The Labor Department reported the U.S. economy created 126,000 jobs in March. This was a sharp slowdown from the 290,000 average over the prior three months. This relatively weak jobs report led many economic analysts to comment that the economy may not be as strong as they had believed.
This reassessment is welcome, but it really raises the question of why so many professional economists and economic reporters could be so badly mistaken about the strength of the economy. There never was much basis for claiming a boom in the U.S. economy and the people claiming otherwise were relying on a very selective reading of the data.
Just starting with the most basic measure, real GDP in the United States grew at just a 2.2 percent annual rate in the fourth quarter of 2014. This is a pace roughly in line with most estimates of the economy’s potential rate of growth. This means that the economy was just keeping up with the growth in its potential, filling none of the large gap between potential GDP and actual GDP that still persists from the 2008–2009 recession.
Those pushing the boom view were prone to treat the modest fourth quarter growth number as an anomaly, pointing out that the economy had grown at an average rate of 4.8 percent in the prior two quarters. But this reasoning was obviously fallacious. The strong growth for the second and third quarters was just making up for negative growth in the first quarter of 2014.
As a result of a number of factors, most importantly weather and a brief government shutdown, the economy actually shrank at a 2.1 percent annual rate in the first quarter. With more normal weather and no further shutdowns in the rest of the year, the first quarter decline virtually guaranteed strong growth in subsequent quarters. The average growth rate for the first three quarters of 2014 was just 2.5 percent, not very different from the fourth quarter figure.
Other data also should have caused analysts to shy away from any boom view. Investment in plant and equipment has been running just slightly ahead of year ago levels. Home construction is on a slight upward path, but not enough to provide a major boost to the economy. The saving rate is already relatively low, meaning that any big uptick in consumption is implausible barring a surge in income. The trade deficit has been trending upward, partly in response to the rise of the dollar, putting a further drag on growth. And, the proponents of austerity are ensuring that there will be no major boost to demand from the government sector.
In this context, the relatively strong employment numbers had been an anomaly. In an economy with weak GDP growth, strong job growth implies low productivity growth and that is in fact what the U.S. has been experiencing. Productivity growth has averaged less than 1.0 percent annually in 2013 and 2014. This is far below almost anyone’s estimate of trend productivity growth.
The implication is that if there is not a pickup in GDP growth, employment growth will have to slow, as it did in March. There will always be erratic factors affecting a single month’s data, and the March numbers were almost certainly held down by bad weather, but the 126,000 number for March is almost certainly closer to the underlying trend than the 290,000 average originally reported for the prior three months. (These numbers were revised down in the March report.)
There is a lesson here that goes beyond the jobs numbers. The fact that such a wrongheaded view of the economy could get wide acceptance speaks to the nature of debate in economic policy circles. It remains the norm to repeat what more important economists are saying rather than do independent analysis. That is why economic policy types continually get surprised by the economy, as when they were surprised by the collapse of the housing bubble and the ensuing recession.
This lack of independent analysis stems from the nature of incentives in the profession. As we saw following the collapse of the housing bubble, no one ever suffers any career consequences from being wrong in the same way as the consensus. It would be difficult to identify anyone at the Federal Reserve Board, International Monetary Fund, or any other major economic policy or regulatory agency who lost their job because they failed to recognize the housing bubble and the risks it posed to the economy. It is unlikely anyone even missed a scheduled promotion.
This means that there were absolutely no negative consequences to being disastrously wrong on an issue where it really should not have been hard to be right. (There was no precedent for the massive run-up in house prices and it was not reflected in any remotely corresponding increase in rents.) On the other hand, standing outside the consensus will always carry risks. No one can ever be certain in their assessment of the economy and people in general are likely to be hesitant to conclude that the leading economists are wrong on major issues.
Given this structure of incentives, economic theory tells us that we should not expect much by way of independent thought on the economy. Most of what we read and hear continues to reflect the consensus view, just as was the case before the housing bubble burst. This is why it is possible for silly views, like the U.S. economic boom, to gain credibility in major news outlets.
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