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Thursday, November 1, 2012

A Slow and Declining Growth Rate Delays Prosperity

In his article “A Slow but Steady Climb to Prosperity” in today’s Wall Street Journal, Alan Blinder argues that “The U.S. economy is improving.” I wish he were right, but the data—even much of the data he mentions—do not support that view.

First, he admits that real GDP growth—the most comprehensive measure we have of the state of the economy—is declining; that’s not an improvement.

Second, he admits that, according to the payroll survey, job growth isn’t faster in 2012 than 2011; that’s not an improvement either.

Third, he mentions that the household survey shows employment growth is faster, but that growth must be measured relative to a growing population. If you look at the employment to population ratio, it is the same (58.5%) in the 12 month period starting in October 2009 (the month he chooses as the low point) as in the past 12 months. That’s not an improvement.

Fourth, he shows that the unemployment rate is coming down. But much of that improvement is due to the decline in the labor force participation rate as people drop out of the labor force. According to the CBO, unemployment would be 9 percent if that unusual and distressing decline--certainly not an improvement--had not occurred.

He then goes on to consider forecasts, saying that there are promising signs, such as the housing market. The problem here, however, is that growth is weakening even as housing is less of a drag, because other components of GDP are flagging.

If you want to look at forecasts, consider this chart of the Fed’s (Federal Open Market Committee’s) forecast for real GDP growth in 2012. It is a depressing picture of a worsening outlook, meeting after meeting, not an improving outlook.