Some recovery!

...reposted from Autos and Economics...

The US recovery continues at a snail's pace; the auto industry is doing better. The rise in the SAAR [seasonally adjusted annual rate of sales] puts us below the bubble-inflated peak of 2005-6, but given subsequent population growth is at a more sustainable level. Other auto-related indicators show marked improvement, but suggest we still have a ways to go. First, the share of the auto industry (retail and manufacturing) was at 2.3% of the labor force in the late 1990s; it then fell steadily to 2.0% before falling off a cliff in 2008. The nadir was 1.6%; today we're back to 1.8%. That is only about halfway, assuming that other structural changes in the US (the continued growth of healthcare) makes it possible to return to the days of yore.

...automotive employment's only about halfway back...

If we look at the details, we get a more nuanced story. The retail side (which includes auto parts and not just vehicles) peaked at about 1.9 million workers; it fell by 300,000 during the Great Recession, and is now 2/3rds of the way back to that level. Manufacturing took a harder hit, falling from 1.1 million at the start of 2006 to 1.0 million in 2007, before dropping by 400,000 in 2008-9 to just above 600,000 workers or less than half the level of the late 1990s. We're now back to almost 850,000, a sharper rise than in retail, but with further to go. Yes, suppliers are running at more than 100% capacity, and that must normalize. So employment will rise further, as overtime and other expedients are replaced by permanent hires. Still, it's not clear that the US is on track to get back to earlier levels, though over the next few years other changes may help (e.g., Honda's goal to export 30% of US-based production).

But overall the story from labor markets is of an anemic recovery. As the baby boomers retire, the growth of the working age population will slow. At present, however, we're only just keeping up with population growth, and the gap between "normal" employment (I tracked age-specific levels back to 1994) is large, roughly 9.1 million workers as of November 2013. Furthermore, more jobs are part-time while a sizeable share of the labor force that had been working employed full-time are still working short hours. If we adjust for that, we're shy 10.8 million full-time jobs. Let's not forget long-term unemployment either, the 27+ week component is improving but is only down to what had been previously been the historic peak.

...the low level of participation isn't just "boomer" retirement...

Finally, this is not due to boomers entering retirement early. Indeed, participation of older workers has trended up throughout the Great Recession and subsequent recovery. In other words, they aren't retiring with past rapidity. That's part of the reason that prime-aged participation rates remain below historic levels. Again, I've traced these levels back much futher – they were essentially flat going into the Great Recession. Now we can see a small increase since the worst of the recession, but only by about 1 percentage point to 95% of the previous norm. And the rate for young workers (age 20-24) remains in the abyss.

As someone who works on the Japanese economy, this halting recovery looks all too familiar. We may not see a lost decade, but we're already in the 6th year since the onset of the Great Recession. Real estate bubbles are matched by lots of debt, and resolving that overhang is a challenge. If lenders aren't expected to bear much of the loss (and through deposit insurance, the government), then households [in the US] and corporations [in Japan] must. That has real ramifications – including ironically a huge buildup in government debt, in the end offering up assets that it stingily refused to do earlier in the game.

      Click on the graphs to expand!

Here are assorted data for your perusal – unfortunately due to the government shutdown data releases are delayed or (for certain data) a month will be skipped. For example, the "Employment Situation" was scheduled for November 1st; instead it will come out November 8th. Click on charts to expand to full size.

First, the first three charts on employment show a slow gain relative to age-adjusted population growth, but only slow. We still are far below normal levels of employment, and there's no particular reason to think that the fundamental structure of the labor markets and participation decisions changed over the course of a few months back in 2008-9 – no big shift in the ability to claim disability, no basic change in unemployment benefits, no change in wages [indeed, this recession reinforces the claim that wages are rigid downward, absent inflation], and I've already corrected the data for boomer retirement. That's clear if you look at the fourth chart of age-specific participation rates. Older workers – those of historic retirement age – are working more than ever [the chart gives data only from 2000, before then employment structures were relatively stable]. But in 2009 the share of people working in prime age brackets dropped, and that of younger people plummeted. Basically, while the economy is growing, it's not growing enough to eliminate the excess capacity of the Great Recession.

The fifth chart is investment. Again, we're out of the trough of 2009, but the level is still below that of some previous recessions. So more of the same: the economy is growing, but not recovering quickly.

That's not true for all sectors. As per the sixth chart, car sales have boomed; suppliers are at capacity, makers are having a hard time launching new vehicles at target levels of output. Still, we remain below the hyped level of the 2000s, and my sense is that sales are leveling out. There's still an overhang of vehicles from the go-go years, though depreciation operates far more rapidly in housing market. At the micro level I'm an example: since I'm stuck with an unsold house, we waited to replace our aging (240K miles 15 years) Volvo until the last minute – it wouldn't restart in the dealership parking lot so they gave me a tradein value lower than the local junkyard. We did buy a new car, as I judged the price differential relative to used cars too slim. However, too many people are underwater on their mortgages, median income [the point at which half the population has higher, half lower income] is falling. So my judgement is that the upside isn't going to move up very fast, despite our rising population. And while I only include the last couple years in the seventh chart, market shares have been relatively stable – with Toyota and Honda at a lower level. The eighth and final chart is of market groups. The top 4 firms have in the aggregate lost share, but over 2012-13 the Big Three and the Detroit Three have been stable.

Finally, interest rates have dropped back to the new normal under the Fed's antirecessionary monetary policy. With the fears of default eased, short rates are essentially zero. Now from day to day rates jump around, but remain extraordinarily low by historic standards, all the way out to 30 years. The yield curve is flat at maturities under 5 years, but there's now a moderately steep differential at longer maturities. With rates low, this isn't reflecting expected inflation but rather that eventually the economy will recover and with it short-term interest rates will rise. The market, however, is pricing that as years away – like 3-5 years. That is unfortunately consistent with my straight-line projection of labor market growth – at the current pace the gap won't be erased until the start of 2019. While I would not be surprised to see things accelerate as the housing stock normalizes ... well, the housing stock doesn't normalize quickly: according to the IRS, which is generous in such things, depreciation takes 30 years, and with median incomes stagnant, half the population isn't in a position to upgrade their "digs".

Date	1 month	3 mo	6 mo	1 yr	2 yr	3 yr	5 yr	7 yr	10 yr	20 yr	30 yr
10/15/13	0.32	0.14	0.16	0.16	0.37	0.68	1.45	2.11	2.75	3.50	3.78
10/16/13	0.14	0.10	0.11	0.15	0.34	0.64	1.41	2.06	2.69	3.43	3.72
10/17/13	0.01	0.05	0.08	0.13	0.33	0.61	1.35	1.98	2.61	3.36	3.66
11/05/13	0.06	0.05	0.08	0.10	0.32	0.60	1.39	2.06	2.69	3.46	3.76

How Fast is Job Creation?

...age composition matters...

How long recovery takes depends on the rate of job creation relative to the growth of the working age population. It turns out that age composition matters. In 2005-6 the economy needed roughly 125,000 a month to keep unemployment from changing; by 2008, when the Great Recession began, that rate had fallen to 102,000. Continued shifts – more people at the retirement end of their working life – pull that down to 71,000 in 2012. It then drops to 65,000 in 2013-14 and 62,000 in 2015-16. Cumulated over 2008-2016 that's a 5 million difference relative to the steady employment growth of the previous decade. (Addendum: Nowhere in the data does the shortfall get anywhere near the 23 million unemployed Romney repeated time and again in the second debate. He can't be very concerned about the issue if, after 7 years on the campaign trail, he has no grasp of basic data.)

So first I calculated the expected normal level of employment, correcting for demographics; details are below the chart. I then calculated trend job growth (a simple regression using data from January 2010, the rough nadir of the recession, through Sept 2012). On that basis we return to normal levels of employment in fall 2018. If we naively take the faster average growth since summer 2011 (the light blue in the graph), we recover in time for the next midterm elections. That's a sharp contrast to the naive straight-line projection of required employment growth, which doesn't get us back on track until far into the future or (under the optimistic light blue scenario) late 2018.

I don't believe the optimistic case – we face headwinds but no tailwinds.  Congress can mishandle the Fiscal Cliff; global growth is slowing. For the latter, the Europeans have yet to provide Greece and Spain a politically viable strategy for staying in the Euro zone. China's economy has slowed. Energy prices remain a drag, particularly on Japan which (due to the shutdown of most nuclear power generation) now faces a huge import bill for hydrocarbons. We are bit by bit moving out of the real estate bubble, as every quarter another 750,000 or so households will work out from being underwater on their mortgages, and as state and local government revenue stabilize. Nothing on the horizon will speed that process; neither presidential candidate has offered realistic proposals to address underlying issues.

Overall, however, this presents a far brighter picture than my previous calculations, which used the straight-line (blue) projections rather than the baby-boom-adjusted (red) projections. When I used the former, we were making almost no progress on closing the employment gap. But in fact we have made progress, even if it's less than we'd like.

A bit of tedium on my calculations. I began by pulling employment to population data from the Bureau of Labor Statistics, a bit tedious as you have to pull a lot of data series, and the series include 13 observations per year because they include an annual number. So I had to delete those. (Thank you Nisus Writer, for making that easy!) Then I graphed it in Excel to see if the data suggested shortcuts.

As it happens, most of the employment-to-population data show no trend over the two decades prior to the onset of the Great Recession. You can observe the impact of increased schooling at the young end of the age spectrum, and a modest rise in the share of people working in older cohorts, those age 60 and above. Even in those cases, most of the shift was before 2005. If we go back further, there were larger changes in schooling and in women's labor force participation, but those predate the 1990s. So with no trend going into the Great Recession – there is no upturn in the mid-2000s corresponding to the bubble – I could take the employment-population figures at the start of 2007 as the starting point.

I thus took the immediate pre-recession levels for 5-year age brackets, age 16-19, age 20-24 through age 70-74. (It would be wrong to stop at age 65, which is what most data sources do, because 18% of Americans are still working in their early 70s.) Note that in the Great Recession the share of people working fell sharply, particularly at younger ages (16-24) and among prime-age workers (those age 25-54). Hence for projections it's necessary to use the (stable) prior level as the reference point. That doesn't matter at older ages; the data show no wave of early retirement, if anything they show a very slight increase in labor force participation. (continued below graph...)

I then went to the US Census for population projections. The 2009 is the most recent, projection population by age for each year through 2050. I reduced these to the 5-year brackets used for the BLS employment-population data. To get the "normal" level of employment, I then multiplied the projected population in each 5-year bracket by the pre-recession employment-to-population ratio (for older workers, the most recent ratio) and added the totals. Since the Census doesn't provide monthly projections, I simply took the annual increment and spread it evenly across each month.

Presumably sometime soon we'll get projections based on the 2010 Census, but fertility rates change slowly, and even if the 2010 data are off, that will make a difference in the 16-19 age bracket only from 2026. Likewise, mortality was already very low in the age 60 bracket; the Census Bureau projects a continued drop in mortality, and that rate also changes slowly. So going out a decade won't lead to much error there, either, and its impact is further reduced because employment rates drop. The weakest part of the projection is immigration. Since that presumably has fallen with our Great Recession, it means that if there's an error, it's towards an overestimate of the population and hence of the number of jobs our economy needs to create.

One final note is that these data are for employment, and not full-time employment. That means it does it take into account those working multiple jobs, and those working involuntary short hours. I cannot track either by age bracket. Glancing at the data suggests no particular trends in multiple jobs; in contrast, there has been a sharp rise in the number of those "working part-time jobs for economic reasons". The latter means that I understate the amount of time recovery will take, because those jobs need to be converted back into regular jobs, on top of the need to create new jobs. Here's what that graph does: it pushes the recovery date out past 2020...

...Mike Smitka...

No fiscal cliff?

The New York Times 29 August 2012 Economix blog, "Is the Fiscal Cliff a Big Deal?" by Casey Mulligan is faulty, because it misses an Economics 101 opportunity cost issue.

...cutting unemployment insurance won't increase employment; in an environment where jobs are scarce, at most it will shift who has jobs...

Now it's easy to find non-economists making this mistake, or comparable ones. The Republican platform worries that trimming the Department of Defense's budget will cut jobs and hurt the economy, but turns around and claims that the roughly half of the 2009 stimulus package that added jobs somehow didn't help the economy. However, absent very large changes -- in an economy with a labor force of 155 million, a million jobs one way or the other is not a large change, however much it matters to those million people -- if such effects exist, they are symmetric.

What Mulligan assumes is that such issues never exist. The issue of unemployment is that people aren't looking for work. So cutting unemployment benefits will actually lead to more people working. First, unemployment benefits are not that generous -- if you're on a tight budget, you really need more income. But in today's context that's beside the point, because the underlying rate of unemployment is high. Corrected for changes in the working age population, the gap from where we were before the recession started is 14.5 million jobs.

Let me give an anecdote. My son has hunted for a regular job for a year, with no "bites" -- other than to become a low-level fast-food supervisor. He does better doing landscaping for neighbors. But a few years back he had opportunities, but wanted to finish his college degree. Most of his friends are in the same position, job-hunting, though they may have part-time jobs that provide some income.

Now an anecdote is not data; it only helps you think about what might be going on. But it does suggest that we look at overall unemployment. After all, if you want to argue that collecting unemployment checks is what is holding the economy back, you have to explain the source of a sudden shift in ethics in early 2007 that led 10-plus million Americans to decide that sitting home was a nice option. Instead, we can look at job losses and mass layoffs, both tracked by the Bureau of Labor Statistics. Their data also show a rise in those "working part-time for economic reasons", that is, people who have had their hours cut but want to work more. If the mass laziness story is true, then we shouldn't see this happening, either -- we'd expect to see the number of people happily accepting part-time work also rising. The data show they're unhappily accepting such work because the alternative, unemployment, is worse.

Mulligan's analysis of why in fact the "fiscal cliff" won't actually hurt growth isn't worth a "mulligan" -- this analysis is too sloppy to be anything more than ideology wrapped in professional credentials; the Times shouldn't grant him another shot.

Incentives do matter -- my paid employment lies in trying to teach students that -- but they aren't the only things that matters. In this case jobs simply aren't there. So if someone enjoying life on the dole gets a job, that means someone else won't have a job. Unless employment opportunities increase, it's a game of musical chairs. That reflects the second main thing that I am tasked with conveying to students, that they calculate opportunity costs appropriately, without double-counting or missing something. Mulligan totally fails to ask whether opportunities have shifted; he would earn a 50% grade in Economics 101.

...mike smitka...

It's not just kids and retirees

...early retirement and education aren't "safety valves"...

At 8.3%, "headline" unemployment represents 1 in 8 would-be workers without jobs. Furthermore, we know that we're seeing not just high unemployment but also a big drop in the size of the labor force. That is, we've observed a big drop in the unemployment-population ratio.

OK, but isn't this just youth staying in school longer? And baby boomers who are retiring, or retiring early? After all, the unemployment rate for "prime" workers is 7.2%, rather lower than the July 2012 average of 8.3%. And if we're thinking of the impact on families -- kids -- high "primer earner" unemployment is more worrisome than that at the young and old ends of the age spectrum.

Now for the population as a whole employment has fallen more than unemployment has risen. Rephrased, the non-participation [in the labor force] rate rose, from 33.9% in January 2004-December 2006 to 36.2% over the 6 months ending in July 2012, a 2.3% rise. Relative to the base (66.1%) that's equivalent to a 3.5% rise in unemployment. If we add that to the headline rate we get 11.8%.

This sort of shift doesn't typify previous recessions. But perhaps this time around it's not the recession but long-term trends that happen to be showing up now. [See the graph below on the long-term trend.] In particular, we've far more youth in higher education, and baby boomers are in their early 60s. So it could be that large numbers of younger individuals are staying in school -- or, having grim job prospects, are enrolling in community colleges en masse. Meanwhile, for the boomers, while retiring before age 65 may be painful, it's feasible. And government workers and others can qualify for pensions before age 65, and don't have to wait on social security.

Unfortunately, the data show it's not just boomers and students: the shift for the prime age workers (age 25-54) is in fact is larger than that for the population as a whole. We're not in fact seeing a boom in schooling and early retirements.

In particular, during the bubble era 2004-7 prime age labor force participation rose by 1.4 percentage points, from a peak of 78.7% to 80.3%, and averaged 79.4% over January 2004-December 2006; over the last 6 months, through July 2012, it's averaged 75.7%. That's a drop of 3.7% (and an equivalent rise in the non-participation rate). Doing the same arithmetic leads to an adjusted unemployment rate of 11.9%. At one level it's not surprising; prime age workers (25-54) are a large proportion of the standard labor force (age 16-64), so the averages can't diverge all that much. Still, I'd hoped otherwise. But early retirement and education aren't "safety valves" that mute the impact of the Great Recession. That's not the case

...Mike Smitka...

Has Unemployment Really Fallen?

...retirement is not the answer...

The Financial Times has a good April 17, 2012 article looking at the sources of continued high unemployment and declining labor force participation.

On the unemployment side, there are structural arguments—workers live in the wrong places, have the wrong skills—and cyclical arguments. The article finds a bit of both, with the suggestion that the latter is pretty strong.

A drop in participation can potentially mask far higher underlying slack in labor markets, as people give up looking for jobs, or return to school (and stop looking for jobs), or retire (and, duh, stop looking for jobs). But to be counted as "unemployed" in our monthly labor force survey you have to be actually job hunting, not merely job dreaming. My own calculations show participation has dropped 2.2%, using the average going into the Great Recession and the average of the past 6 months. If all those would in fact have temporarily given up on finding work and so are counted as unemployed, that would push the current rate from 8.1% to 11.5%.

Other countries use similar methods while differing in details, such as how recently you have to have undertaken concrete job search efforts. Japan uses two weeks, the US four, and so unsurprisingly Japanese unemployment tends to look low from a US perspective.

Technically they are NILFs, Not In the Labor Force. But how many of those who have officially exited the labor market retired according to plan? The higher that number, the less that this shift in participation matters.

A block of the baby boomers have now hit age 62 and thus can potentially begin collecting their Social Security pension. Leaving aside the possibility that many had no intention of retiring, how much of the bump in NILFs is due to people age 62 and above? I'm doing such calculations for Japan and will post those results in due course to my Japan and Economics blog. Unfortunately, comparable age-specific data are not publicly available for the US. The gist of the FT article is that (unfortunately) intended retirement is not the cause.

The recession, in other words, remains really bad. The graph below thus projects the pace of recovery in employment using pre-recession employment-to-population ratios. At the current pace, we'll be back to par in 2016, assuming the the rapid pace of recent months continues unabated for the next four years.

...Mike Smitka...

Note: Another component of the drop in participation is due to those who qualify for disability pensions and actually "retire" and start claiming them. While some of that is because of the onset of disability, some is a function of the difficulty for an older individual to land another job. leading them to drop out of the labor force (become a NILF) and claim a pension. Herman Schwartz, a political scientist at UVA, has looked at this in the European context, and finds strong evidence that in hard times (or when unfavorable adjustments are made in the rules of regular retirement pensions) those who claim disability increases, indeed increases a lot. Of course that means that people aren't naturally welfare cheats, to use current US labels: lots of people who could retire due to age or disability in fact don't. Most people prefer work to just sitting around...