Government statistics don’t pass the ‘sniff test’
Have you ever gone to the refrigerator, opened it up, and been hit in the face with an odor that tells you something in the fridge is not quite right? Well, that is precisely what is happening right now with the government’s current crop of economic statistics. Something stinks. The problem is that it is sometimes extremely difficult to tell what the smelly culprit is, and if a wrong guess is made, the health-related consequences could be significant, much like trying to digest a rotten piece of food.
Over the past few months, the usual economic data have been released and various data elements suggest a very different nature to our nation’s economic growth path.
The data releases that tend to get the most attention, the employment/unemployment figures, seem to point to a strengthening business sector. For the past three reported months — from December of last year through February of this year — the average number of payroll jobs created exceeded 240,000. At the same time the unemployment rate has tracked downward, falling from 8.5 percent to 8.3 percent. All-in-all, these numbers would seem to suggest the much-anticipated turnaround in labor markets has arrived and its clear sailing ahead.
But then there are other data series flashing red lights and warning that the near-term outlook is anything but rosy. Most particularly, recent data related to past, present, and future economic growth may be problematic.
Consumer spending, which accounts for over 70 percent of economic activity has been flat for the past three reported months, and this despite strong retail sales data which seem to suggest the consumer sector is picking up steam. In part this difference may be due to the realization that retail sales make up less than half of all consumer spending, with spending on “services” sometimes weak even as retail sales are strong.
But even with this distinction, how can a flat-lined consumer sector produce so many new jobs? Well, perhaps the jobs being created are not all that great in terms of the income they produce, which then facilitate only mediocre consumer spending. On this matter, figures are hard to come by, since the payroll data series do not provide the needed data to break down the nature of jobs being created. Fortunately the other labor market series, the household survey, does distinguish between full time (working at least 35 hours per week) and part time workers.
Over the one-year time frame from February 2011 through February 2012 total employment expanded by 1.8 percent. When broken down by full time versus part time, the latter grew much more quickly, with a year-over-year growth rate of 2.6 percent (compared to 1.7 percent for full time). But then — it seems like there is always a “but then” when dealing with economists — the average number of hours worked (by all workers) rose by 0.6 percent over that same one year, so average weekly earnings are not as adversely impacted as the part-time employment numbers alone suggest.
Which then brings the analysis to figures on total personal income, which are partially derived from the wages received from workplace efforts. Over the one year period from January 2011 through January 2012, personal income from all sources rose by a modest 3.6 percent. Far more robust was the growth rate from wage and salary income, up by 5.0 percent. So, perhaps it is this work-related income which really counts in terms of consumer spending. But then, why isn’t consumer spending stronger, particularly given that the savings rate has fallen over the past year (from 5.2 to 4.6 percent)?
One possible explanation could be that other sources of income — such as from government transfer payments like unemployment compensation — have partially offset the higher earned income. Data would seem to suggest this is true, with transfer payments rising by a very slim 0.2 percent over the most recent one-year period.
But then if this is true and government is backing off as a source of income (either before or after taxes), how can the level of total consumer spending hold up as time progresses? And won’t this eventually cause business hiring to stall out, as production and employment needs stagnate along with consumer spending?
In the final analysis, something about the present economic data is simply not passing the sniff-test. The problem is, analysts don’t know where the stench is originating and guessing wrong may lead to a very sick future business environment.
Dr. James Newton serves as chief economic advisor to Commerce National Bank and is an auxiliary faculty member in economics and statistics at OSU-Marion and OSU-Newark. Dr. Newton’s views do not necessarily reflect those of Commerce National Bank or OSU-Marion/Newark.