Economics
The recovery in jobless recovery
THE darnedest thing about the continuing weakness in the labour market is that other economic indicators continue to pour in showing a strengthening American recovery. Just to take this week, for example, we have the Philadelphia Fed index:
The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, increased from a reading of 15.2 in January to 17.6 this month. The index has now remained positive for six consecutive months...There was a notable increase in the current new orders index suggesting an improvement in demand for manufactured goods "” the new orders index increased 20 points. The current shipments index increased 9 points. The current inventory index increased 5 points, to its first positive reading since September 2007.
We have the Fed's report on industrial production:
Industrial production increased 0.9 percent in January following a gain of 0.7 percent in December. Manufacturing production rose 1.0 percent in January, with increases for most of its major components, while the indexes for both utilities and mining advanced 0.7 percent. At 101.1 percent of its 2002 average, output in January was 0.9 percent above its year-earlier level. The capacity utilization rate for total industry rose 0.7 percentage point to 72.6 percent, a rate 8.0 percentage points below its average from 1972 to 2009.
And we have the New York Fed's manufacturing survey:
The Empire State Manufacturing Survey indicates that conditions for New York manufacturers improved at a healthy pace in February. The general business conditions index climbed 9 points, to 24.9. The new orders index fell, though it remained positive, and the shipments index inched downward as well. The inventories index rose sharply, to 0.0, its highest reading in considerably more than a year.
And this:
The index of U.S. leading indicators rose in January for a 10th straight month, pointing to an economy that will keep expanding through the first half of this year.
The New York-based Conference Board's measure of the outlook for three to six months increased 0.3 percent, less than anticipated, after a revised 1.2 percent rise in December that was higher than previously estimated. The series of gains in the index is the longest since 2004.
The news isn't blockbuster, but it's consistently positive and improving. And yet even as these numbers roll in, hiring continues to lag. Perhaps the economy is approaching a point at which employers suddenly conclude that the recovery is for real and start hiring, generating new momentum for the expansion. But it is strange to see recovery this persistent and this strong, with so little new job creation. Keep in mind this chart, from the Economic Report of the President:
This is an atypical recession, in terms of the relationship between labour markets and output. It will be interesting to see how long this persists (and increasingly painful the longer that it does).
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I suspect frictional unemployment as a big part of the story. It's interesting that manufacturing seems to be leading the way. I doubt many of my age or younger thought preparing for factory work would provide a secure future. By the time I was making career-affecting choices, manufacturing as progress already belonged to the old men's reminiscence of how it was when they were my age but not as foolish.
You're right, just completely disregard the 15 million out of work people and everything becomes rosy.
Hayek explains it all in "The Ricardo Effect." It's available online at hayekcenter.org. The largest loss of employment took place in the capital goods producing industries. Manufacturing growth is probably happening in the consumer goods industries. As with most federal data, aggregating hides the most interesting stuff.
Massive federal spending (stimuli) raise prices for consumer goods and reduce the relative cost of labor. As a result, the consumer goods producers use more labor and don't buy capital equipment to increase production. But due to excess capacity they don't need to hire more workers; they just work them longer hours. If needed, they can work overtime cheaper than new workers can be hired. As long as relative wages are cheap, consumer goods producers will continue to use more labor and refrain from purchasing new equipment.
However, consumer good producers never had high levels of unemployment; high unemployment happened in the capital goods industries. To get capital goods industries hiring, consumer goods producers need to purchase new capital equipment. The only way to do that is to get prices down so that relative wages are higher. When wages are too high, consumer goods producers switch to purchasing capital equipment to use in production.
BTW, this isn't just Hayek. It's Microecon 101. Every textbook has a chapter on the optimum allocation of capital and labor based on their relative costs.
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