Let’s go back in time by 2 months to August: stock markets were reeling and fears of a double dip recession were being increasingly espoused (at least according to Google’s recollection) and a measure of consumer sentiment plunged. However, a funny thing happened to those naysayers’ predictions: the economy continued to grow, clearly not strongly enough, but it continued to grow. Consumers increased their spending, exports remained at very high levels, and factory production grew apace.
Looking at the third quarter in its entirety, today the Bureau of Economic Analysis reported that real GDP grew 2.5 percent at an annual rate in the third quarter, close to expectations and an increase from the small 1.3-percent gain in the second quarter. The strengthening was fairly broad based and reflected contributions from consumer spending, non-residential structures, business spending on equipment and software, exports, and federal government spending.
Wait a minute: the economy picked up steam, but didn’t the job market slow down? Yes; from the second quarter to the third quarter of this year, private payrolls only added 230,000 jobs, as compared to a gain of 466,000 from the first quarter to the second. How can this be? Well, it turns out this result is not unusual. As I have discussed in a previous blog and as shown in the figure below, the relationship between private-sector job growth and GDP growth on a quarterly basis has been surprisingly weak over the course of the first three years of the past three economic recoveries (and “surprisingly weak” is an understatement as the correlation between the two series is close to 0).
Why the weak relationship between GDP and jobs? Several reasons, the primary one being simply that quarterly changes in employment and GDP frequently vacillate, so looking at longer-term averages is generally more meaningful. Second, firms adjust the number of hours their employees work in addition to simply adjusting their headcounts. A third reason is that the pace of productivity growth, which can affect hiring decisions (more productivity means firms can produce more with fewer workers) can also vary greatly from quarter to quarter; it’s one reason why people who study productivity don’t place too much emphasis on quarterly fluctuations.
The proposed American Jobs Act is designed to provide a short-term boost to job growth. As Acting Deputy Secretary Rebecca Blank has so cogently noted, “It attacks every part of our jobs problem. First, it would help firms that are reluctant to hire by cutting taxes on businesses, especially small businesses. Second, the president’s plan would allow localities to avoid laying off teachers, firefighters and cops by providing them aid, while also helping put construction workers back on the job by funding much-needed roads, rail and airport projects that will make America more competitive. Third, the president’s plan would help put the long-term unemployed back to work by making the most innovative reforms to unemployment insurance in 40 years. And finally, the American Jobs Act would give more businesses confidence that there will be customers for their products and services by putting more money in the pockets of American workers.”
~Mark Doms, Chief Economist, U.S. Department of Commerce
October 27, 2011
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