Well, that was an unpleasant surprise. Any way you cut it, the June employment report was a big disappointment. (If by chance you are inclined to doubt that, the Wall Street Journal's Real Time Economics blog rounds up representative commentary from the disappointed.) Last month's anemic pace of job creation will almost surely amplify growing concerns about the almost sure-to-be dour final count on gross domestic product (GDP) growth in the second quarter. More specifically, though expectations for June employment growth were pretty modest to begin with, the failure to yet see any sign of momentum in labor markets has to make you wonder about forecasts of a soon-to-be-seen pick-up in economic growth.
A pick-up in economic growth in the third quarter is important, as it would help to relieve the anxiety associated with this picture, a version of a chart I first saw in a Bloomberg Economics BRIEF by Richard Yamarone. (The full briefings, which are proprietary, can be accessed here.)
The bottom line of this chart is that there has been a pretty reliable relationship between sustained bouts of sub-2 percent growth and U.S. recessions (indicated by the gray shaded areas). In fact, over the entire post-World War II era, periods in which year-over-year real GDP growth has been below 2 percent have been almost always associated with downturns in the economy.
A few notes to talk us back from the ledge. First, we unfortunately now have plenty of experience with advances in output that are accomplished without much progress on the jobs front. In other words, productivity-driven growth has been and may still be the story of the day:
Second, it does seem that we have the misfortune to be attempting a steep climb from a deep trough precisely as demographic factors are conspiring to reduce the potential growth rate of the economy. From the summary of a new paper by David Bloom, David Canning, and Gunther Fink:
"If their population age structure between 1960 and 2005 had been what projections suggest it will be for the 2005 to 2050 period, the OECD countries would have grown by 2.1 percent per year rather than by 2.8 percent per year."
This is not to say that demographics give reason for expecting, and tacitly accepting, near 2 percent growth going forward. Bloom et al. are focusing on 45-year trends, which do not manifest themselves overnight. Furthermore, employment is so far below its prerecession level that it seems unreasonable to suppose that the economy can't or shouldn't be growing above its potential rate for some time to come. The point is, rather, that there are structural changes in play, which means that old rules of thumb—even those that appear as reliable as the "2 percent rule"—should be take with an even healthier dose of skepticism than usual.
Finally, in the end we are talking about a month's worth of data, yet to be revised. And though it is the latest in a persistent string of such disappointments, our own thinking here on the staff in Atlanta has been that real signs of improvement will only become apparent as the summer progresses—we have already conceded the second quarter. I was surprised by today's news but, in context, I would have been equally surprised with strong employment numbers that might have suggested strength in June.
Cold comfort, but better than no comfort at all.
By Dave Altig, senior vice president and research director at the Atlanta Fed