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A blog by Leon Oudejans

A big economic mystery (Axios)

23 July 2022


Axios Macro title: A big economic mystery
By: Neil Irwin and Courtenay Brown
Date: 18 July 2022

Usually two of the most important indicators of economic health move together: GDP and jobs. More work means more activity that leads to more stuff getting made.

  • Not right now. GDP has flatlined or fallen in the first half of 2022, while job growth has been exceptionally strong.

Why it matters: Either there is a serious data measurement error, or Americans are becoming less productive, or both. None of these options is particularly reassuring.

By the numbers: So far this year, U.S. payrolls have expanded by an average of 457,000 jobs a month. The total number of hours worked in the private sector has been rising as well, and in the first half of 2022, they rose at a 2.5% annual rate.

  • That being the case, you would think economic output would also be rising. Instead, GDP fell at a 1.6% annual rate in the first quarter. It looks likely to show slow growth or further contraction in Q2
  • Analysts expect the preliminary second-quarter GDP number, which is to be released next week, to show only a 0.9% growth rate. The Atlanta Fed’s latest “nowcast” modeling GDP contracted at a 1.5% annual rate.

If we take those numbers at face value, it suggests a collapse in American productivity, and the country is now working more to make less: Labor productivity fell at a 7.3% annual rate in the first quarter, the worst reading since 1947.

  • If that’s what’s really happening, it’s a potential crisis for America’s economic future, implying that businesses are getting worse at deploying labor to create the goods and services people consume.
  • A more favorable take: Large-scale hiring means firms will have lots of new employees on the job. With time, they will become more productive.

Yes, but: An alternate possibility is that productivity hasn’t really collapsed. Rather, either GDP or jobs — or both — are sending misleading signals.

  • In particular, while GDP looks weak, Gross Domestic Income, which aims to measure overall economic activity through a different approach, has been solid. (Look for more on this divide in this space in the coming days).
  • “GDP and GDI are basically measuring the same activity in different ways,” Federal Reserve governor Christopher Waller said last week, “and in the past when such wide gaps in the two numbers have appeared initially, they tend to move toward each other when the data are finalized.”

Other data supports the notion of a strong labor market. If job growth has really been as strong as the reported numbers, you might have expected the unemployment rate to decline in recent months.

  • Instead, it has held steady.

The bottom line: The eventual solution to this mystery — whether falling productivity, understated GDP, or overstated job growth — will matter tremendously for understanding how robust the U.S. economy really is heading into a potentially difficult future.”



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