AS PROMISED IN LAST WEEK’S COLUMN, I have some predictions about the coming year’s economic performance. I’ll devote a column next December to review what I got right and wrong below.
I’ve mentioned before in this space that economic expansion based on debt tends to end in tears (see 1929 and 2008 for what I mean by “tears”), while economic expansion based on rising wages (within certain limits) tends to be more sustainable and better for everyone, including the rich. The best example of this would be the post-World War II boom. For roughly 30 years after the war, strong unions and government support for the rights of labor meant the economy and the wages of the average worker grew in tandem, and there was enough left for capitalists to enable them to invest in further capacity to meet the ever-rising demand created by rising wages, so everyone got better together.
Fast forward to today: Unemployment is finally dropping to a level where workers can be confident of getting a new job if they leave their current position. Look at the statistics on “quits” — generally voluntary separations initiated by the employee. The quits rate “can serve as a measure of workers’ willingness or ability to leave jobs,” according to the Labor Department’s Job Openings and Labor Turnover Summary for October. That month, “The number of quits was unchanged at 2.7 million … maintaining the prior month’s increase.”
Workers’ increasing confidence of getting a new job if they leave their old job suggests that they may soon start to have more leverage when negotiating wages with prospective employers. This and the previously mentioned falling unemployment rate means companies will have a harder time filling positions than in the last few years, which also raises hope for a reversal of the decline in wages for the typical worker that has been a drag on economic recovery since the formal end of the Great Recession in mid-2009.
Another factor is the astonishing decline in gas prices in recent months, which has effectively given the average American worker a $1,200 annual raise. As the typical American household uses 1,200 gallons of gasoline per year, every dollar drop in the gas price means $1,200 that can be spent on other goods the economy produces.
In last week’s column, I raised the possibility that we may be on the verge of an economic boom. That was based mostly on my sense that there are a number of factors mentioned above which, taken together, point toward an acceleration in the rate of economic growth. While this is the consensus view of most mainstream economists, my speculating about the prospects of an actual boom (as opposed to a modest acceleration in economic activity) may have been premature.
As Dean Baker, macroeconomist and founder of the Center for Economic and Policy Research, said recently:
“I hate to put a damper on the party, but some of the reporting on the economy is getting a bit out of hand. The (Washington) Post gave us an example, with a piece on the revised fourth quarter GDP numbers headlined, ‘Robust economic growth in the third quarter raises hopes that a boom is on horizon.’ That’s not what Mr. Arithmetic says.
“First, just to be clear, the third-quarter numbers were definitely good news. Five percent GDP growth is a solid economic performance by any measure, so there is no doubt that it is a big step forward by any measure. The economy is clearly growing, and likely at a reasonably respectable rate. The issue is whether the term ‘boom’ is appropriate.
“As this article and other reporting notes, the third quarter follows a strong second quarter of 4.6 percent growth, which in turn followed a first quarter where GDP shrank by 2.1 percent. The piece dismisses the drop in first-quarter GDP as the result of bad weather. This is surely true, but the strong growth in the subsequent two quarters is clearly related to the drop in the first quarter. The growth in these quarters was a reversal of the decline in the first quarter.
“If we take the average growth over the last three quarters, we get a 2.5 percent annual growth rate. This isn’t bad, but it’s hardly anything to write home about. If we assume the economy has a potential growth rate (the rate of growth of the labor force plus productivity) in the range of 2.2-2.4 percent, then with the 2014 growth rate we are filling the gap in output at the rate of between 0.1-0.3 percentage points a year. CBO estimates that the gap between potential GDP and actual GDP is still close to 4 percentage points. This means that at the 2014 growth rate we can look to fill that gap in somewhere between 13 and 40 years. Perhaps we should put a hold on that champagne.”
Ok, Dean — point taken.
All that said and acknowledged, here are my predictions for 2015:
I expect the economy to grow somewhat above its potential growth rate. So, I’m going to go out on a limb and project 4.5 percent growth in GDP by December of next year.
Given the still-considerable slack in the labor market, plus unused productive capacity in the economy, plus those previously mentioned plunging gas prices, I expect inflation to remain below 2 percent for 2015 — I’ll say 1.6 percent.
I’m also going to be optimistic on the unemployment rate, which was 5.8 percent in November. I expect by the end of 2015 it will drop nearly another percentage point, settling to 5 percent flat by year’s end.
Finally, it is worth mentioning that while the signs are good that the economy will look better in 2015 than since before the financial crisis of 2008, there is still a long way to go before we pop the champagne corks mentioned by Dean Baker.
The broadest measure of labor market slack is called the “U-6 rate of unemployment” and it includes not just unemployed people who are actively looking for work, but also those who have given up looking for a job but are willing to work, those who are working part-time but would like full-time work, and so on. This measure is still over 11 percent — for comparison, it was around 7 percent at the crest of the 1990s boom — so there is still much work to be done to fully emerge from the shadow of the Great Recession.
Matt Talbot is a writer and poet, as well as an old Benicia hand. He works for a tech start-up in San Francisco.
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“I’ll devote a column next December to review what I got right and wrong below.”
Yet, the challenges to your predictions will come far sooner. The topic of breakfast food might even come up.
Matt you forgot a couple of things. These things could increase all of your predictions. Remember we will now have a minority Democratic party only backed by the President and his veto power which will be over ridden. Which means Harry Reid and his no result Senate will be exposed big time. It will now be the President Obama of no, which means vetos. Bad news for the Dems. Coal regs will be reduced to help places like Western Kentucky. After all you say we must help the lower income and improvished. Would you agree with that. The Keystone pipeline will be approved. Gas prices in Californis will go up. But that is because of Cap and Trade not from over supply. More Natural gas depots will be approved for overseas shipments along with pre refined crude for oversea shipments. We will also ship coal in large numbers to China. Medicaid will expand but not for the reason that the Dems say. Republicans will increase Medicaid on a state by state bases. Remember it is to the advantage of Republicans to put the bill on the Government. As you know the government at present pays 100% and will go to 90%. You know that tax money goes to pay for increased Medicaid coverage. That means less money to the EPA AND other Dem favorite items. The Republicans will not up taxe They may reduce them to help the growth. Yes Matt it will be a good year but the Dems will not be able to take credit. After all they only have the veto power and that will make them obstructionist. You know what they called the House Republicans.. The Republicans will take away the tax for bringing profits back ti the USA. plus other corporate taxes will be reduced. All that means is more money for domestic growth in production. The Dems do not understand that. Yes Matt 2015 could be a big year all to the advantage of the Republicans in a build up to 2016. Bye Bye Hillary and in steps the former Republican who is now a Socialist Senator Elizabeth Warren. I can hardly wait. We will compare in Jan of 2016. I like my chances.
Matt Stated: economic expansion based on debt tends to end in tears (see 1929 and 2008 for what I mean by “tears”)
You have touched on many issues in the past two pieces. It would be interesting to see your response to the following points:
1) You attribute primary causation of the ’29 depression and ’09 recession to ‘debt’, obviously referring to privately held debt and not to federal debt which you have previously encouraged. Given the financial situation of the past 6 years do you believe that ‘debt’ has increased or decreased?
2) Additional to point one above: The economies of the US and Canada are inextricably linked for obvious reasons. If debt was the primary cause of the depression, Canada would have suffered from the same impact of said causation. That being the case, why did over 8,000 banks fail in the US yet not one failed in Canada?
3) Although not specifically stated, one is led to the conclusion (based on previous writings) that actions taken by the current administration have positioned the country for the economic boom you have predicted. Can you tell us what specific actions taken by the administration have led you to this conclusion?
4) You have mentioned in both pieces the significance of the reduction in gas prices. Following on question two above, what actions by this administration has resulted in an increase in the supply of gas and thus a reduction in the price at the pump?
You have obviously studied economics judiciously and have looked deeply into the causes of the depression of ’29, thus the responses to one and two should be readily available. Additionally, your admiration for the current President should make the answers to both three and four also be easily attained.
I will look forward to your response.
I stated: Following on question two above
Correction: “three above”
I wasn’t aware that Matt was into economic forecasting, but having followed the economy pretty closely for about 40 years now I’d like to add my two cents. First of all I’m not sure I have ever heard that “For roughly 30 years after the war, strong unions and government support for the rights of labor meant the economy and the wages of the average worker grew in tandem,… “. We had a post-WWII boom, no doubt caused by pent up demand following the war, savings that would support it, a baby-boom, which created demand for all kinds of things and, ultimately, lower taxes. What does seem clear is that the recent recovery is very belated (the worst since WWII) and I’m afraid may not be sustainable. Most worrisome is a federal debt of 18 Trillion dollars. A simple calculation indicates that at more normal and historic rates of interest the yearly cost would swamp the federal budget. Hopefully, we will have an economic boom but it will take a real willingness to compromise on the part of the President to allow that to happen. .
We are about to have an economic boom. Pay attention. And the president has always been willing to compromise. Others haven’t.
H H explain his comprises to the readers. yOU SAY HE HAS ALWAYS BEEN WILLING TO COMPROMISE. PLEASE EXPLAIN THAT COMMENT. I think you will find Reg Page as a very well informed commentor. He makes no personal attacks or engages in name calling..
I’m sorry, I don’t understand what you are trying to say. Perhaps if you typed slower, or dictated to one of your great-grandchildren.
H H you know exactly what I was saying. Explain. By the way my youngest Great Grand child wants to know how come you have such a difficult time reading and understanding. I would be A little concerned about that..