The optics of the GDP report were 'positive' at first blush, but not upon closer inspection [5]. Growth in the second quarter was better than expected. Recovery period growth was revised up slightly. And the Great Recession, while still catastrophic, now shows a modestly smaller decline in output than it did in the pre-revised data. But underlying GDP growth is frustratingly slow. And growth rates in the very recent past were revised lower.
But as Credit Suisse notes, this only deepens one of the unsolved mysteries in US data: buoyant payroll job gains of about 200K per month on average in 2013, juxtaposed against consistently tepid increases in real GDP. This is not a typical pattern. It seems our concerns over Obamacare's impact [6] (and the delayed impact of the sequester) are being ignored by the Pollyanna policymakers for now (though they are well aware of the 'born-again jobs scam' [7]).
[8]
One hypothesis advanced by some is that businesses are doubling up on part-time positions, as firms seek to minimize “Obamacare” mandates for providing health insurance to full-time employees [6]. The doubling up could be artificially raising payroll headcount without a corresponding increase in output. This has a certain amount of superficial plausibility. It’s true that the Household Survey shows a disproportionately large increase in part-time jobs this year, and payroll job gains have been heavily concentrated in restaurants and other low wage service jobs that have a large part-time component. On the other hand, the average workweek in the payroll survey has not declined in any significant way, either at an aggregate level or in specific relevant industries. If an increase in part-time employment were such a dominant factor, we would expect the average workweek to be shortening.
Another hypothesis: employment fell so far relative to output during the downturn, and took so long to recover, that even slow gains in GDP are good enough to produce an uptrend in employment. Put another way, firms are finding it harder to raise productivity at this more advanced stage of the cycle, so gains in output need to be “financed” increasingly with more workers at the margin [7]. If this is the case, solid employment growth may not be so out of step with GDP as long as demand does not slow sharply. But again, the data are not convincingly one way. If it’s taking more payroll to create GDP, we would expect even weaker corporate profits than we are currently observing.
Whatever the explanation, the disconnect between jobs and GDP remains a puzzle, and muddies the picture for policymakers.
Sequester shoe to drop in Q3 growth?
One of the reasons Q2 managed a better-than-expected quarter was the absence of the anticipated federal sector sequester drag. This was the first quarter of the year fully inclusive of the sequester, and a large decline in federal outlays was also implied by monthly Treasury data. But this scarcely registered in the GDP figures. Federal consumption and investment fell by just $3 billion (nominal terms) on the quarter.
Timing issues often cause an inconsistency between the GDP government figures and the budget data produced by Treasury. Given the large cuts to discretionary spending that are mandated in law, we might expect a deeper decline from the sequester to be scored in Q3 GDP, which imparts downside risk to our 2.6% Q3 growth forecast.
Source: Credit Suisse