Friday, June 10, 2016

Our Limping and Unknowable Economy

Gross Domestic Product Growth Slows

A few days ago, the quarterly UCLA Anderson economic forecast estimated that this year's domestic GDP would be 2.7 percent greater than last year's.  The report also left open the possibility that GDP growth could be as low as 1.7 percent.  Six months earlier, in December 2015, Anderson was forecasting 3.3 percent growth for this year.

As Yogi Berra would say, it's hard to predict the future.

The forecast also noted that one trend is likely to continue -- a general slowdown in annual growth.

Between 1965 and 2005, average GDP growth in the U.S. was 3 percent.  Since 2010, annual GDP growth has been about 2 percent.  Economists now think 2 percent growth, or a little more or a little less, is the new normal.

We see reflections of this in various ways.  Gallup tells us economic concerns in this election year rank second only to (understandable) dissatisfaction with government.  We learned recently that more 18- to 34-year-olds live with their parents than with partners or spouses, a reversal of what had been the traditional circumstance for generations.

Job Growth Slows

Recent history also has made people worried about employment.  There were seven financial recessions between 1960 and 2008.  In the first six, the jobs lost were replaced in 2.5 years or less.  After the Great Recession, employment did not return to its pre-recession level for almost 6.5 years.

Last week, the Bureau of Labor Statistics released the report on new jobs in May.  Economists were expecting about 160,000 new jobs.  Instead there were only 38,000.

There was a big Verizon strike last month that meant 35,000 who otherwise would have been working were off the job.   If we add those people back, then the jobs report looks a bit better -- about 73,000 more people at work.

Still, that is not much.  Let's look at recent job trends, net of downward adjustments also announced last week.

       March new jobs:  186,000
       April new jobs:     123,000
       May new jobs:       73,000

 In 2015, new jobs averaged 221,000 per month; in 2014 the average was 260,000.

Interestingly, even with the low level of job creation, unemployment dropped by 0.3 percentage points, to 4.7 percent.  This is because the labor pool has been shrinking.  One reason for this is the retirement of baby boomers, which was to be expected.

Another reason is that people have given up looking for work.  This notion is supported somewhat by the increasing numbers of workers who have gone on disability since the Great Recession.  While this also may correlate with the aging of the workforce, there is some evidence that people who have lost jobs and cannot find new ones have been seeking disability payments (private and public) to replace at least some of their incomes.

And then, I believe, there is a third reason.  

The Underground Economy

This is a great big unknown, and one that probably grows each year.  Because of its very nature, it is not reflected in government reports.  It has several elements.

One is the unknown number of undocumented or illegal (your choice) immigrants.  It was said at the turn of the millennium that the number of these was 11 million; we still read the 11 million number, but the likelihood is that many more economic immigrants have crossed the border since 2000.

Without green cards or other documents, these immigrants cannot be employed in the traditional economy.  We have no idea how many construction workers, housekeepers, landscapers, restaurant workers and others without papers are making their livings in the US.  There is no way to quantify how many are in the labor pool and how many are working.

In addition, more Americans are working off the books, at least partly because of government incentives.

If you can can generate $500 a week doing odd jobs and you don't report the income to the IRS, you can keep an extra $306 a month in self-employment (Social Security and Medicare) taxes.  That's real money when your income is $24,000 a year.

If you are one of the many people who now can find only part-time work and you supplement your income with $200 by walking dogs or babysitting, you can save $31 in self-employment taxes.  Even small marginal increments matter if your income is low.

If you live in California and start a small LLC (limited liability corporation), which is a good idea if you have a small services company, you pay a minimum of $800 each year to register your LLC with the state, plus the 15.3 percent federal self-employment rate, plus federal and state income taxes, which in California are relatively high.  These things add up, and I'm betting lots of masseuses and party planners and one-person consultancies don't report their income, or at least not all of it.

A side benefit of managing your income downward is that you may qualify for Earned Income Tax Credits and government-subsidized health insurance.

Then there is the matter of illegal work.  Drug dealers and sex workers are expected to report and pay taxes on their incomes just like the rest of us, but my guess is that most of them do not do so.  It is true that Al Capone was jailed for income tax evasion, but that was a long time ago; I don't hear much about it these days.

What Do We Know?

As more people move out of the formal economy, we lose track of the size of the economy itself.   We don't really know how many people are working, and the monthly jobs growth figures become less relevant.  Because many informal businesses don't report incomes,  there is some part of GDP that is not captured in federal reports.

There is some evidence to believe this is happening.  In recent years, for instance, consumer spending has ticked up more than would be suggested by employment and income reports.  

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