Two views of the anemic US economy. For starters, you have the Labor Department’s employment-cost index, a broad measure of workers’ wages and benefits. It rose just 0.2% in the second quarter from the first quarter. That marked the smallest quarterly gain since record keeping began in 1982. On a year-over-year basis, the ECI increased 2.0% in 2Q, “the softest gain in about a year,” notes JPMorgan. And the private sector was particularly weak, not rising at all. Gains could only found in government work.
Moreover, real GDP growth in the first half rose at a mere 1.5% annual pace. (Also, the economy’s annual growth rate over the past two years was downgraded to 2% from 2.3%.) The economy would have to experience a pretty powerful surge to hit 3% growth for the year, something it has not done since 2015. Yup, a Lost Decade — at least as measured by not hitting 3% growth, about the postwar average. Bloomberg: “The economy would have to grow at a 4.75-percent rate during the final two quarters of 2015 to reach 3 percent for the year. A recent Bloomberg survey of 70 economists found that the median forecast for the remainder of the year was for GDP of 3 percent.”
Just another sign that 2015 is not shaping up to be the Year of Acceleration, as many economist anctipated. Same-old, same-old stagnation. Bloomberg reporter Peter Gosselin offers three reasons: First, recessions driven by financial crisis and housing collapse produce weak recoveries. New home sales are still only at a third of 2005’s level. Second, the economy is less efficient as evidenced by lackluster productivity growth. “Labor Department figures show that productivity growth peaked in 2002, well before the economy slowed and contracted.” Third, there’s the decline in entrepreneurship, which may be affecting productivity growth. Census data show “that among U.S. firms, the share that are young — less than a year old and with at least one employee — has fallen from 11 percent in the early 1990s to 10 percent early in the last decade to 8 percent early in this decade. Meanwhile, the fraction of firms that are 16-years-old or more has gone from 23 percent to 29 percent to 35 percent.”
But, but, but … what if there is more this story, as I explore in my new The Week column:
Think about it: Month after month, the economy is generating about a quarter million net new jobs. The unemployment rate is close to 5 percent. Corporate profit margins are at record highs, with stock values not far behind. And Silicon Valley is on fire. A new TechCrunch analysis finds that the number of unicorns — technology startups valued at over $1 billion — has more than doubled since 2013. Europe would love to have a “stagnant” economy like America’s. …
It’s a puzzle for which Goldman Sachs has a simple answer: We are measuring productivity wrong, and therefore we are measuring GDP wrong. A metric devised for America’s 1930s “steel-and-wheat” economy, in the words of economic historian Joel Mokyr, doesn’t work so well for a rapidly growing digital economy. In a recent report, Goldman economist Jan Hatzius and Kris Dawsey note that prices of tech hardware — adjusted for quality improvements — have fallen a lot faster than those for software. This suggests software isn’t improving much. But Goldman thinks this gap is a “statistical mirage” reflecting the “amorphous” nature of software improvements. …
As the Goldman economists reckon, then, U.S. inflation is lower than we think due to sharply falling, “quality adjusted” IT hardware and software prices — and thus real economic growth and productivity are higher. GDP growth might actually be close to 3 percent right now, which would be more in sync with what’s happening in labor markets and the tech sector. Oh, and it also means real incomes are growing faster than we think, which is why the economists are “skeptical of confident pronouncements” that American living standards aren’t improving as fast as they used to. By the way, new analysis by the Peterson Institute suggests worker incomes have pretty much been keeping up with productivity gains. So perhaps more good news for the 99 percent.
Goldman could be wrong, of course. It is a debate I have been blogging about (see below). And either way, we hardly have policy that is optimal for innovation, productivity, and growth. To make sure we avoid the Great Stagnation, we need the Great Optimization.
Is America really suffering a ‘great stagnation’? Why Goldman Sachs is skeptical
Why JPMorgan says the US economy is stuck in ‘the slow lane’
Goldman Sachs says the US economy could be growing a lot faster than GDP stats say. Here’s why
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