Tag: Unemployment insurance

Real GDP Growth Comes in Slightly Below Expectations, Inflation Is Below Target, and the Labor Market Shows Some Weakening

Image of GDP generated by GTP-4o

This week, two data releases paint a picture of the U.S. economy as possibly slowing slightly, but still demonstrating considerable strength. The Bureau of Economic Analysis (BEA) released its advance estimate of GDP for the third quarter of 2024. (The report can be found here.) The BEA estimates that real GDP increased by 2.8 percent at an annual rate in the third quarter—July through September. That was down from the 3.0 percent increase in real GDP in the second quarter and below the 3.1 percent that economists surveyed by the Wall Street Journal had expected. The following figure from the BEA report shows the growth rate of real GDP in each quarter since the fourth quarter of 2020.

Two other points to note: In June, the Congressional Budget Office (CBO) had forecast that the growth rate of real GDP in the third quarter would be only 2.1 percent. The CBO forecasts that, over the longer run, real GDP will grow at a rate of 1.7 to 1.8 percent per year. So, the growth rate of real GDP according to the BEA’s advance estimate (which, it’s worth recalling, is subject to potentially large revisions) was above expectations from earlier this year and above the likely long run growth rate.

Consumer spending was the largest contributor to third quarter GDP growth. The following figure shows growth rates of real personal consumption expenditures and the subcategories of expenditures on durable goods, nondurable goods, and services. There was strong growth in each component of consumption spending. The 8.1 percent increase in expenditures on durables was particularly strong. It was the second quarter in a row of strong growth in spending on durables after a decline of –1.8 percent in the first quarter.

Investment spending and its components were a more mixed bag, as shown in the following figure. Investment spending is always more volatile than consumption spending. Overall, gross private domestic investment increased at a slow rate of 0.3 percent—the slowest rate since a decline in the first quarter of 2023. Residential investment decreased by 5.1 percent, reflecting difficulties in residential construction due to mortgage interest rates remaining high. Business fixed investment grew 3.1 percent, powered by an increase of 11.1 percent in spending on business equipment. Spending on structures—such as factories and office buildings—had increased rapidly over the past two years before slowing to a 0.2 percent increase in the second quarter and a decline of 4.0 percent in the fourth quarter.

The GDP report also contained data on the private consumption expenditure (PCE) price index, which the FOMC uses to determine whether it is achieving its goal of a 2 percent inflation rate. The following figure shows inflation as measured using the PCE and the core PCE—which excludes food and energy prices—since the beginning of 2016. (Note that these inflation rates are measured using quarterly data and as compound annual rates of change.) Despite the strong growth in real GDP, inflation as measured by PCE was only 1.5 percent, below the 2.5 percent increase in the second quarter and below the Federal Reserve’s 2.0 percent inflation target. Core PCE, which may be a better indicator of the likely course of inflation in the future, declined to 2.2 percent in the third quarter from 2.8 percent in the second quarter. The third quarter increase was slightly above the rate that economists surveyed by the Wall Street Journal had expected.

This week, the Bureau of Labor Statistics (BLS) released its “Job Openings and Labor Turnover” (JOLTS) report for September 2024. The report provided data indicating some weakening in the U.S. labor market. The following figure shows the rate of job openings. The BLS defines a job opening as a full-time or part-time job that a firm is advertising and that will start within 30 days and the rate of job openings as the number of job openings divided by the number of job openings plus the number of employed workers, multiplied by 100. The 4.9 percent job opening rate in September continued the slow decline from the peak rate of 7.4 percent in March 2022. The rate is also slightly below the rate during late 2018 and 2019 before the Covid pandemic.

In the following figure, we compare the total number of job openings to the total number of people unemployed. The figure shows a slow decline from a peak of more than 2 job openings per unemployed person in the spring of 2022 to 1.1 job openings per employed person in September 2024, somewhat below the levels in 2019 and early 2020, before the pandemic. Note that the number is still above 1.0, indicating that the demand for labor is still high, although no higher than during the strong labor market of 2019.

Finally, note from the figure that over the period during which the BLS has been conducting the JOLTS survey, the rate of job openings has declined just before and during recessions. Does that fact indicate that the decline in the job opening rate in recent months is signaling that a recession is likely to begin soon? We can’t say with certainty, particularly because the labor market was severely disrupted by the pandemic. The decline in the job openings rate since 2022 is more likely to reflect the labor market returning to more normal conditions than a weakening in hiring that signals a recession is coming.

To summarize these data:

  1. Real GDP growth is strong, although below what economists had been projecting.
  2. Inflation as measured by the PCE is below the Fed’s 2 percent target, although core inflation remains slightly above the target.
  3. The job market has weakened somewhat, although there is no strong indication that a recession will happen in the near future.

Glenn, Harry Holzer, and Michael Strain Analyze the Effect of Changes in Unemployment Benefits during the Pandemic

A job fair in Jackson, Mississippi (photo from the Associated Press)

As part of the Social Security Act of 1935,Congress created the unemployment insurance program to make payments to unemployed workers. The program run jointly by the federal government and the state governments. It’s financed primarily by state and federal taxes on employers. States are allowed to determine which workers are eligible, the dollar amount of the unemployment benefit workers will receive, and for how long workers will receive the benefit. 

 What’s the purpose of the unemployment insurance program? A document published the U.S. Department of Labor explains that: “Unemployment compensation is a social insurance program. It is designed to provide benefits to most individuals out of work, generally through no fault of their own, for periods between jobs…. [Unemployment compensation] ensures that a significant proportion of the necessities of life can be met on a week-to-week basis while a search for work takes place.”

But the same document also notes that unemployment compensation “maintains [unemployed workers’] purchasing power which also acts as an economic stabilizer in times of economic downturn.” By “economic stabilizer,” the Department of Labor is noting that unemployment compensation is what in Macroeconomics, Chapter 16, Section 16.1 (Economics, Chapter 26, Section 26.1) we call an automatic stabilizer. An automatic stabilizer is a government spending or taxing program that automatically increases or decreases along with the business cycle.  

As shown in the following figure, when the economy enters a recession, the total amount of unemployment compensation payments increases without the federal government or the state governments having to take any action because eligibility for the payments is already defined in existing law. So, during a recession, the unemployment insurance program helps to keep aggregate demand higher than it would otherwise be, which can lessen the severity of the recession.  

As we discuss in Macroeconomics, Chapter 9, Section 9.3 (Economics, Chapter 19, Section 19.3), the unemployment insurance program can have an unintended effect. The higher the unemployment insurance payment a worker receives and the longer the worker receives it, the more likely the worker is to delay searching for another job. In other words, by reducing the opportunity cost of being unemployed, unemployment insurance benefits may unintentionally increase the length of unemployment spells—the amount of time the typical worker is unemployed. 

During and immediately after the 2020 recession, the federal government increased the dollar amount of the unemployment insurance payments that workers received and extended the number of months workers could continue to receive these payments.  Under the American Rescue Plan, a law which President Biden proposed and Congress passed in March 2021, workers receiving unemployment insurance benefits received an additional $300 weekly from March 2021 until September 6, 2021. Also, under the law, people, such as the self-employed and gig workers, would receive unemployment insurance benefits even though they had previously been ineligible to receive them. (Note the resulting spike during this period in the total dollar amount of unemployment insurance benefits as shown in the above figure.)

Some state governments were concerned that the extended benefits might cause some workers to delay taking jobs, thereby slowing the recovery of these states’ economies from the effects of the pandemic. Accordingly, 18 states stopped participating in the programs in June 2021, meaning that at that time unemployed workers would no longer receive the extra $300 per week and workers who prior to March 2021 hadn’t been eligible to receive unemployment benefits would again be ineligible.

Were unemployed workers in the states that ended the expanded unemployment insurance benefits in June more likely to become employed than were unemployed workers in states that continued the expanded benefits into September? On the one hand, ending the expanded benefits would increase the opportunity cost of not having a job. But, on the other hand, because government payments to workers would decline in these states, the result could be a decline in consumer spending that would decrease the demand for labor.  Which of these effects was larger would determine whether employment increased or decreased in the states that ended expanded unemployment benefits early.

Glenn, along with Harry Holzer of Georgetown University and Michael Strain of the American Enterprise Institute, carried out an econometric analysis to explore the effects ending expanded unemployment benefits early had on the labor markets in those states.  They find that:

  1. Among unemployed workers ages 25 to 54 (“prime-age workers”), ending the expanded unemployment benefit program increased the number of workers in those states who moved from being unemployed to being employed by 14 percentage points.
  2. Among prime-age workers, the employment-to-population ratio in those states increased by about 1 percentage point.
  3. Among prime-age workers, the unemployment rate in those stated decreased by about 0.9 percentage point.

These estimates indicate that the effect of ending the expanded unemployment benefit program raised the opportunity cost of being unemployed more than it decreased the demand for labor by reducing the incomes of some household. But what about the larger question of whether households were made better or worse off as a result of ending the program early? The authors find that ending the program early decreased the share of households that had no difficulty meeting expenses. They, therefore, conclude that the effects on household well-being of ending the program early are ambiguous. 

The paper presenting these results can be found here. Warning! The econometric analysis is quite technical.