Jobless Recovery: Is it a fact or fiction?

Every time employment report gets published and given we are still losing jobs, albeit fewer than the previous report, Now we are hearing more and more from the pundits about the notion of a jobless recovery!

I guess, I do not need to post links to the articles on "Jobless Recovery", you can just Google It or Bing It, and you will find many articles.

In simple terms, the term recovery is being used to state that the economic size, which is measured as GDP, will or is growing again, and since we are still losing jobs, the pundits are calling this a "Jobless Recovery". The assumption is that that productivity gains far exceed growth being experienced, hence no job growth. This slideshow in business-week, august,2009 issue, titled "Welcome to a flat productivity world",raises doubts on whether productivity assumptions are really true.

Hence my concern whether; this notion of “Jobless Recovery” in the current situation a reality or a myth? OR a fact or a fiction?

The rest of this post is my attempt to find an answer to the above doubt/question.

I am an Engineer first, so I wanted do a 50,000 foot view of this concept of “Jobless Recovery” from an analytical perspective. So

First, let's look at how GDP is measured:
The most common approach to measuring and quantifying GDP is the expenditure method: (Source: Wikipedia)
GDP = C + I + G + (X − M)
or
GDP = private consumption + gross investment + government spending + (exports − imports)

Second, let's analyze what each represent

1. (X-M) or Exports – Imports: The june report, published at http://www.bea.gov/newsreleases/international/trade/tradnewsrelease.htm), shows US deficit at $27B (i.e 27 Billion). This is has been the trend for a while and I have not come across a credible report that will change this from a deficit to surplus. As of News release on "GROSS DOMESTIC PRODUCT: SECOND QUARTER 2009 (SECOND ESTIMATE)" this deficiency was a staggering -707.8B, or about 5% of GDP. Changing this to surplus would either require us to export more, consume less or combination of the two. As you will see later consuming less will not be encouraged as that is biggest chunk of GDP, although that may be the right medicine.
2. Private Investment: The GDP Second quarter report has this at 2,136.1B of 14,441.4B, about 14.8% of GDP. To impact this, will require lots of additional investment from private sector. However given the uncertain economic times. Keeping this at this at the current levels will be a challenge. Even if we go optimistic and estimate that business will grow this by 50%, the impact to GDP will be about 7.35%. Personally, my most optimistic estimate is to hold this at the current levels.
3. Government Spending: The GDP report on second quarter has Government Spending at 2883.2B; this is about 20% of GDP. Of the 2883.2B, 37.5% was federal and 62.5 was State and Local Government Spending. If you look at this more closely, State and Local Governments spending across the country is being squeezed and cut, and they are the lion's share of government spending. So for every 1% cut in State and local spending, an additional 2% will have to be spent at Federal Level. This gets even more complicated if we take a deeper look at the breakdown of federal spending. It shows that Non - Defense Spending is only 344.7B of 1082.6B, about 31.8%. So in reality of all the government spending, Federal Non-Defense Spending is only meager 2.4% of the GDP. Assuming we hold the Defense budget constant, this means for every 1% cut at state and local, Federal Non-defense Spending has to go up by 6%, just to hold the GDP component of federal spending at current levels (no growth). Given what we see in California and other states with regards to local budget cuts, we can quickly get to a point where we can question whether the current federal stimulus money is big enough.
4. Private Consumption: Second quarter GDP Report shows Personal Consumption Expenditures is a whopping 10,129,1B of the 14,441.4B, i.e 70% of the GDP. Now you can see why our leaders quickly come up with Programs like “Cash for Clunkers”. Programs like these make us Spend Money. i.e. Consume, which then lowers inventories, which then makes manufacturer start-up their factories, which then leads to Jobs/Wage growth, which then leads to more consumption – the cycle finally resulting in growth, and ending recession. However, this logic has had a negative impact on the average citizen, who is now saddled with debt he cannot repay.

Finally, so what is my take#

This simple analysis says that if our government is targeting increasing private consumption, then it better result in Job Growth or else we are just converting tax payer money into corporate profits, which in the short run may show +ve impact on stock markets but will eventually fail to compensate for the loss of consumption due lack of job growth. Hence – Jobless recovery in the current situation is a Myth and is not something that is sustainable. Additionally, Jobless Recovery has the potential to make things worse as poverty will raise, reliance government benefits will increase and Private Investments will fall as it will become tougher to sustain lower taxes.

So what should be done! In my humble opinion:

1. We should encourage people to save as our debt burden at all levels (individuals to government) is out of control; in the short run this may be painful but today’s saving will eventually become tomorrow’s capital-leading to innovation and job growth. My original thought was that, this will eventually lead to reducing trade deficit. However a lecturer of mine was kind enough to point out that I was only thinking in absolute terms and not relative terms. Based on the feedback, I now have changed my opinion to: reduction in consumption due to savings may or may not reduce our trade deficit on relative terms as the cut in consumption will cut both domestic and import consumption. I still feel encouraging individuals to save is the right move, given our individual debt condition.
   
2. We should target some stimulus to businesses that promote investments/R&D in US. Just giving businesses tax breaks will not cut it and does not guarentee that it will increase investment in the US. A targetted stimulus for investing by business into US will help in increasing Private Investments contributions to GDP which eventually will help drive-up consumption as these investments will potentially lead to job growth.
   
3. Personal Consumption as % of GDP has gone from 61% in the 50's and 60's to more than 70% now. This change on hind sight has come from Unsustainable increase in personal debt and decrease in personal savings. Sticking my neck out as I am not an expert economist I suggest, Economists should take a hard look at this data. It looks like governments are relying more and more on private consumption at the detriment of the long-term health of the economy and citizens. There is probably a metric that can identify when consumption is changing to unsustainable over consumption, which could then become a leading indicator to make effective policy decisions?

Thanks for reading. Please free to post your comments as I would love to learn from your thoughts too!

Thanks

Nagesh

The views represented in this blog are my personal views and are not a "reflection of" or "opinions of" any of the institutions I am associated with or have worked for.