Friday, July 10, 2009

Some Things Get Better, Some Things Get Worse

. Friday, July 10, 2009

Some interesting data came out recently. First, the U.S. trade deficit is declining, mostly because imports have declined faster than exports, but also because exports have fallen at a lower pace than many expected. This is a partial win. Still, unemployment continues to rise and wages earned have continued to decline, once again giving reason to guard against deflation.

Despite that, it looks likely that the economy may be technically out of the recession:

Now that we have the May trade figures, the modal forecast is (i) an economy that was flat in the second quarter relative to the first quarter, (ii) an economy that starts to grow relatively slowly in the third quarter, and (iii) an unemployment rate that keeps rising for another one and a half to two years--like it did in 1992 and 2002--as the old-fashioned business-cycle productivity-employment pattern is broken once again. Bob Hall's NBER committee is likely to proclaim that recovery began sometime in the second quarter, but it won't feel like a recovery to workers (as opposed to asset owners) for quite some time to come.

How is this happening? It's partially because employers are laying off their least productive workers first, and hoarding the top talent. Therefore, measured productivity has jumped:

With labor input falling at a rate of 6% per year in the second quarter, that suggests a productivity growth rate in the economy as a whole of some 6.2%--which is really weird. It used to be the case that businesses hoarded labor in recessions because they did not want their skilled workers to wander off and to have to train new ones....

Now it is really beginning to look as though businesses take recessions as opportunities to greatly slim down their workforces without making the workers they retain too angry and depressed. We saw this in 2002-2003. We saw it before in 1992-1993. The fact that productivity is no longer strongly countercyclical in recessions is good news in the long run--it means that our average long-run rate of productivity growth is higher than we used to think.

So we now face a "jobless recovery" in which the economy technically moves into the black, but job growth lags for a year or two. In exchange we get higher productivity in downturns which can help keep recessions somewhat short. This is a mixed blessing at best, but the outlook is certainly better than it was in January.

In other news, Krugman thinks that all economists that disagree with him are motivated solely by ideology. I guess if you are convinced of your own infallibility then that is the only possible conclusion.


Some Things Get Better, Some Things Get Worse
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