Ch20: Economic Growth, the Financial System, and Business Cycles – Page 2

Are We in a Recession? Depends on Which Forecast You Believe

Image generated by GTP-4o of people engaging in economic forecasting

How do we know when we’re in a recession? Most economists and policymakers accept the decisions of the National Bureau of Economic Research (NBER), a private research group located in Cambridge, Massachusetts (see Macroeconomics, Chapter 10, Section 10.3). Typically, the NBER is slow in announcing that a recession has begun because it takes time to gather and analyze economic data. The NBER didn’t announce that a recession had begun in December 2007 until 11 months later in November 2008. When the NBER announced in June 2020 that a recession had begun in February 2020, it was considered to be an unusually fast decision.

On its website, the NBER notes that: “The NBER’s traditional definition of a recession is that it is a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” The NBER lists the data it considers when determining whether a recession has begun (or ended), including: “real personal income less transfers (PILT), nonfarm payroll employment, real personal consumption expenditures, manufacturing and trade sales adjusted for price changes, employment as measured by the household survey, and industrial production.” In practice, it is normally the case that an NBER business cycle peak coincides with the peak in nonfarm payroll employment and an NBER business cycle trough coincides with a trough in the same employment series.

Of course, policymakers at the Fed don’t wait until the NBER announces that a recession has begun when formulating monetary policy. Members of the Fed’s policymaking Federal Open Market Committee (FOMC) monitor a wide range of data series as the series become available. The broadest measure of the state of the economy is real GDP, which is only available quarterly, and the data are released with a lag. For instance, the Bureau of Economic Analysis’s “advance” (first) estimate of real GDP in the first quarter of 2025 won’t be released until April 30.

Given the importance of GDP, there are several groups that attempt to nowcast GDP. A nowcast is a forecast that incorporates all the information available on a certain date about the components of spending that are included in GDP. The Federal Reserve Bank of New York and the Federal Reserve Bank of Atlanta both release nowcasts of GDP. They use different methodologies, so their forecasts are not identical. Today (March 3), the two estimates are surprisingly far apart. First, here is the nowcast from the NY Fed:

This nowcast indicates that real GDP will grow in the first quarter of 2025 at a 2.94 percent annual rate. That would be an increase from growth of 2.3 percent in the fourth quarter of 2024.

The nowcast from the Atlanta Fed—which they call GDPNow—is strikingly different:

The Atlanta Fed nowcast indicates that real GDP in the first quarter of 2025 will decline by 2.8 percent at an annual rate. If accurate, this forecast indicates that—far from the solid expansion in economic activity that the NY Fed is forecasting—the U.S. economy in the first quarter of 2025 will contract at the fastest rate since the first quarter of 2009, near the end of the severe 2007–2009 downturn (leaving aside the highly unusual declines in the first three quarters of 2020 during the Covid pandemic).

What explains such a large difference between these two forecasts? First, note that the Atlanta Fed includes in its graphic the range of forecasts from Blue Chip Indicators. These forecasts are collected from 50 or more economists who work in the private sector at banks, brokerages, manufacturers, and other firms. The graphic shows that the Blue Chip forecasters do not expect that the economy grew as much as the NY Fed’s nowcast indicates, but the forecasters do expect solid growth rate of 2 percent or more. So, the Atlanta Fed’s forecast appears to be an outlier.

Second, the NY Fed updates its nowcast only once per week, whereas the Atlanta Fed updates its forecast after the release of each data series that enters its model. So, the NY Fed nowcast was last updated on February 28, while the Atlanta Fed nowcast was updated today. Since February 28, the Atlanta Fed has incorporated into its nowcast data on the Institute for Supply Management (ISM) manufacturing index and data on construction spending from the Census Bureau. Incorporating these data resulted in the Atlanta Fed’s nowcast of first quarter real GDP growth declining from –1.5 percent on February 28 to –2.8 percent on March 3.

But incorporating more data explains only part of the discrepancy between the two forecasts because even as of February 28 the forecasts were far apart. The remaining discrepancy is due to the different methodologies employed by the economists at the two regional Feds in building their nowcasting models.

Which forecast is more accurate? We’ll get some indication on Friday (March 7) when the Bureau of Labor Statistics (BLS) releases its “Employment Situation” report for February. Economists surveyed are expecting that the payroll survey will estimate that there was a net increase of 160,000 jobs in February, up from a net increase of 143,000 jobs in January. If that expectation is accurate, it would seem unlikely that production declined in the first quarter to the extent that the Atlanta Fed nowcast is indicating. But, as we discuss in this blog post from 2022, macro data can be unreliable at the beginning of a recession. If we are currently in a recession, then even an initial estimate of a solid net increase in jobs in February could later be revised sharply downward.

Glenn on How the Trump Administration Can Hit Its Growth Target

Treasury Secretary nominee Scott Bessent. (Photo from Progect Syndicate.)

By setting an ambitious 3% growth target, U.S. Treasury Secretary nominee Scott Bessent has provided the Trump administration a North Star to follow in devising its economic policies. The task now is to focus on productivity growth and avoiding any unforced errors that would threaten output.

U.S. Treasury Secretary nominee Scott Bessent is right to emphasize faster economic growth as a touchstone of Donald Trump’s second presidency. More robust growth not only implies higher incomes and living standards—surely the basic objective of economic policy—but also can reduce America’s yawning federal budget deficit and debt-to-GDP ratio, and ease the sometimes difficult trade-offs across defense, social, and education and research spending.

But faster growth must be more than just a wish. Achieving it calls for a carefully constructed agenda, based on a recognition of the channels through which economic policies can raise or reduce output. While a pro-investment tax policy might boost capital accumulation, productivity, and GDP, higher interest rates from deficit-financed tax or spending changes might have the opposite effect. Similarly, since growth in hours worked is a component of growth in output or GDP, the new administration should avoid anti-work policies that hinder full labor-force participation, as well as sudden adverse changes to legal immigration.

While recognizing that some policy shifts that increase output might adversely affect other areas of social interest (such as the distribution of income) or even national security, policymakers should focus squarely on increasing productivity. The three pillars of any productivity policy are support for research, investment-friendly tax provisions, and more efficient regulation.

Ideas drive prospects in modern economies. Basic research in the sciences, engineering, and medicine power the innovation that advances technology, improvements in business organization, and gains in health and well-being. It makes perfect sense for the federal government to support such research. Since private firms cannot appropriate all the gains from their own outlays for basic research, they have less of an incentive to invest in it. Moreover, government support in this area produces valuable spillovers, as demonstrated by the earlier Defense Department research expenditures that became catalysts for today’s digital revolution.

This being the case, cuts in federal support for basic research are inconsistent with a growth agenda. Still, policymakers should review how research funds are distributed to ensure scientific merit, and they should encourage a healthy dose of risk-taking on newer ideas and researchers.

In addition to encouraging commercialization of spillovers from basic research and defense programs, federal support for applied research centers around the country would accelerate the dissemination of new productivity-enhancing technologies and ideas. Such centers also tend to distribute the economy’s prosperity more widely, by making new ideas broadly accessible—as agricultural- and manufacturing-extension services have done historically.

To address the second pillar of productivity growth, the administration should seek to extend the pro-investment provisions of the Tax Cuts and Jobs Act that Trump signed into law in 2017. While the TCJA’s lower tax rates on corporate profits remain in place, the expensing of business investment – a potent tool for boosting capital accumulation, productivity, and incomes – was set to be phased out over the 2023-26 period. This provision could be restored and made permanent by reducing spending on credits under the Inflation Reduction Act, or by rolling back the spending – such as $175 billion to forgive student loans – associated with outgoing President Joe Biden’s executive orders.

If the new administration wanted to go further with tax policy, it could build on the 2016 House Republican blueprint for tax reform that shifted the business tax regime from an income tax to a cashflow tax. By permitting immediate expensing of investment, but not interest deductions for nonfinancial firms, this reform would stimulate investment and growth, remove tax incentives that favor debt over equity, and simplify the tax system.

That brings us to the third pillar of a successful growth strategy: efficient regulation. The issue is not “more” versus “less.” What really matters for growth is how changes in regulation can improve the prospects for growth through innovation, investment, and capital allocation, while focusing on trade-offs in risks. Those shaping the agenda should start with basic questions like: Why can’t we build better infrastructure faster? Why can’t capital markets and bank lending be nimbler? Not only do such questions identify a specific goal; they also require one to identify trade-offs.

Fortunately, financial regulation under the new administration is likely to improve capital allocation and the prospects for growth, given the leadership appointments already announced at the Securities and Exchange Commission and the Federal Reserve. But policymakers also will need to improve the climate for building infrastructure and enhancing the country’s electricity grids to support the data centers needed for generative artificial intelligence. This will require a sharper focus on cost-benefit analysis at the federal level, as well as better coordination with state and local authorities on permitting. Using federal financial support programs as carrots or sticks can be part of such a strategy.

Bessent’s emphasis on economic growth is spot on. By setting an ambitious 3% target for annual growth, he has provided the new administration a North Star to follow in devising its economic policies.

This commentary first appeared on Project Syndicate.

1/17/25 Podcast – Authors Glenn Hubbard & Tony O’Brien discuss the pros/cons of tariffs and the impact of AI on the economy.

Welcome to the first podcast for the Spring 2025 semester from the Hubbard/O’Brien Economics author team. Check back for Blog updates & future podcasts which will happen every few weeks throughout the semester.

Join authors Glenn Hubbard & Tony O’Brien as they offer thoughts on tariffs in advance of the beginning of the new administration. They discuss the positive and negative impacts of tariffs -and some of the intended consequences. They also look at the AI landscape and how its reshaping the US economy. Is AI responsible for recent increased productivity – or maybe just the impact of other factors. It should be looked at closely as AI becomes more ingrained in our economy.

https://on.soundcloud.com/8ePL8SkHeSZGwEbm8

Is the United States Entering a Period of Higher Growth in Labor Productivity?

Image generated by GTP-4o illustrating labor productivity

Several articles in the business press have discussed the recent increases in labor productivity. For instance, this article appeared in this morning’s Wall Street Journal (a subscription may be required).

The most widely used measure of labor productivity is output per hour of work in the nonfarm business sector. The BLS calculates output in the nonfarm business sector by subtracting from GDP production in the agricultural, government, and nonprofit sectors. (The definitions used by the Bureau of Labor Statistics (BLS) in estimating labor productivity are discussed in the “Technical Notes” that appear at the end of the BLS’s quarterly “Productivity and Costs” releases.) The blue line in the following figure shows the annual growth rate in labor productivity in the nonfarm business sector as measured by the percentage change from the same quarter in the previous year. The green line shows labor productivity growth in manufacturing.

As the figure shows, both labor productivity growth in the nonfarm business sector and labor productivity growth in manufacturing are volatile. The business press has focused on the growth of productivity in the nonfarm business sector during the period from the third quarter of 2023 through the third quarter of 2024. During this time, labor productivity has grown at an average annual rate of 2.5 percent. That growth rate is notably higher than the growth rate that many economists are expecting over the next 10 years. For instance, the Congressional Budget Office (CBO) has forecast that labor productivity will grow at an average annual rate of only 1.6 percent over the period from 2025 to 2034.

The CBO forecasts that the total numbers of hours worked in the economy will grow at an average annual rate of 0.5 percent. Combining that estimate with a 2.5 percent annual rate of growth of labor productivity results in output per person—a measure of the standard of living—increasing by 34 percent by 2034. If labor productivity increases at a rate of only 1.6 percent, then output per person will have increased by only 23 percent by 2034.

The standard of living of the average person in United States increasing 11 percent more would make a noticeable difference in people’s lives by allowing them to consume and save more. Higher rates of labor productivity growth leading to a faster growth rate of income and output would also increase the federal government’s tax revenues, helping to decrease federal budget deficits that are currently forecast to be historically large. (We discuss the components of long-run economic growth in Macroeconomics, Chapter 16, Section 16.7; Economics, Chapter 26, Section 26.7, and the economics of long-run growth in Macroeconomics, Chapter 11; Economics, Chapter 21.)

Can the recent growth rates in labor productivity be maintained over the next 10 years? There is an historical precedent. Labor productivity in the nonfarm business sector grew at an average annual rate of 2.6 percent between 1950 and 1973. But growth rates that high have proven difficult to achieve in more recent years. For instance, from 2008 to 2023, labor productivity grew at an average annual rate of only 1.5 percent. (We discuss the debate over future growth rates in Macroeconomics, Chapter 11, Section 11.3; Economics, Chapter 21, Section 21.3.)

The Wall Street Journal article we cited earlier provides an overview of some of the factors that may account for the recent increase in labor productivity growth rates. The 2020 Covid pandemic may have led to some increases in labor productivity. Workers who temporarily or permanently lost their jobs as businesses closed during the height of the pandemic may have found new jobs that better matched their skills, making them more productive. Similarly, businesses that were forced to operate with fewer workers, may have found ways to restore their previous levels of output with lower levels of employment. These changes may have led to one-time increases in labor productivity at some firms, but are unlikely to result in increased rates of labor productivity growth in the future.

Some businesses have used newly available generative artificial intelligence (AI) software to increase labor productivity by, for instance, using software to replace workers who previously produced marketing materials or responded to customer questions or complaints. It will take at least several years before generative AI software spreads throughout the economy, so it seems too early for it to have had a broad enough effect on the economy to be visible in the productivity data.

Note also that, as the green line in the figure above shows, manufacturing productivity has been lagging recently. From the third quarter of 2023 to the third quarter of 2024, labor productivity in manufacturing has increased at an annual average rate of only 0.4 percent. This slowdown is surprising given that over the long run productivity in manufacturing has typically increased faster than has productivity in the overall economy. It seems unlikely that labor productivity in the overall economy can sustain its recent growth rates if labor productivity growth in manufacturing continues to lag.

Finally, the productivity data are subject to revision as better estimates of output and of hours worked become available. It’s possible that what appear to be rapid rates of productivity growth during the last five quarters may turn out to have been less rapid following data revisions.

So, while the recent increase in the growth rate of labor productivity is an encouraging sign of the strength of the U.S. economy, it’s too soon to tell whether we have entered a sustained period of higher productivity growth.

Glenn on the Economic Policies Necessary to Increase Growth

Image showing scientific research generated by GTP-4o

Note: The following op-ed first appeared in the Wall Street Journal.

The Trump Economic Awakening

Traditional policies like tax cuts, targeted aid and responsible spending can deliver stronger growth.

Political scientists will debate the forces that shaped Donald Trump’s victory, but one thing is clear: Americans yearn for a change in economic policy. Voters have rejected the interventionist policies that brought inflation and high deficits. They want an economic awakening, a new way forward that uses traditional economic policies to achieve Mr. Trump’s goal of more jobs for Americans whose fortunes have been harmed by technological change and globalization.

Any economic path to a successful awakening begins with growth: the engine that powers individual income and our collective ability to support the nation’s defense, economy, education and healthcare industry. To pursue this growth, the new administration should consider at least three measures:

First, by working with Congress, it should build on the successes of the Tax Cuts and Jobs Act of 2017 to make permanent the expensing of business investment. Second, it should increase support for science and defense research, which would have significant spillover to the commercial sector, particularly in space exploration. Third, it should build on this research by constructing applied research centers around the country, linked to regional university and city hubs. Like the land-grant colleges of the 19th century, these centers would generate and distribute knowledge, improving local capabilities in manufacturing and services.

Opportunity is also a pillar of the awakening. Community colleges are an underfunded source of skill-building and mobility. As Austan Goolsbee, Amy Ganz and I proposed in a 2019 report, a modest federal block grant to support community colleges on the supply side—rather than a demand-side emphasis on financial aid—can help these schools push more Americans toward better jobs by working with local employers on skill needs and curriculum development. Targeted aid to places with depressed economic activity can help distribute opportunity to communities better than one-size-fits-all Washington-directed programs.

Corporate tax reform can play a role, too, by improving incentives for companies to settle and invest in the U.S. This can magnify opportunities for Americans, all without having to rely on costly tariffs.

Working a job doesn’t merely generate income; it also promotes human dignity. Enlisting more people into the workforce is thus another element of the economic-policy awakening. While growth and opportunity policies can boost labor-force participation, strengthening the earned-income tax credit to boost the incomes of childless workers can help attract younger people to the workforce. Maintaining the child tax credit can also provide parents with easier pathways toward economic participation.

These ideas share several important themes with Mr. Trump’s campaign and the traditional conservative playbook. They emphasize that policy ideas should be practical and workable, not merely rhetorical. Each makes use of America’s federalist system and innovative ethos. Making a priority of strong local involvement in applied research centers and community colleges and as tailoring place-based aid are more effective approaches than Washington diktats. Programs need to be held accountable for results, not simply allocated money.

This economic-policy awakening requires a clear-eyed assessment of budget trade-offs. Profligate spending with little regard for debt and inflation—à la the American Rescue Plan—contributed to Mr. Trump’s victory. It is possible to accomplish the steps above in a fiscally responsible way by offsetting spending and tax changes.

Organizing for the policy awakening’s success will be essential. Lack of communication among cabinet agencies can stymie creative ideas for expanding the economic pie for American workers. Like the president’s Working Group on Financial Markets, created by Ronald Reagan in 1988 to convene disparate agencies, the new administration would benefit from a senior executive team that can coordinate economic ideas and learn from leaders in business, labor and social services. Such a body, unlike the National Economic Council, could more adeptly cut across silos related to tax, trade, regulatory and industrial policy.

Voters have signaled they’re ready for an economic awakening. The president-elect, equipped with a new playbook and vision, should seize the opportunity.

Acemoglu, Johnson, and Robinson Win the 2024 Nobel Prize in Economics

Daron Acemoglu and Simon Johnson (Credit: Acemoglu, Adam Glanzman; Johnson, courtesy of MIT, from news.mit.edu)

James Robinson (photo from news.uchicago.edu)

Many economic studies have a relatively limited objective. For instance, estimating the price elasticity of demand for soda in order to determine the incidence of a soda tax. Or estimating a Keynesian fiscal policy multiplier in order to determine the effects of a change in federal spending or taxes. (We consider the first topic in Microeconomics, Chapter 6, and the second topic in Macroeconomics, Chapter 16.)

Other economic studies consider much broader questions, such as why are some countries rich and other countries poor? As the late Nobel laureate Robert Lucas once wrote: “The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them, it is hard to think about anything else.”

Today, the Royal Swedish Academy of Sciences awarded the 2024 Nobel Prize in Economic Sciences to Daron Acemoglu and Simon Johnson of MIT, and to James Robinson of the University of Chicago for “for studies of how institutions are formed and affect prosperity.” Acemoglu, Johnson, and Robinson (AJR) have published work highlighting the key importance of a country’s institutions in explaining whether the country has experienced sustained economic growth. Their work builds on earlier studies by the late Douglas North of Washington University in St. Louis, who received the Nobel Prize in 1993.

The institutional approach to economic growth differs from other approaches that focus on variables such as temperature, prevalence of disease, ethnic fragmentation, resource endowments, or governments adopting flawed development strategies in explaining differences in growth rates in per capita income across countries.

Two of AJR’s most discussed papers are “The Colonial Origins of Comparative Development: An Empirical Investigation,” which was published in the American Economic Review in 2001 (free download here), “Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution,” which was published in the Quarterly Journal of Economics in 2002 (available here). In these papers, the authors argue that the institutions European countries established in their colonies helped determine economic growth in those countries even decades after colonization.

As with any analysis that covers many countries over long periods of time, AJR’s analysis of the effect of colonialism on economic growth has attracted critiques focused on whether the authors have gathered data properly and whether their data may be better explained with a different approach.

The authors, writing both separately and jointly, have explored many issues beyond the effects of colonialism on economic growth. The wide scope of their research can be seen by reviewing their curricula vitae, which can be found here, here, and here. The announcement by the Nobel committee can be found here.

(Probably) the Final Word on the Non-Recession of 2022

Image generated by GTP-4o to illustrate GDP.

About one month after a calendar quarter ends, the Bureau of Economic Analyis (BEA) releases its advanced estimate of real GDP. In July 2022, the BEA’s advance estimates indicated that real GDP had declined in both the first and second quarters. A common definition of a recession is two consecutive quarters of declining real GDP. Accordingly, in mid-2022 there were a number of articles in the media suggesting that the U.S. economy was in a recession.

But, as we discussed at the time in this blog post, most economists don’t follow the popular definition of a recession as being two consecutive quarters of declining real GDP. Instead, as we discuss in Macroeconomics, Chapter 10, Section 10.3 (Economics, Chapter 20, Section 20.3), economists typically follow the definition of a recession used by the National Bureau of Economic Research (NBER): “A recession is a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income, and wholesale-retail trade.”

During the first half of 2022, the other data that the NBER tracks were all expanding rather than contracting. So, it seemed safe to conclude that despite the declines in real GDP in those quarters, the U.S. economy was not, in fact, in a recession.

That conclusion was confirmed by the BEA in September 2024 when it released its most recent revisions of real GDP . As the following table shows, although the BEA still estimates that real GDP fell during the first quarter of 2022, it now estimates that it increased during the second quarter.

In the earlier post from 2022, we also noted that the BEA publishes data on gross domestic income (GDI), as well as on GDP. As we discuss in Chapter 8, Section 8.1, when considering the circular-flow diagram, the value of every final good and service produced in the economy (GDP) should equal the value of all the income in the economy resulting from that production (GDI). The BEA has designed the two measures to be identical by including in GDI some non-income items, such as sales taxes and depreciation. But as we discuss in the Apply the Concept, “Should We Pay More Attention to Gross Domestic Income?” GDP and GDI are compiled by the BEA from different data sources and can sometimes significantly diverge.

We noted that although, according to the BEA’s advance estimates, real GDP declined during the first two quarters of 2022, real GDI increased. The following figure shows movements in real GDP and real GDI using the current estimates from the BEA. The revised estimates now show real GDP falling the first quarter of 2021 and increasing in the second quarter while real GDI is still estimated as rising in both quarters. The revisions closed some of the gap between real GDP and real GDI during this period by increasing the estimate for real GDP, which indicates that the advance estimate of real GDI was giving a more accurate measure of what was happening in the U.S. economy.

The figure shows that the revised estimates indicate that real GDP and real GDI moved closely together during 2021, differed somewhat during 2022—with real GDI being greater than real GDP—and differed more substantially during 2023 and 2024—with real GDP now being greater than real GDI. Because the two measures should be the same, we can expect that further revisions by the BEA will bring the two measures closer together.

It’s even possible, but unlikely, that further revisions of the data for 2022 could again present us with the paradox of real GDP declining for two quarters despite other measures of economic activity expanding.

9/15/24 Podcast – Authors Glenn Hubbard & Tony O’Brien provide a Macroeconomics update & highlight next steps in advance of FOMC meeting.

Welcome to the first podcast for the Fall 2024 semester from the Hubbard/O’Brien Economics author team. Check back for Blog updates & future podcasts which will happen every few weeks throughout the semester.

Join authors Glenn Hubbard & Tony O’Brien as they provide an update on the Macroeconomy. They offer thoughts on the likelihood of a soft landing and whether the actions of the Federal Reserve helped or hindered that process. The monetary and fiscal challenges facing the new administration are real and the Fed will begin its process of rate-cutting this week in the upcoming FOMC meeting. Gain insight into this evolving situation by listening to this podcast. Click HERE to access the podcast.

https://on.soundcloud.com/ywr6WfPPKPofeHr19

Latest Jobs Report May Indicate the Labor Market Is Weakening

Image generated by ChatGTP 4o.

Recent macroeconomic data have been sending mixed signals about the state of the U.S. economy. The growth in real GDP, industrial production, retail sales, and real consumption spending has been slowing. Growth in employment has been a bright spot—showing steady net increases in job growth above the level necessary to keep up with population growth. Even here, though, as we discuss in a recent blog post, the data may be overstating the actual strength of the labor market.

This morning (July 5), the Bureau of Labor Statistics (BLS) released its “Employment Situation” report (often referred to as the “jobs report”) for June, which, while seemingly indicating continued strong job growth, also provides some indications that the labor market may be weakening. The jobs report has two estimates of the change in employment during the month: one estimate from the establishment survey, often referred to as the payroll survey, and one from the household survey. As we discuss in Macroeconomics, Chapter 9, Section 9.1 (Economics, Chapter 19, Section 19.1), many economists and policymakers at the Federal Reserve believe that employment data from the establishment survey provides a more accurate indicator of the state of the labor market than do either the employment data or the unemployment data from the household survey. (The groups included in the employment estimates from the two surveys are somewhat different, as we discuss in this post.)

According to the establishment survey, there was a net increase of 206,000 jobs during April. This increase was a little above the increase of 1900,000 to 200,000 that economists had forecast in surveys by the Wall Street Journal and bloomberg.com. The following figure, taken from the BLS report, shows the monthly net changes in employment for each month during the past to years.

It’s notable that the previously reported increases in employment for April and May were revised downward by 110,000 jobs, or by about 25 percent. (The BLS notes that: “Monthly revisions result from additional reports received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors.”) As we’ve discussed in previous posts (most recently here), revisions to the payroll employment estimates can be particularly large at the beginning of a recession.

As the following figure shows, the net change in jobs from the household survey moves much more erratically than does the net change in jobs in the establishment survey. The net increase in jobs as measured by the household survey increased from –408,000 in May (that is, employment by this measure fell during May) to 116,000 in June.

Note that the BLS also reports a survey for household employment adjusted to conform to the concepts and definitions used to construct the payroll employment series. After this adjustment, over the past 12 months household employment has increased by 32.5 million less than has payroll employment. Clearly, this is a very large discrepancy and may be indicating that the payroll survey is substantially overstating growth in employment.

The unemployment rate, which is also reported in the household survey, ticked up slightly from 4.0 percent to 4.1 percent. Although still low by historical standards, June was the fourth consecutive month in which the unemployment rate increased.

The establishment survey also includes data on average hourly earnings (AHE). As we note in this post, many economists and policymakers believe the employment cost index (ECI) is a better measure of wage pressures in the economy than is the AHE. The AHE does have the important advantage that it is available monthly, whereas the ECI is only available quarterly. The following figure show the percentage change in the AHE from the same month in the previous year. The 3.9 percent increase for June continues a downward trend that began in January and is the smallest increase since June 2021.

The following figure shows wage inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month wage inflation, whereas this figure shows 1-month wage inflation.) One-month wage inflation is much more volatile than 12-month inflation—note the very large swings in 1-month wage inflation in April and May 2020 during the business closures caused by the Covid pandemic.

The 1-month rate of wage inflation of 3.5 percent in June is a significant decrease from the 5.3 percent rate in May, although it’s unclear whether the decline was an additional sign that the labor market is weakening or reflected the greater volatility in wage inflation when calculated this way.

What effect is today’s job reports likely to have on the Fed’s policy-making Federal Open Market Committee as it considers changes in its target for the federal funds rate? As always, it’s a good idea not to rely too heavily on a single data point—particularly because, as we noted earlier, the establishment survey employment data is subject to substantial revisions. But the Wall Street Journal’s headline that the “Case for September Rate Cut Builds After Slower Jobs Data,” seems likely to be accurate.

NEW! 4/5/24 Podcast – Authors Glenn Hubbard & Tony O’Brien react to the newest Friday Jobs Report for March & discuss next steps for the Economy.

Join authors Glenn Hubbard & Tony O’Brien as they react to the jobs report of over 300K jobs created which was way over expectations of about 200K. They consider the impact of this report as the Fed considers the next steps for the economy. Are we on a glide path for a soft landing at 2% inflation or will the Fed reconsider its long-standing target by adopting a higher 3% target? Glenn and Tony offer interesting viewpoints on where this is headed.