Friday, August 7, 2015

The U.S. economy: not as good as it seems

The unemployment rate now stands at 5.3%, which is good and close to the 4.8% in June 2006. However, this number does not show an accurate reflection of the labor market, nor the economy. Labor labor force participation is down 3.6% since June 2006 from 66.2% to 62.6%, but this isn't a particularly good number either.  It is not a good number because it doesn't factor in people retiring as the U.S. gets older, nor involuntary part-time workers. In the future most of the decrease will be because of demographics. However, I will argue that right now,  people focusing on the unemployment rate and not on alternate measures of under-utilization, and stating the U.S. economy is in good health should be less optimistic than they are. 

There are two reasons June 2006 is a good starting time. First of all, it was before the recession during good but not great economic growth. In the prior two quarters, average GDP growth was 3.05%. June 2006 should indicate what economic data should be in slightly above average times. Also, it is exactly 9 years before the latest statistics were available(when post was first drafted). This allows for comparison of statistics that are not seasonally adjusted.

To show that the drop in the labor force participation rate isn't solely due to aging, I will bring up an important statistic. Labor force participation ages 25-54 in June 2015 down 2.1% from June 2006, from 82.7% to 80.6%. 25-54 are the peak working years, so this number should not be shrinking even though the country is aging. This shows that even among people who are not out of peak work years, the labor force participation rate is shrinking. 

To more accurately determine the labor situation, I will use an alternate rate of labor underutilization, one provided by the BLS, referred to as U6. [It is calculated as all unemployed people + plus all marginally attached workers + all employed part time for economic reasons/ (civilian labor force + all marginally attached workers)] * 100.  It stood at 8.4% June 2006 (after revisions), but was 10.5% in June 2015. Both of the previous figures were seasonally adjusted. While this number has gotten better, it was at 17.1% in September 2010(after revisions) it is still significantly above that of 8 years ago. 
The less than stellar employment numbers are reflected in GDP as well. In 2006, GDP growth averaged 3.05% in the first and second quarters. This number is slightly below the year average during the fairly brisk expansion of the mid 2000s (2003-2006).  This is good relative to what the economy has done since the great Recession, but far below the growth seen in the mid-late 90s. Therefore, it is not such a high number that it is unreasonable to reach it during good economic times, but not so low that it can be reached easily. In the first two quarters of 2015, GDP growth averaged 1.45%. Although growth may pick up later this year, no annual GDP increases for the past 8 years have come within .65% of the number back in the first part of 2006.

    The economy has recovered significantly, but is not in good shape yet. Employment and GDP growth are far behind what they have been in the past in the middle of prior robust expansions. Fortunately, the economy could get better, as the general trend for economic indicators in the past few years is that they have been getting better. Unfortunately, better economic growth is not guaranteed. If this is the new good, the best days of America's economy are surely behind us. At the very least, anyone stating America's economy is back to normal is wrong, and the economy should be a much bigger issue in the election cycle than it has been so far.

(note:all statistics are accurate as of when this post drafted)

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