Macroeconomics is Irregular, 7/18
Every episode is different
This recession—if that’s what it is—isn’t like other recessions. According to the latest employment report issued by the Bureau of Labor Statistics, the economy added 372,000 new jobs in June, with the unemployment rate remaining stable at 3.6%. Over the past 12 months, according to the same report, average hourly earnings increased by 5.1%, another sign of a tight labor market. What explains a full-employment recession?
Macroeconomic theories describe regularities. But in the real world, regularities are scarce.
One of the most reliable regularities used to be Okun’s Law, which said that a 1 percentage point decline in the unemployment rate would be associated with about 2.5 percent higher real GDP. This year, the unemployment rate has declined by 3/10 of one percent, which should be associated with an increase in real GDP of close to 1 percent. But instead, real GDP has declined at an annual rate of more than 1 percent. Call the cops: Okun’s Law is being broken.
Consider what we have observed in the past 25 years or so:
The stock market crash of 2000, as the Dotcom bubble ended. An enormous destruction of wealth, with only the mildest of recessions.
The Financial Crisis of 2008. Arguably a smaller destruction of wealth, but the most severe downturn since the Great Depression.
The COVID economy, with all sorts of supply disruptions but a stock market that recovered to rise past its previous peak.
The current economy, with inflation soaring, a lot of “we’re hiring” signs, and a lot of companies shifting production away from Russia and at least thinking about shifting production away from China.
Of course, now we can tell stories that fit these episodes. But if you had tried to predict each episode using a set of equations that fit only the prior history, you would have failed.
Macroeconomics in textbooks and newspaper stories is a science of regularities. But you might be wiser to think of it as just-so stories and 20/20 hindsight.
My just so story is that the recession oddity is mainly due to inflation and getting goods, both intermediate and finished.
A 5% increase in wages is pretty weak after a year and a half of 8-10% inflation; that looks to me like a 3-5% drop in wages. Inflation, unusually, seems to be both due to massive spending/money printing by government and the huge drop in goods production and disruptions caused by the COVID reactions. Prices are going up because there is more money chasing fewer goods.
On the supply side, there are still big shortages in raw materials, intermediate goods and finished goods, with rationing based on things other than prices that are locked in by contract. My company has some lead times of at least a year, others I have seen up to two years. That is, if you order today you will get it July 2024. That isn't for high end, very complex finished goods either, but intermediates that were pretty standard 6 week lead time items. So we need the staff to run as hard as we can with what we can get, but we are paying out the nose for transport (flying stuff in some cases) and it is hand to mouth up and down the chain. No spare money for growth. If that holds true across manufacturing industries, then lots of zero growth due to just scraping by means there is little countering industries with negative growth. A recession due to not being able to get enough stuff to grow.
The employment situation may not as rosy as you paint it. The Great Immiseration grinds on. From May to June, the civilian labor force shrank by 353,000, from 164,376,000 to 164,023,000 and remains below its 164.6 million peak back in February 2020. And still the unemployment rate at 3.6 percent remains above its 3.5 percent low in 2020.
The labor force participation rate, at 62.2 percent, and the employment-population ratio,
at 59.9 percent, remain below their February 2020 values (63.4 percent and 61.2 percent, respectively).
The number of persons not in the labor force who currently want a job was 5.7 million in June, above the February 2020 level of 5.0 million.
Women and minorities remain hardest hit by inequities in labor force participation with 70 percent of white males participating, 57.1 percent of white females, 62.2 percent of Blacks, and 64.4 percent of Asians.
But worst of all seasonally adjusted real average hourly earnings for all employees decreased 1.0% from May to June and are down 3.6% from the same time last year. An analysis released last month by LendingClub finds that found 61% of U.S. consumers, approximately 157 million adults, were living paycheck to paycheck in April, and price increases have only escalated since then.
Quality of life for low-wage earners, of course, continues to be hammered, but even upper incomes are suffering. LendingClub’s reported that in April 2022, 36% of consumers earning $100,000 to $150,000, 31% earning $150,000 to $200,000, 26% earning $200,000 to $250,000 and 24% earning more than $250,000 were living paycheck to paycheck without issues paying their bills. Between 10% and 12% of consumers in these higher-income brackets lived paycheck to paycheck with issues paying their bills in April 2022. It has only gotten worse since and there is no improvement in sight.