $7.8 trillion and always increasing) and it becomes clear that the US has a problem. The economy may be growing, but not in a good, sustainable way that benefits the country as a whole. And should that really be the point?