June 20, 2004
Statistics are Not Reality
The new economic story among the establishment is that the stupid masses don't recognize that economic stats are telling them they should be happy. And the regular folks refuse to get properly happy.
Take this NY Times piece, The Slump Has Ended But Not the Gloom: it reiterates the establishment talking points - jobs are increasing, growth has accellerated, so why aren't people buying it.
The author at first tries to write it off as people overreacting to high gas and milk prices, but near the end he touches on a core problem-- the jobs being created don't pay much.
Which is a taste of the real answer, which is that statistics are always, always proxy for something else. A GDP growth number counts something, which we think is a proxy for more stuff being produced in the economy, which in turn we think is a proxy for higher living standards for the average American. As I've argued in posts (See Is Growth Real? to the right), there are serious doubts about whether the stats reflect even more stuff being produced.
But it's the second question-- does a higher GDP number lead to better living for average Americans -- that we should question, since this "recovery" is startling unique in how its benefits are going overwhelmingly to the richest Americans. Take this Economist story (full story in extended post) that does a somewhat better job at identifying why folks aren't buying this great "recovery":
But it is also true that for many Americans the economy does not seem so wonderful. The fruits of this recovery, thus far, have been more evident in firms' profits than in workers' wages. As a share of GDP, wages are at their lowest level in decades. . . .According to the latest employment report, hourly wages for non-supervisory workers rose by only 2.2% in the year to May, compared with consumer-price inflation of 2.3% in the year to April.The Econonomic Policy Institute has compared this recovery to the past eight recoveries and the comparison is astounding. Unlike those past cycles, corporate profits are breathtakingly higher and wage gains are almost non-existence:
Look at that graph some more. Get some friends to look at it. And they should just get really, really, really pissed that Bush took such good care of his corporate buddies during the recession, while giving working americans the shaft.
These are of course only statistics as well, which is why the skepticism and anxiety of people across the country is probably the best measure of the problems in the economy. But if you need to fight stats with stats, the graph above is a good place to start.
THE ECONOMIST ARTICLE, June 10, 2004
Is the economy doing well enough, plainly enough, to help George Bush?
MORNING in America or jobless recovery? 1984 or 1992? These parallels have long inspired and haunted George Bush's White House. Ronald Reagan romped to a landslide victory in 1984 amid a booming economy; George Bush senior lost the 1992 election during a lacklustre, job-scarce recovery. Fortunately for today's president, America's current recovery is looking ever more robust. But voters do not yet seem to agree.
For the past nine months America's economy has grown at an average annualised rate of 5.6%, the fastest nine-month growth since 1984. Not only do the latest figures show jobs being created apace, but new statistical revisions suggest that job growth has been stronger for longer than many had thought.
Almost 1m jobs were created between March and May, the fastest increase since the giddy days of early 2000. Since January, the average monthly job gain has been 238,000—not blistering, but certainly healthy. With 1.4m new jobs created since last August, more than half the 2.7m jobs lost on George Bush's watch have now been recovered. According to Jim O'Sullivan of UBS Bank, recent revisions to income statistics also suggest that job growth at the end of 2003 will turn out to be stronger than the current numbers suggest.
Earlier this year Greg Mankiw, the chairman of Mr Bush's Council of Economic Advisers, was ridiculed for a forecast that suggested America's economy would create 2.6m jobs this year. If job creation continues at today's pace, that forecast will prove too low.
The quality of new jobs is also improving. More are permanent and higher-paying; less than 10% of the net new jobs created this year have been temporary. The long-beleaguered manufacturing sector has been adding new jobs for four months. The gap between job growth in low- and high-paying industries has narrowed substantially. Earlier in the recovery, job growth was concentrated in industries, such as hotels and restaurants, that pay well below average, while the jobs in higher-paying industries were shrinking. That has now changed, as the pace of job creation has risen sharply in higher-paying jobs.
Moreover, a slew of other statistics suggest the economy's strength is unflagging. Despite higher petrol prices, both chain-store sales and car sales accelerated in May. Monthly surveys of purchasing managers in both services and manufacturing suggested persistent strength across the economy. As Richard Berner from Morgan Stanley puts it, “Recovery is now maturing into a solid expansion.”
Given all this, the Federal Reserve is virtually certain to raise rates at its meeting on June 29th. The big question is how far or fast thereafter. The Fed's official position is that America's extremely loose monetary policy can be tightened at a “measured” pace. This week, however, Alan Greenspan, the chairman, raised the possibility that tightening could be more rapid if inflationary pressures required it, going out of his way to stress that the Fed would do “what is required” to keep inflation under control.
The irony for Mr Bush, however, is that while Wall Street frets about inflation and higher interest rates, ordinary Americans still seem deeply glum about their economy. According to Gallup's latest monthly poll, only 35% of people felt the economy was in good or excellent shape in early June, up from 29% in May, but not much changed from readings earlier in the year. The number of Americans seeing economic improvement (47%) was barely higher than the share who felt the economy is getting worse (45%). In February, by contrast, 53% of respondents thought the economy was improving.
What explains the gap between the economic statistics and the polls? Time is clearly a vital factor. Voters' perceptions of economic improvements always lag actual economic shifts by many months (a fact that cost George Bush senior the 1992 election). And even when Americans' own circumstances improve, that may not translate into confidence in the overall economy. Concerns about other things, too—notably Iraq—are probably clouding Americans' opinions of the recovery.
But it is also true that for many Americans the economy does not seem so wonderful. The fruits of this recovery, thus far, have been more evident in firms' profits than in workers' wages. As a share of GDP, wages are at their lowest level in decades. By several measures, the job market is still weak: the average spell of unemployment, for instance, is still rising. But, most important, for many Americans improved job news is being offset by bad news, from rising petrol prices to soaring medical costs. Though wage growth has begun to accelerate recently, how much it is rising depends on what numbers you look at. According to the latest employment report, hourly wages for non-supervisory workers rose by only 2.2% in the year to May, compared with consumer-price inflation of 2.3% in the year to April.
As a gauge of overall wage pressure, the hourly wage statistics have problems (they exclude supervisory workers and benefits, for instance). But they may help explain why many ordinary Americans do not feel better off. If the economy continues its current trajectory, there is no doubt that this glumness will go. But it is too early to be sure that it will lift before election day in November.
Posted by Nathan at June 20, 2004 07:51 AM