Friday, November 02, 2007

The View from 1600 Pennsylvania Ave

A friend in the White House emails me an economic update:
Today is Jobs Day. Here’s what you need to know about the October employment report:
  • +166,000 net new jobs were added in October. This is almost twice what the markets expected.
  • The unemployment rate is unchanged at 4.7%.
  • The US economy has created 1.68 M net new jobs over the past year, and 8.3 M since the labor market turnaround in August 2003.
  • We’ve had 50 months (4 years and 2 months) of continuous employment growth, a new record.
  • Wages are up 1.2% over the past year, adjusting for inflation.
In other economic news, on Wednesday we got GDP data:
  • GDP grew 3.9% in the 3rd quarter, well above market expectations of about 3%. This is the strongest quarterly GDP growth in 1½ years. Extra happy.
  • We can see the effects of a strong labor market in the consumption numbers – people are working and their real incomes are climbing, so they’re buying more stuff. Since consumption is about 70% of the economy, strong consumption growth is critical to continued GDP growth.
  • Housing is still a drag – it knocked 1.1% off the third quarter growth number. This is bad but unsurprising. The silver lining is that there’s no evidence the housing decline is spilling over into consumption.
  • Business investment was solid. Investment in “equipment and software” grew at a 6% rate, the best in 1½ years.
  • Exports continue to be strong, and they now make up 1 in 8 dollars of our GDP (12%). The rest of the world is growing, and they’re buying our stuff.

    This last point is a useful reminder – world economic growth is not a zero sum game. When other countries’ economies grow, they buy more US goods. That’s good for us.

    It’s no fun unless you have a picture. The yellow bar shows the total of 3.9% GDP growth. The other bars show where the growth is coming from.

This is my favorite way to show what’s actually going on – you can see that most of our growth is coming from consumption, that business investment and exports are important, and that housing is still a big drag.

We also had some happy news that productivity grew 2.6% in the 2nd quarter of this year. Higher productivity means each worker makes more stuff. Over time, productivity growth leads to wage growth.

Wednesday the Federal Open Market Committee cut the fed funds rate by a quarter point, to 4.5%. They also cut the discount rate by the same amount, to 5%.
The FOMC also put out a statement. Since we don’t comment on the Fed’s monetary policy actions, I’ll leave it at that.

There are, however, some clouds going forward.
  • It’s probably going to take a while to work out of the housing downturn. We expect housing will continue to be a drag on GDP growth.
  • Oil prices are nearing an all-time inflation-adjusted high (depending on how you measure inflation).
  • The credit markets are still working through problems that first appeared in August.

One of our favorite words when talking about the US economy is “flexible” – we have extremely flexible labor and capital markets. When bad things happen (e.g., a factory closing, wildfires, housing and credit market troubles), a flexible economy can adjust and recover quickly and with the smallest amount of pain. We’re seeing the benefits of a flexible economy now.