Employment, Recession and the Dollar

Friday's employment/unemployment report pretty much settled the issue of whether the economy is entering recession.  The net loss of 80,000 payroll jobs in March was bad enough without the downward revision of January and February to minus 76,000 each. The three months of the first quarter are estimated to have lost 232,000 net jobs.  

The unemployment rate, estimated from a different household survey, rose from 4.8 to 5.1 percent, resulting mostly from a reversal of the shrinkage of the labor force in February which had lowered the unemployment rate from 5 to 4.8 percent.

After 6 solid years of expansion, the first quarter is now likely to go down as the first quarter of a recession, although benchmark revisions in the future may revise the 4^th quarter from 0.6 percent positive to a small negative, making it the potential first quarter of a recession. (That happened in 2001, when, at the time, the 3^rd quarter was the first negative quarter, but later revisions suggested the recession began in March and ended only 8 months later in November. Thus, the recession was ending just when we thought it was beginning.  Not only does the future keep changing, which is confusing enough, but so does the past.)

I heard Marty Feldstein say on CNBC this morning that the last 2 recessions were both only 8 months long while the previous two lasted 16 months.  If he said it, I believe it, and I won't bother to look it up.  Assuming both the 1^st and 2^nd quarter real GDP numbers are negative, there is no telling whether this recession would come closer to 8 or 16, or be milder or more severe.  My guess it will be about as short and almost as mild as the recent two.

One thing real GDP has going for it this time is that the 0.6 growth rate of the fourth quarter wasn't as bad as it seemed.  For one thing, declines in inventories, which are treated as negative investment by the accountants, subtracted 1.7 percentage points from the GDP calculation.  Setting inventories aside, real final sales grew a respectable 2.3 percent.  Assuming the inventory declines were unintended and resulted from above-forecast sales, it augurs well for the near future.

Another bright spot in the recent GDP stats is international trade in goods and services have, under the influence of a more competitive dollar exchange rate, turned from a net negative in GDP calculations to a net positive.  For a long while, optimists have talked about rapidly growing exports while neglecting to mention that imports were growing rapidly too, offsetting the potentially expansionary export growth.  Recently, however, imports have slowed, and helped the surging exports provide net stimulus (defined as less of a drag) to the economy.  Since imports are substantially larger than exports, a smaller percentage in import growth might exceed a larger percentage of export growth in dollar terms.

Let me pause here and briefly address an issue that never gets addressed and one that I'm sure confuses many people.  Having imports subtracted from the GDP calculation, gives the impression that they are somehow negative or bad.  The reason they are subtracted is because in counting the other components of GDP, like consumption spending and investment spending or even government spending and exports, there are import components that haven't been taken out.  It is easier to add them up and take imports out of the total than to do it category by category.  The reason imports are subtracted in the first place is that spending on imports generates income in the exporting countries, not here.

The weaker dollar of late has contributed to the improvement in the net trade balances, and is one reason I'm in no big hurry for the dollar to rise again.  First, we need the stimulus to moderate the impending recession, or avoid it altogether.  Secondly, we need to shrink the current account deficit for its own sake.  Normally, a large excess of imports over exports would push the currency down to correct the imbalance, but capital inflows have prevented that adjustment.  The result has been a balance of payments pattern more suitable for a developing country than for the richest country in the world.  We have been borrowing money from countries poorer than us to finance our excess absorption of goods and services.  The accumulation of dollars abroad has the potential of stoking protectionist fears and fears that "foreigners are buying up our country."  We all feel better paying for our imports of goods and services with exports of goods and services rather than with financial and real assets.

Don't get me wrong, I like a strong dollar normally.  As I've said recently, I feel about a strong dollar like St Augustine felt in his famous prayer about chastity:  "Lord, make me chaste, but not just yet."  I say, "Lord, give us a strong dollar, but not just yet."