Saturday, December 7, 2013

US Recovery Shows New Strength with GDP Growth up to 3.6 Percent and Unemployment Down to 7 Percent

Data released this week by the Bureau of Economic Analysis showed that the U.S. economy grew at a respectable annual rate of 3.6 percent in the third quarter of 2013. That made it the first quarter since early 2012 for which growth was fast enough to make a significant dent in the output gap. The advance estimate released last month had put growth at 2.5 percent.

The upward revision should be interpreted with caution, since, as the following table shows, it was due almost entirely to an increase in the estimated growth of inventories. Faster inventory growth is an ambiguous indicator. In some cases, it can mean that businesses are stocking up in anticipation of higher future sales, but inventories can also grow when firms produce more than they had hoped to sell or order raw materials but fail to use them at the rate they had expected. On a more positive note, the contribution of fixed investment was also revised upward, with residential and nonresidential structures leading the way.

This week’s release reported downward revisions for the contributions of consumer spending and net exports. Exports increased slightly less than previously reported, and imports were slightly stronger. (Note that imports enter into the national account with a negative sign, so the revision in the contribution of imports from -0.3 percentage points to -0.43 percentage points indicates more imports of goods and services than previously estimated.)

The federal government’s contribution to GDP was negative, as it has been for most of the past three years. However, decreasing federal government consumption and investment was more than offset by growth in state and local government spending.

The new report also gives the first look at corporate profits for the third quarter. Nominal corporate profits rose at an annual rate of 7.5 percent, and after-tax profits grew at a 10.7 percent annual rate. Both measures of profits reached record highs, and both grew faster than GDP. As the next chart shows, corporate profits as a percentage of GDP have been higher over the past two years than ever before, a fact that no doubt helps to explain the recent strong performance of stock prices.

Separately, the Bureau of Labor Statistics reported that the U.S. economy added 203,000 new payroll jobs in November, easily beating analysts’ expectations. The job gains were spread widely across the economy, with construction and manufacturing both showing significant increases along with job growth in transportation, retailing and health care. Federal government employment decreased by 7,000, continuing a long decline, but that was more than offset by gains in government jobs at the state and local levels.

Because the government shutdown had distorted October’s data, observers paid special attention to the revisions in the new jobs report. Some had feared that it would revise last month’s unexpectedly strong increase of 204,000 payroll jobs sharply downward. As it happened, the initial October estimate moved downward only slightly, to 200,000. At the same time, the BLS revised September’s job gains upward to 175,000 from the 163,000 previously reported. The following chart shows both revised and first-reported payroll job increases.

The BLS also reported that the unemployment rate fell to 7.0 percent in November, a new low for the recovery. The unemployment rate is based on a survey of households that is separate from the survey of employers that is used to compile changes in payroll jobs. The household survey showed that the number of employed workers increased by 818,000 during the month. The increase in the number of employed workers often differs from the number of new payroll jobs, in part because the household survey includes self-employed and farm workers, and in part because of differences in survey methodology. Adding to the good news, the latest report showed increases in both the labor force participation rate and the employment-population ratio.

In addition to the standard unemployment rate, the BLS also provides a broader measure of labor market distress known as U-6. The broad measure includes involuntary part-time workers and discouraged workers, who are not counted as unemployed because they have given up hope of finding a job. U-6 fell to 13.2 percent in October. As the next chart shows, that figure, too, marked a new low for the recovery.

You have to look hard in this week’s report to find any bad news, although you can do so if you try. One of the few unfavorable developments in the employment situation for November was an increase in the percentage of unemployed workers who were out of a job for more than 26 weeks. As the next chart shows, although long-term unemployment has been trending downward, it remains stubbornly high by historical standards even as other employment indicators have improved. The mean and median duration of unemployment also increased.

Taken together, faster GDP growth, strong job gains, and lower unemployment show that the United States continues to be one of the better performers among developed economies. The U.S. economy is still operating below potential and unemployment remains elevated by historical standards, but at least things seem to be moving in the right direction.

Follow this link to view or download a classroom-ready slideshow with details of the latest GDP and employment data. This post is based on material previously published on Economonitor

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