Payroll employment highly subdued. 408 thousand workers exit the labour force due to lack of jobs. Overheating potential zero. In last month’s assessment – US labour market – things are getting worse again as the virus spreads (January 18, 2021) – I predicted things would get worse given the trajectory of the virus. I have formed a strong view that nations have to deal with the health issue before they can expect the economy to open up again. No nation can ignore a spiralling death rate and avoid some restrictions which damage the economy. The evidence demonstrates that the nations that have largely suppressed the virus are doing the best in economic terms. Last Friday (February 5, 2021), the US Bureau of Labor Statistics (BLS) released their latest labour market data – Employment Situation Summary – January 2021 – which is consistent with my prediction. Payroll employment growth has slowed rapidly (only increasing by 49 thousand). But the labour force survey data is a bit difficult to interpret this month due a population benchmarking changes (see below). In terms of the household survey, employment rose by 201 thousand and the labour force was reduced by 408 thousand, meaning that official unemployment fell by 606 thousand and the unemployment rate fell by 0.4 points. Taking out the population control effect, the labour force shrank by 200 thousand. While the signals are a little confused, the data is showing there is no strong recovery going on at the moment as the health crisis intensifies. There is an elevated degree of excess capacity. I consider that the US will have to stabilise the health situation before they will be able to sustain any economic recovery. And we can disregard New Keynesian macroeconomists who are suffering from attention deficit problems it seems, and claiming that the economy is close to overheating and cannot absorb the proposed stimulus from the new Administration. The stimulus is actually too little!
US Department of Labor’s latest unemployment claimant data is worrying with the claimants in the week to January 9, 2021 rising to 1,151,051 a shift of 231,335. This is the highest level since the week ending July 25, 2020 and confirms what we now know – that unless a nation deals with the health crisis and gets the virus infections under control (preferably to the point of zero community transmission), it cannot hope for a sustainable economic recovery. The data is the result of lockdowns leading to layoffs in the hospitality and recreation sectors which has pushed the US economy back into contraction. The rise in new claimants follows the payroll data that revealed that employment had fallen by 140,000 (net) – see this blog post for analysis of that data release – US labour market recovery has ended as health problem intensifies (January 11, 2021). And given the nature of the employment most impacted, you can be sure that socio-economic inequalities will have risen. I will write about that last issue another day.
It has been clear that with the virus infections in the US increasing rapidly and with the lack of fiscal support from government, that the labour market conditions would probably start to deteriorate after a brief period of recovery following the first blush with the virus. I have been predicting that since December 2020. The latest data reveals that assessment was accurate. On January 8, 2021, the US Bureau of Labor Statistics (BLS) released their latest labour market data – Employment Situation Summary – December 2020 – which reveals a deteriorating or static situation, depending on the weight one gives to the payroll data relative to the household survey. Payroll employment fell by 140 thousand. In terms of the household survey, with employment and the labour force hardly moving, unemployment and the unemployment rate was unchanged. While the signals are a little confused, the data is showing the recovery has ended as the health crisis intensifies. I consider that the US will have to stabilise the health situation before they will be able to sustain any economic recovery. The US appears to be going in the opposite direction to that.
The answer to the question posed in the title is No! Lawrence Summers’ macroeconomic assessment does not stack up. In – Is the $US900 billion stimulus in the US likely to overheat the economy – Part 1? (December 30, 2020) – I developed the framework for considering whether it was sensible for the US government to provide a $US2,000 once-off, means-tested payment as part of its latest fiscal stimulus. Summers was opposed to it claiming that it would push the economy into an inflationary spiral because it would more than close the current output gap. Today, I do the numbers. The conclusion is that there is more than enough scope for the Government to make the transfers without running out of fiscal space.
Comments made last week by the former Clinton, Obama and now Biden economist Lawrence Summers contesting whether it was sensible for the US government to provide a $US2,000 once-off, means-tested payments was met with widespread derision and ridicule from progressive commentators. There were Tweets about eviction rates, bankruptcy rates, poverty rates, and more asserting that the widespread social problems in the US clearly meant that Summers was wrong and a monster parading as a progressive voice in the US debate. I didn’t see one response that really addressed the points Summers was making. They were mostly addressing a different point. In fact, the Summers statement makes for an excellent educational case study in how to conduct macroeconomic reasoning and how we need to carefully distinguish macro considerations from distributional considerations, even though the two are inextricably linked, a link that mainstream macroeconomics has long ignored. So while Summers might have been correct on the macro issues (we will see) he certainly wasn’t voicing progressive concern about the distributional issues and should not be part of the in-coming Administration. This is Part 1 of a two-part analysis. In Part 2 we will do some sums. In this part, we will build the conceptual base.
Last month, I noted that with the virus infections in the US increasing rapidly and renewed lockdowns almost inevitable combined with the lack of fiscal support from government, labour market conditions would probably deteriorate in November. I thought the US faced an uncertain and pessimistic future. The latest data reveals that assessment was accurate. On December 4, 2020, the US Bureau of Labor Statistics (BLS) released their latest labour market data – Employment Situation Summary – November 2020 – which reveals a deteriorating situation. Employment growth has slowed dramatically and participation fell by 0.2 points, which is the only reason that the unemployment rate fell by 0.2 points. Once we take into account the decline in the labour force, we realise that the fall in unemployment is illusory – it just means that workers who would normally be considered unemployed are now being classified as outside the labour force (that is, as hidden unemployed). The impasse at Congress on the the size and design of the next tranche of fiscal support is not helping. And then the data shows the lax health policy is allowing the virus to run out of control and how that plays out is anyone’s guess. I suspect a nation has to get the health problem sorted before they can really sort out the economic problem. The US appears to be going in the opposite direction to that. I doubt it will turn out well.
Last week we saw further evidence of the way in which class divisions create havoc for society although the way these events have been constructed in the media and popular perception are the antithesis of what was really going on. After having no coronavirus cases since April 16, 2020, suddenly we were informed on Sunday, November 15, 2020, that a dangerous virus cluster had emerged in South Australia (in particular the capital Adelaide) as a result of a breach in quarantine. The memories of Victoria’s second wave, which had started as a result of a similar breach came flooding back and the South Australian state government almost immediately imposed a very harsh 6-day lockdown (the most restrictive imaginable). The following day, amidst all the furore about the severity of the restrictions, the Government announced they were rescinding the orders (mostly). Why? Because some foreign worker had contracted the virus had lied to investigators about his status and was, in fact, working at both the quarantine hotel where the breach occurred and a pizza shop were additional cases had been detected. Apparently this ‘lie’ led to the severe lockdown because it created some uncertainty in transmission links. I doubt that was the case and I think the Government just overreacted and lacked confidence in their own systems. But now it is the ‘lie’ that everyone is focusing on and the Premier is threatening to ‘throw the book’ at the individual. Not many questions are being asked in the media about the poor systems that led to the breach in the first place nor the overreaction of the government. All attention is being focused on a casualised, precarious worker who was forced to work (at least) two jobs to survive. There lies the issue.
On November 6, 2020, the US Bureau of Labor Statistics (BLS) released their latest labour market data – Employment Situation Summary – October 2020 – which shows that employment continues to grow, but will take a long time at this rate to make up the job losses incurred in March and April. Further, the unemployment rate fell by 1 point to 6.9 per cent and the participation rate rose by 0.3 points. So, on the face of it, this is a positive outcome – jobs growth, participation increasing and unemployment falling. There is some doubt about the strength of the labour force employment estimates but the payroll data also shows steady employment increases. Worrying trends were in the loss of government employment, particularly at the state and local government level. Those losses will worsen if there is no extra fiscal support applied at that level by the federal government. The impasse at Congress on the the size and design of the next tranche of fiscal support is not helping. And then the data shows the lax health policy is allowing the virus to run out of control and how that plays out is anyone’s guess. I suspect a nation has to get the health problem sorted before they can really sort out the economic problem. The US appears to be going in the opposite direction to that. I doubt it will turn out well.
A few weeks ago, I updated my research on the way employment growth accesses the different unemployment duration pools using Australian data. In that blog post (October 19, 2020) – The long-term unemployed are not an inflation constraint in a recovery – I showed that the claim that the long-term unemployed constitute an inflation constraint because employers will not choose to offer them jobs due to perceived scarring is a popular neoliberal assertion but has no basis in the actual data. The orthodox economists use that assertion to justify microeconomic (supply-side) policies (training, activation, etc) rather than direct job creation. The reality is that when employment growth is strong enough, both short-run and long-run pools of the unemployed are accessed by employers. In the latter case, employers alter hiring standards and offer on-the-job training to ensure they do not lose market share. I have received several E-mails stating that the US is different and the long-term unemployed are shunned by employers, which means that trying to stimulate the economy will hit the inflation constraint sooner than if there was a Job Guarantee in place. Logically, there is no reason the US labour market operates differently in any fundamental way to the Australian labour market so I decided to examine the validity of the ‘irreversibility hypothesis’ using US data. Guess what? The hypothesis doesn’t hold up in the US either.
Today, I celebrate – my home town of Melbourne has recorded zero new infections for the first time since June 9, 2020 and zero deaths. But things are not so hot elsewhere in the world. As the US labour market started to rebound over the summer, I stopped updating my analysis of the claimants data horror story that had earlier demonstrated how sharp the decline in March and April had been. But I have still been monitoring it on a weekly basis and the information we are now getting from the US Department of Labor’s weekly data releases are indicating that as the virus escalates, seemingly out of control, the labour market recovery has all but stalled and a reasonable prediction would be that it will deteriorate somewhat if the infection rate leads to tighter restrictions (which it should). A relatively short blog post today (tied up with things today) – just some notes as I updated the data to see what was going on. The conclusions are obvious. Much more fiscal support is needed in the US, especially targetted at the bottom end of the labour market. Devastation will follow with the sorts of numbers that appear to be entrenched at present.