Productivity growth over the business cycle: preview

I haven't hammered out a story yet, but here's some food for thought:



Lately productivity growth has accelerated, while the unemployment rate has skyrocketed. Some commentators (e.g.) have noted that businesses squeeze more output out of every hour of work, presumably by cutting down on the least productive tasks, jobs, or both. Eventually, the story goes, the squeezing will strain the employed labor force, forcing employers to resume hiring.

From the chart, it's obvious that unemployment and productivity growth are not always positively related. Why? What does it mean when they're not? What does the relationship tell us about an eventual job recovery?

Hopefully I'll find the time to write something soon. Stay tuned.

First publication!!!

I just found out that my paper (with co-authors E. Hurst, A. Lusardi, and A. Kennickell) got published!!

Abstract—Not properly accounting for differences between business owners and nonbusiness owners in studies of household wealth can lead to erroneous conclusions about the significance of different saving motives. Using data from the Panel Study of Income Dynamics from the 1980s and 1990s, we show that within samples of both business owners and non–business owners, the amount of precautionary savings with respect to labor income risk is modest and accounts for less than 10% of total household wealth. Previous large estimates of the size of precautionary balances resulted from pooling these two groups together. Such pooling is inappropriate given that business owners face higher labor risk and accumulate more wealth than non–business owners for reasons unrelated to precautionary motives.

GDP growth and the contribution of the change in inventories

The latest figures on economic growth released by the Bureau of Economic Analysis (BEA) are bad. Yes, GDP growth has surged to 5.7% in the fourth quarter of 2009. But the contributions of investment, government expenditures, and net exports are almost nigh. Personal consumption expenditures has added 1.4 percentage points to growth, down from 2 percentage points in the third quarter. (See Chart 1.) The largest contribution (3.4 points out of 5.7) comes from the change in private inventories, i.e. the variation in the stockpiles of goods that businesses store. An increase in inventories adds to GDP, because those are goods that are produced but not sold, and therefore not included in expenditures; a decrease in inventories, on the other hand, must be subtracted from growth, because those goods were already counted in GDP at the time they were produced.

Chart 1 (click to enlarge)

What is wrong with having more than half of our growth coming from inventories?

First of all, in the medium term we are probably going to see inventories decrease more, not less, on average. Current inventory levels, as measured by the sales-to-inventory ratio, are too high relative to their long-term trend. (See Chart 2.) True, inventories plummeted through 2009, but that was just a correction to the excess stockpiles accumulated during 2008. Taking the recent trend of the sales-to-inventory ratio as benchmark, we should now be closer to 1.2 than to the 1.28 where we actually are. In the near term, therefore, and on average, we should expect net declines in inventories.

Chart 2 (click to enlarge)

Secondly, (optimistic) observers may have claimed that the positive contribution of the change in inventories is a sign that businesses anticipate an increase in demand. In fact, the present behavior of inventories is just a reflection of the economic past: businesses are increasing stockpiles, or at least reducing them more slowly, because consumption expenditures have picked up over the past six months. In other words, businesses are best characterized as backward-looking creatures. There is a strong correlation between current changes in private inventories and the past increase in personal consumption expenditures (PCE). (See Chart 3.) In fact, using quarterly data, the correlation coefficient is around 0.7. The correlation between changes in inventories and future PCE growth, on the other hand, is only 0.4. Saying that increases in inventories forebode stronger demand in the near future is almost wishful thinking.

Chart 3 (click to enlarge)

Finally, and this is a lesser point, estimates of changes in inventories are unreliable. Remember, the figures released by the BEA last Thursday are only advance estimates: over the next two months the government will release two revisions: the preliminary estimate and the final estimate. The “final” estimate will be revised again a few months down the road. Based on recent experience, substantially lower or higher revised figures for changes in inventories should not surprise us. Since 2006, for example, the average difference between the advance estimate and the “finally final” estimate has been $13 billion; the average absolute difference has been $4 billion –in the fourth quarter the change in inventories was -33.5 billion.

Did the recession end in May?

It’s looking more and more as if the recession in the U.S. ended in May. To support that claim I have looked at initial unemployment insurance (UI) weekly claims and the pattern that that time series has followed in previous recessions. The four-week moving average of not seasonally adjusted weekly claims has peaked less than eight weeks before the end* of the each recession since 1970 (see chart).

Click on the chart to enlarge.

The lead time was eight weeks in the 1973-75 recession, seven weeks in two recessions (1980 and 1981-82), six in 1970, five in 2001, and zero in 1991. The moving average declined essentially monotonically after each of those identified peaks.

During the current recession, the moving average saw a peak on the week that ended on April 4, 2009. That would put the end of the recession somewhere between April and May (zero to eight weeks later). And if the past is any indication, most likely in May.

The usual caveat applies: the pattern-recognition method is based on only six episodes of recession, and six is a very small number to make any claim on the significance of this finding. Moreover, each episode is spaced by several years from each other, so the hypothetical relationship between UI claims and the business cycle may have changed since last time.

I can’t help, nonetheless, to find some solace in that chart.

*Here I take the NBER dating of the business cycles. The NBER, however, provides the month in which a business cycle trough occurs, not the week. I take the liberty of dating the end of each recession on the last week of the month when the NBER identifies a business cycle trough.

Recession buzz: April update

Recession talk decreased slightly again in April. According to an index which includes eight newspapers, each publication included an average of 1.96 articles per day using the word “recession,” down from 2.16 in March and significantly below the level of 3.70 in January (see chart 1). The decrease occurred in spite of the continued softening of the job market in March, which was known the first week of April. The release of the first-quarter growth of GDP and the meeting of the FOMC committee, which might have generated some R-talk, occurred on the last days of the month, so their impact on R-word statistics probably straddled April and May.

Chart 1 (click to enlarge)

In spite of the diminishing buzz, the current level of talk is still consistent with an economy in recession, judging from historical trends (see chart 2).

Chart 2 (click to enlarge)

Previous updates: January, February , March



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