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Signs of Gradually Accelerating GDP Growth
U.S. fourth-quarter GDP came in at 2.8%, up from 1.8% in the third quarter. While this was a bit weaker than expected, the groundwork is being laid for a gradual acceleration of the U.S. and global economies in 2012. An acceleration makes sense after the battering in 2011 from Japan’s earthquake; the unsettling U.S. debt-limit fiasco and downgrade in August; the ECB’s delay in providing banks with unlimited access to a lender-of-last-resort facility; and China’s engineered slowdown from its real-estate bubble. Fourth-quarter GDP growth was helped by a buildup in inventories, which provided 1.9% of the 2.8% growth. The inventory buildup added to output in the quarter but will probably subtract some from future quarters — in effect, businesses produced more than they needed to. As 2012 progresses, however, several factors argue for an acceleration of the U.S. economy including: 1) pent-up investment demand — durable-goods orders grew a strong 3% in December, which should add to production in the first quarter; 2) a pickup in Asia — China and other countries are loosening monetary and credit policies, and production is shifting to meet the strong growth in domestic demand; China will encourage bank lending to support the leadership transition late in 2012; and 3) continued growth in corporate profits — corporate profits have been one of the best leading indicators of GDP growth, falling well before GDP and rising during expansions. One particular bright spot already: Vehicle sales rose to a 14-million annual rate in January, up 13% since January 2011. Labor Environment Improving Gradually Stronger growth in the fourth quarter gave a boost to the labor environment. Claims for unemployment insurance fell well below 400,000 per week in most of December and January. The Labor Department’s report on job openings in December showed a 258,000 increase, pushing job openings up to 3.4 million at the end of 2011, matching the strongest level since 2008. For January, the population-adjusted household survey showed 631,000 net job gains, while the labor force increased 250,000, allowing the unemployment rate to fall to 8.3%. The household survey helps pick up turning points because it includes jobs created by new and small businesses and in self-employment. One particular uncertainty in the labor outlook is that the weakness in employment since 2008 coincided with the baby boom’s transition into retirement age. It’s not clear how many older workers who have left the labor force will find or want employment when labor conditions improve. The data show a decline in the participation rate — the percentage of the employable population that is employed or actively looking for work — to 63.7% in January from a peak of 67.3% in 2000. During the same time period, the percentage of the working-age population 55 and over has increased rapidly, reaching 32% in 2011, up from 26-27% in the 1990s. Historically, participation in the labor force has tended to decline with age, explaining part of the decline and suggesting that it won’t fully reverse. Another part of the low participation rate is due to discouragement (those who have given up looking for a job due to the weakness of the economy). This factor may reverse when labor conditions improve. If so, it will slow the decline in the unemployment rate but also add to the labor force and the economy’s growth rate as those workers returning to the labor force find jobs. Because the number of older workers and discouraged workers is large (causing the sharp decline in the participation rate), their decisions on whether to return to the work force will have a big impact on unemployment, employment, and GDP growth in coming years. For example, if the participation rate recovers to 65.5%, the midpoint between the peak and the present level over the next five years, and the unemployment rate declines to a still-high 7.2%, the midpoint from the 2007 trough and the 2010 high, it would bring the U.S. GDP growth rate to 3.6%, breaking the economy fully out of its stagnation. Consistent job growth above labor-force growth will be necessary to reduce the unemployment rate over the long run. Unfortunately, the increase in employment over the last 10 years has only been about 50,000 per month, while the working-age population growth averaged 215,000 per month. This left the unemployment rate much higher than a decade ago. Growth in the working-age population went through the baby-boom surge in the 1970s (up 200,000 per month), the bust in the 1980s and early 1990s (up 100,000 per month), the echo of the baby boom in the 2000s (up 200,000 per month), and is now slowing toward a much slower growth rate in the 2020s (trough will be about 80,000 per month). That suggests that the unemployment rate could fall substantially as the economy recovers some of its lost dynamism.
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