Major Economic Confusion

Major Economic Confusion

 Anybody confused by recent economic reports is not alone. The BEA has just reported a totally unexpected decline in real GDP for the first quarter of a 1.4% annual rate.  At the same time layoffs have reached a half century low and employment continues to rise.  How can we have an apparently beginning recession with the hottest job market in decades?

Probably this has to do with the sources of the reported decline, which may yet get revised upwards.  Consumption and investment have continued to grow.  There is a small decline of government with the end of the stimulus and a small decline in exports, half of that being in petroleum products that tend to have not lots of labor input.  There is s somewhat larger decline in inventories, which does not necessarily imply a job loss.  Indeed, that is likely to lead to rising inventories pushing growth up in the second quarter. The largest part of the decline, clearly responsible for the net negative figure, is imports. While these can lead to a decline in employment if they displace consumption, they have not done so yet, so not leading to unemployment. This looks like how we can have this anomalous result.

As it is, basically nobody is forecasting that second quarter will be a net negative, which would give us the old textbook definition of a recession.  Inventories are likely to turn around in particular.  Exports of petroleum products are likely to rise with the surge of LNG going abroad now.  The decline of government stimulus is over. If recession comes it will have to be a decline in consumption with consumer sentiment declining or maybe a decline in residential investment, this quite possible as mortgage rates rise.  

This data is certainly confusing, and certainly contributing to the sharp drop of the stock market yesterday after a week of mostly declines already, But there is evidence that the public was already pretty confused previously, some of this reflecting clearly politically biased reporting. So, even though GDP grew at 5.7% last year, the highest rate since “Morning in America” 1984, and job growth was the largest ever for the first year of a presidency, fully 29% of the population recently declared that we have been seeing job losses, with only 31% somehow aware that we have seen job gains, with many declaring the economy “bad,” although that is explained by the public listing inflation as their biggest concern. But how people can turn stories about “worker shortages” into job losses is beyond me.

I also observe that people worried about “worker shortages” are also likely to be worked up about blocking illegal immigration, so consistent.

Barkley Rosser