Monday, March 10, 2008

Brian Wesbury does not see a recession looming

as he writes:
As a result, following Friday’s report that private payrolls dropped 101,000 in February (the second consecutive decline), it has become easy to believe that a recession has begun.

However, this would be a significant overreaction. Employment data in the past few months has not changed nearly as much relative to its trend as it did in previous recessions. Moreover, jobs fell in 2002 and early 2003, but the economy still expanded. Demographic patterns have slowed employment growth below historical norms. Consequently, the recent decline in payrolls is not proof that the overall economy is contracting.

The last recession officially ended in November 2001 and since then payrolls have grown by an average of about 100,000 per month. In the past two months payrolls have dropped by an average of 43,000. The total swing is 143,000 and this represents a 1.7 million annual change or 1.2% of the total number of payroll jobs currently in existence. This is a significantly smaller shift than those that occurred in the recessions of 1990-91 or 2001.

Why? Well, one reason is that we may not really be in recession. Swings of 100,000 per month in jobs are barely above the level of statistical significance. Another reason is that we have seen a major shift in demographic factors.

Unlike the expansions of the 1980s or 1990s, the current one is the first to be affected by the aging of Baby Boomers beyond their peak working years. At the same time, the current expansion has seen much higher college enrollment rates for young people, while labor force participation by students has fallen. As a result, the trend growth in payrolls has been understandably lower. (Making up for this has been a strong increase in productivity, outdoing the expansions of the 1980s and 1990s.)

How can the economy still grow if payrolls are shrinking? The answer is productivity growth: more output per hour worked. For an historical example, we need look no further back than 2002 and the first half of 2003. During that 18-month period, payrolls declined by an average of 50,000 jobs per month (worse than the average in the past two months) while real GDP expanded at a 2% annual rate (matching our forecast for Q1).


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