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Euro Zone Business Activity Rises

September 23, 2013 by

Business activity in the euro zone rose this month to a 27-month high, according to a survey of the zone’s purchasing managers by Markit Economics, a data and analysis firm based in London.

Germany, which has the largest economy in Europe, led the euro zone with strong new business and employment gains, according to the Markit survey. French purchasing managers also reported modestly improving business.

The report came on the heels of the election victory of Chancellor Angela Merkel in Germany. European stock markets and the euro currency were essentially unchanged, as investors took the widely expected election outcome in stride; only the large margin of Ms. Merkel’s success had been unexpected.

Ms. Merkel’s triumph and the fact that the anti-euro party Alternative for Germany fell short of the total needed to enter Parliament may allow her more freedom to address problems like the likelihood that Greece, Portugal and Slovenia will need additional bailouts. Germany also holds trump cards in crucial European discussions on banking oversight. But Germany’s own banks remain fragile.

Markit’s composite index of euro zone purchasing managers, which tracks sales, employment, inventory and prices, rose to 52.1 in September from 51.5 in August, the sixth consecutive monthly gain. Markit said new orders received by businesses accounted for the gain, rising at their fastest pace since June 2011.

James Howat, an economist with Capital Economics in London, wrote in a note that the data suggested a rise in quarterly growth of about 0.4 percent, after the second quarter’s gain of 0.3 percent, or 1.1 percent on an annualized basis.

While even a modest increase in growth would be welcome news for the battered European economy, a much more significant rebound will be necessary to address its unemployment crisis. More than 19 million people are without a job in the euro zone, according to Eurostat, the European Union statistical agency.

The zone’s economy had contracted for the six quarters before the April-to-June period, and Mr. Howat said that some recent data had been disappointing. The recovery remains “fragile,” he said.

While Germany’s economy is improving, the country’s central bank warned on Monday that German banks were still shaky.

As a group, German banks reported higher operating profit in 2012, the German Bundesbank wrote in its monthly report. But much of the improvement was the result of trading profits, which are subject to large fluctuations, the Bundesbank said.

The better overall result “should not obscure the fact that the German banking industry remains in a complex state of conflict,” the Bundesbank said. Banks must find a balance between the need for profitability and the need to build more sustainable businesses, it added.

While there is no shortage of credit in Germany, banks like HSH Nordbank in Hamburg and Commerzbank in Frankfurt remain burdened by exposure to loans to the troubled shipping industry and other problems. As a group, German banks are among the most highly leveraged in the world, which could make them vulnerable to financial shocks.

Jack Ewing contributed reporting from Berlin.

Article source: http://www.nytimes.com/2013/09/24/business/global/euro-zone-business-activity-rises-in-quarter.html?partner=rss&emc=rss

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Manufacturing in China Picked Up in March

March 21, 2013 by Leave a Comment

HONG KONG — Manufacturing activity in China has perked up in March after a lull during the Lunar New Year holiday in February, underlining that China’s economy appears on track for solid — but not sizzling — growth this year.

A closely watched index of sentiment in the vast Chinese manufacturing sector, published by the British bank HSBC on Thursday, showed a reading of 51.7 points in March. That was a better-than-expected improvement from the 50.4 in February, when many factories shut during the Lunar New Year break, and took the reading well above the level of 50 that separates expansion from contraction.

But despite the rebound, the March result was shy of the level seen in January — yet another indicator that the economy has settled into more modest growth than it experienced prior to the global financial crisis.

The purchasing managers’ index reading “implies that the Chinese economy is still on track for gradual growth recovery,” Qu Hongbin, chief China economist for HSBC, wrote in a statement accompanying the data release. “Inflation remains well behaved, leaving room for Beijing to keep policy relatively accommodative in a bid to sustain growth recovery.”

Improving overseas orders for Chinese-made goods and a flow of government-mandated investment into infrastructure projects helped pull the economy out of a slowdown last year, averting a “hard landing.”

The upturn has, however, been gradual, in part because policy makers have been eager to steer the economy toward more modest expansion in the hope of easing the risks of inflation, potential loan defaults and inefficient investment.

Balancing the various pressures will be tricky, analysts warn.

A renewed climb in property prices, for example, earlier this month prompted fresh efforts to cool the market — potentially hurting some developers and their lenders.

Likewise, the surge in credit that supported growth in recent years has created new risks that will need to be reined in. Zhiwei Zhang, an economist at the investment bank Nomura, warned in a report last Friday that “China is displaying the same three symptoms that Japan, the U.S. and parts of Europe all showed before suffering financial crises: a rapid build-up of leverage, elevated property prices and a decline in potential growth.”

The government is likely to tighten policy to contain financial risks, Mr. Zhang wrote, but this will come at the cost of slowing overall growth in the second half of this year.

Longer term, Chinese demographics — its labor force will shrink as the population ages — mean that the productivity of workers and companies will have to rise. The new leadership in Beijing is betting on faster urbanization as a major driver of future growth.

Analysts cautioned, however, that potentially tough changes would also be needed — including, for example, allowing more competition in areas dominated by sprawling state-owned enterprises, and weaning the economy off its reliance on state-driven investment and exports.

“China’s new leaders pledged to make the Chinese dream come true by bringing benefits of growth to the people,” economists at Citibank wrote in a research note Monday. “This requires a difficult balance between growth and reform. Reform is likely painful but there is no alternative.”

Article source: http://www.nytimes.com/2013/03/22/business/global/manufacturing-in-china-picks-up-in-march.html?partner=rss&emc=rss

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Economic View: Housing Market’s Future Still Has Many Clouds

January 26, 2013 by Leave a Comment

It would be comforting if they were. Yet the unfortunate truth is that the tea leaves don’t clearly suggest any particular path for prices, either up or down.

On the one hand, there were sharp price increases in 2012, with the S.P./Case-Shiller 20-City Index, which I helped devise, up a total of 9 percent over the six months from March to September. That comes after what was generally a decline in prices for five consecutive years. And while prices dropped very slightly in October, the trend was quite encouraging for the market. (Our November data come out on Tuesday.)

But some of these changes were seasonal. Home prices have tended to rise every midyear and to fall slightly every fall and winter. And for some unknown reason, seasonal effects have become more pronounced since the financial crisis.

After screening out these effects, a number of indicators are up, including data for housing starts and permits as well as the National Association of Home Builders/Wells Fargo Index of traffic of prospective homebuyers, which has made a spectacular rebound since last spring.

What might explain this picture? It’s hard to pin down, because nothing drastically different occurred in the economy from March to September. Yes, there was economic improvement: the unemployment rate, for example, dropped to 7.8 percent from 8.2 percent. But that extended a trend in place since 2009. There was also a decline in foreclosure activity, but for the most part that is also a continuing trend, as reported by RealtyTrac.

And, last spring, along with Karl Case of Wellesley College and Anne Thompson of McGraw-Hill Construction, I conducted a detailed survey of the attitudes of recent home buyers in four American cities, as I discussed here in October. We did not see any evidence of increased optimism.

In short, it is hard to find an exact cause for the rebound in home prices. But that isn’t unusual — we hardly ever know the real causes of major changes in speculative prices. Yet we do know that any short-run increase in inflation-adjusted home prices has been virtually worthless as an indicator of where home prices will be going over the next five or more years.

THERE is a good deal of short-run momentum in home prices — they tend to keep going in the same direction for a year or maybe more. But those prices have generally reverted to the mean fairly quickly, in inflation-corrected terms. The upswing in home prices from 1997 to 2006 — up 86 percent, in real terms — was an anomaly. And that upswing was almost completely reversed by 2012. We certainly can’t rule out another boom. It’s possible that the 20th-century pattern of real home prices, which typically hugged the historical mean, has disappeared. Perhaps people are more speculative in their thinking, after the recent roller-coaster ride, and more prepared psychologically to buy into a bubble. But I wouldn’t put any money on that.

History doesn’t suggest that another big bubble will come so fast. In fact, before the most recent one, the United States had had only one major national home price boom in the last century, when real prices rose a total of 68 percent from 1942 to 1953.

After the traumatic collapse of the last price bubble, Americans seem less sanguine about owning versus renting. According to the Census Bureau, the homeownership rate has been falling, from 69.0 percent in the third quarter of 2006 to 65.5 percent in the third quarter last year.

A study of the causes of these rate movements, by Stuart Gabriel of the University of California, Los Angeles, and Stuart Rosenthal of Syracuse University, concluded that further declines seem likely, but that a forecast would depend “on uncertain forecasts of attitudes toward investing in homeownership as well as changes in credit market and other economic conditions.” (The study was presented at the January meetings of the American Real Estate and Urban Economics Association/American Economic Association.) If the trend continues, it would suggest long-term declines in prices of existing detached single-family homes, because they are costly to manage as rentals.

The housing market has also been subject to new oversight, including that of the Consumer Financial Protection Bureau, which just this month announced new ability-to-repay standards for mortgage lenders. Those standards will make wild lending harder to do.

So it seems that since 2006, our society — including both buyers and lenders — hasn’t become more speculative in its attitudes toward housing. Instead, it has become more wary, and more regulated.

And, of course, economic clouds are still hovering. Slow overall growth continues in the United States, and European financial markets remain vulnerable.Much of our economy, notably housing, is still supported by taxpayer bailouts, which are clearly not a long-term solution. There are also lingering uncertainties about emerging-market economies, as well as the risk that a disturbance in the Middle East could cause an energy crisis.

Most experts are not predicting any big change in home prices. As of December, the Zillow-Pulsenomics Home Price Expectations Survey, which involves more than 100 forecasters, and the S. P. Case/Shiller Composite Index Futures were both forecasting modest increases for the next half-decade, implying inflation-adjusted price growth of 1 to 2 percent a year.

The bottom line for potential home buyers or sellers is probably this: Don’t do anything dramatic or difficult. There is too much uncertainty to justify any aggressive speculative moves right now. If you have personal reasons for getting into or out of the housing market, go ahead. Otherwise, don’t stay up worrying about home prices any more than you do about stock prices.

I can’t offer any clearer picture, and I don’t see a solid basis for anyone else to do so, either.

Robert J. Shiller is professor of economics and finance at Yale.

Article source: http://www.nytimes.com/2013/01/27/business/housing-markets-future-still-has-many-clouds.html?partner=rss&emc=rss

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U.S. Economy Adds 155,000 Jobs; Jobless Rate Is 7.8%

January 4, 2013 by Leave a Comment

The biggest gains were in health care, food services, construction and manufacturing, and the government sector showed modest job losses, the report said. The unemployment rate was 7.8 percent, the same as in November, whose rate was revised up from 7.7 percent.

“It’s not a home-run report by any stretch, but it’s constructive,” said John Ryding, chief economist at RDQ Economics. “It’s another month of fairly stable, solid, moderate job creation.”

Over the course of 2012, the country added 1.8 million jobs, despite continued job losses in the government sector and anxiety related to the presidential election and scheduled tax increases and spending cuts. 

Economists are unsure of what the rest of the year holds for the American job market, but most are forecasting more of the same: hiring fast enough to stay just ahead of population growth, but still too slow to make a sizable dent in the 12.2-million-person backlog of unemployed workers.

A number of encouraging trends in the economy suggest that businesses have good reason to speed up hiring, including the housing recovery, looser credit for small businesses, a rebound in China and pent-up demand for new autos. Friday’s jobs report also showed slightly faster wage growth and longer working hours in December, both of which bode well for hiring.

But Congress’s last-minute deal to raise taxes earlier this week will offset some of these sources of growth, since higher taxes trim how much money consumers have available to spend each week.

“Job creation might firm a little bit, but it’s still looking nothing like the typical recovery year we’ve had in deep recessions in the past,” Mr. Ryding said. “There’s nothing in the deal to do that and nothing in this latest jobs report to suggest that. We’re a long way short of the 300,000 job growth that we need.”

The fiscal compromise also renewed for a year the federal government’s emergency unemployment benefits program. That allows workers to continue receiving unemployment benefits for up to 73 weeks, depending on the unemployment rate in the state where they live, and acts as a stimulus to the American economy because unemployment benefits are spent almost immediately.

The extension has proved to be a tremendous relief to the 2 million workers who would have otherwise abruptly lost their benefits this week.

“We woke up on Wednesday morning and saw the news and just said, ‘thank God, thank God, thank God,’ and then went out and went food shopping because we knew we had money coming in,” said Gina Shadis, 56, of Newton, N.J.

Both she and her husband, Stephen, were laid off within the last 14 months from jobs they had held for more than a decade: she from a quality assurance manager position at an environmental testing lab, and he as foreman and senior master technician at an auto dealership. They are now each receiving $548 per week in federal jobless benefits, or about a quarter of their pay at their most recent jobs.

“It has just been such a traumatic time,” she said. “You know you wake up in the morning with shoulders tense and head aching because you didn’t sleep the night before from worrying.”

While Congress’s deal on New Year’s Day brought clarity to tax and unemployment benefits policies, lawmakers have still not settled their disputes about federal spending cuts and the debt ceiling. Economists worry that the lingering uncertainty over these issues could discourage businesses from investing in more workers or equipment.

“We may be seeing the calm before the storm right now,” said Ian Shepherdson, chief economist at Pantheon Macroeconomic Advisors, noting that a recent survey from the National Federation of Independent Business found that alarmingly few small companies plan to hire in the coming months. “Small businesses are wringing their hands in horror at what’s going on in Washington.”

In the meantime, more than six million workers have exhausted their unemployment benefits altogether since the recession began in December 2007, according to the National Employment Law Project, a labor advocacy group.

Millions of workers are sitting on the sidelines and so are not counted in the total tally of unemployed. Some are merely waiting for the job market to improve, and others are trying to invest in skills to appeal to employers who are already hiring.  

“I have a few prospects who say they want me to work for them when I graduate,” said Jordan Douglas, a 24-year-old single mother in Pampa, Tex., who is enrolled in a special program that allows her to receive jobless benefits while attending school full time to become a registered nurse. She gets $792 in benefits every two weeks, a little less than half of what she earned in an administrative position at the nursing home that laid her off last year.

She calculates that her federal jobless benefits will run out the very last week of nursing school.

“This had to have been a sign from God that I had to do this since it all worked out so well,” she said.

Article source: http://www.nytimes.com/2013/01/05/business/economy/us-economy-adds-155000-jobs-jobless-rate-is-7-8.html?partner=rss&emc=rss

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Union Membership Rate Fell Again in 2011

January 30, 2012 by Leave a Comment

The nation’s union membership rate continued a decades-long slide last year, falling to 11.8 percent of the American work force in 2011, the Bureau of Labor Statistics announced in a report on Friday.

That was down from 11.9 percent the previous year even though total union membership edged up, rising by 49,000 last year to 14.76 million. The overall membership rate declined because the increases in organized labor’s ranks did not keep pace with overall growth in employment.

The bureau announced these numbers as the nation’s labor unions have been coming under heavy political attack. Republican governors and Republican-controlled legislatures in Wisconsin and in several other states have pushed to curb the power of public employees to bargain collectively. Moreover, Indiana is poised to become the first state in more than a decade to enact a “right to work” law, which bans employers and unions from agreeing to contracts that require workers to pay fees for union representation.

According to the bureau, 16.3 million workers are represented by unions, some 1.5 million more than the total membership, indicating that many workers opt out of joining the unions that represent them at their workplaces.

The percentage of public sector workers in unions was 37 percent last year, more than five times the 6.9 percent membership rate for private sector workers. In the 1950s, more than 35 percent of private sector workers were in unions.

The Bureau of Labor Statistics said the number of private sector workers in unions increased by 110,000 to 7.2 million, buoyed by a rebound in manufacturing and construction employment. But with many states, cities and school districts laying off employees, the number of public sector workers in unions dropped 61,000, to 7.56 million.

The bureau found that New York State had the highest unionization rate, 24.1 percent, followed by Alaska (22.1 percent) and Hawaii (21.5 percent). North Carolina had the lowest rate, 2.9 percent, with South Carolina second-lowest (3.4 percent). The data was collected in the Current Population Survey, a monthly survey of 60,000 households.

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Economix Blog: A Challenge for Unions in Public Opinion

September 2, 2011 by Leave a Comment

A new Gallup poll has found that a slim majority of Americans, 52 percent, approve of labor unions and that the difference in views between how Democrats and Republicans feel toward unions has reached record levels.

The Gallup poll, released on Thursday, found that the approval rate for unions was unchanged from 2010 and was up from 2009, when unions had the lowest approval rating, 48 percent, since Gallup began this survey in 1936.

Gallup

Showing a huge partisan difference in views, the poll of 1,008 adults found that 78 percent of Democrats approve of unions, while just 26 percent of Republicans do, the lowest percentage ever for Republicans.

Jeffrey M. Jones, Gallup’s managing editor, wrote, “This could reflect a greater politicization of union issues given the fact that many state-level efforts to curb union influence were promoted by Republican governors often backed by a Republican-controlled legislature.”

After Republicans swept to power in many states last November, the Republican governors of several states, most notably Wisconsin and Ohio, moved to curb collective bargaining by public-employee unions, an effort that generated huge resistance from labor unions and Democrats.

Mr. Jones wrote that the huge debate over union rights this year “seems to have resulted in a draw in the court of public opinion, with labor unions neither gaining nor losing Americans’ support overall compared with last year.”

The Gallup poll found a strong rebound of Democrats’ and independents’ views toward unions over the last two years. Approval among Democrats rose to 78 percent from 66 percent in 2009, and to 52 percent from 44 percent among independents. For Republicans, the approval rating was 26 percent this year, down from 34 percent last year (and 29 percent in 2009).

This year’s poll found that 52 percent of Americans approved of unions and 42 percent disapproved. (The survey was conducted Aug. 11 to 14 with 95 percent confidence that the maximum margin of sampling error is plus or minus 4 percentage points.)

When the overall approval rating for unions fell to its lowest level ever in 2009, many labor relations said that was because many Americans believed that labor unions could be too stubborn and demanding and were a major cause of the General Motors and Chrysler bankruptcies that year. Union leaders maintain that a major reason for the overall decline in approval ratings in recent years — the approval rate was 65 percent less than a decade ago — is that conservative politicians and think tanks have been putting out a flood of negative information about organized labor.

Business groups say labor’s approval ratings have slid from decades past because many Americans feel they have good wages and benefits and no longer see a need for unions.

Labor leaders acknowledge that one of their biggest challenges is to figure out how to make Americans more enthusiastic about unions and unionizing at a time when many workers face stagnating wages, rising insecurity on the job and employers’ cutting back on pensions and other benefits — all while corporate profits have been quite strong.

Article source: http://feeds.nytimes.com/click.phdo?i=ef1fd2af70f1f9cb116e96761e5eb2dd

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Asian Markets Rebound

August 25, 2011 by Leave a Comment

The Fed’s symposium at Jackson Hole, Wyo., has been the key focus of investor attention for days now, with some anticipating — rightly or wrongly — that the Fed’s chairman, Ben S. Bernanke, could outline more stimulus measures for the ailing U.S. economy during the event.

Many have been sitting on the sidelines in anticipation of the event, though hopes for fresh signals of Fed support have also helped stock markets in the United States and Europe post gains.

Markets in Asia have staged a less decisive rally than those in Europe and the United States this week, mostly wavering between losses and gains all week.

After modest falls on Wednesday, Thursday was a day of muted rises across the region: The key indexes in Japan, Singapore and Hong Kong were all 1.4 percent higher by late morning. In Australia, the S.P./ASX200 rose 1.2 percent, and in mainland China, the Shanghai composite index gained 0.9 percent by late morning.

Meanwhile, the price of gold hovered around the $1,750-an-ounce mark, having sagged about $100 dollars during the U.S. trading day Wednesday.

The precious metal is seen as a haven, and is generally much sought after in times of uncertainty. This haven status has pushed the price of gold sharply higher since July — an ounce of gold was worth about $1,484 on July 1. But as the price rises continued, analysts have increasingly warned that the market was due for a correction.

Article source: http://www.nytimes.com/2011/08/26/business/daily-stock-market-activity.html?partner=rss&emc=rss

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Spending Fell and Income Barely Rose in June

August 2, 2011 by Leave a Comment

WASHINGTON — Americans cut back on spending in June for the first time in nearly two years, and their incomes grew by the smallest amount in nine months, troubling signs in a barely growing economy.

The Commerce Department said in a report released on Tuesday that consumer spending dropped 0.2 percent in June. Some of the decline was caused by declining food and energy prices, which had spiked in recent months. When excluding those items, consumer spending was flat.

Income rose 0.1 percent, the weakest showing since September, reflecting anemic hiring this spring, while the personal savings rate rose to 5.4 percent of after-tax incomes, the highest level since August 2010.

The data highlighted that consumer spending weakened during the April-June quarter, which could mean the sluggish economy is worsening. Consumer spending is closely watched because it accounts for 70 percent of domestic economic activity.

“The recent run of weak economic news has made us more concerned that any rebound will be more modest than previously looked likely,” said Paul Dales, senior United States economist at Capital Economics.

High gas prices and unemployment have squeezed household budgets this spring, leading to tepid overall economic growth in the April-June quarter. The economy expanded at an annual rate of 1.3 percent in the second quarter after only 0.4 percent growth in the first three months of the year. The combined growth for the first six months was the worst since the recession ended two years ago.

Many Americans are cutting back on purchases of cars, furniture, appliances and electronics. Employers have responded by reducing hiring. The economy added just 18,000 net jobs in June, the fewest in nine months. The unemployment rate rose to 9.2 percent, the highest level this year.

The government is to issue its employment report for July on Friday.

The biggest drop in spending occurred in items like food and gasoline. Spending on such non-durable goods fell 5.5 percent, reflecting price declines after increases early this year. An inflation gauge tied to consumer spending dropped 0.2 percent in June, the biggest one-month decline since September 2009. Outside of food and energy, prices were up 0.1 percent.

Still, spending on durable goods, such as autos, also fell in June 1.1 percent. One reason for the decline may be the shortage of popular car models in showrooms. Supply chain disruptions caused by the March earthquake in Japan have limited production of auto and electronic parts.

Declining growth and rising unemployment have raised concerns that the country could fall back into a recession.

Many analysts were still hopeful that growth will rebound in the second half of the year, but the timing of any turnaround is hard to gauge. Manufacturers had their weakest growth in two years in July, according to the Institute for Supply Management.

And gasoline prices remain high, even after coming down from a peak of nearly $4 a gallon in early May. The average price for a gallon of regular unleaded was $3.70 on Tuesday — 14 cents higher than a month ago and almost a dollar more than in the same month last year.

Some economists have begun to trim their forecasts for the second half of the year. Capital Economics said it had cut its outlook for second-half growth to 2 percent from a previous forecast of 2.5 percent.

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Economic View: Jobless Rate Is Not the New Normal

April 10, 2011 by Leave a Comment

The turmoil of the last few years, however, has shaken up the economy. Is it possible that it has affected the natural rate of unemployment — increasing it to 8 or even 9 percent? Such a climb would imply that the prospects for a rebound in output and employment have been greatly reduced — and that high unemployment would be our new normal.

This is implicitly the view of some Federal Reserve policy makers, who say that there is nothing more the central bank can do to lower unemployment. And it’s the view of those who say “structural” factors are the main cause of our current high unemployment, which stood at 8.8 percent in March.

Fortunately, there is a more compelling explanation. Strong evidence suggests that the natural rate of unemployment actually hasn’t risen very much. Instead, the elevated unemployment rate appears to reflect mainly cyclical factors, particularly a lingering shortfall in consumer spending and business investment.

Consider the effects of changes in industrial composition. The housing bust and financial crisis led to a decline in construction and finance employment that is likely to be long-lasting. Does that imply a substantial rise in normal unemployment? Almost surely not. Compared with the pre-crisis days, about 1.3 million more construction and finance workers are out of work. Even if they all remained permanently unemployed — which is obviously unrealistic — this change would add less than a percentage point to the normal unemployment rate.

More fundamentally, the economy can usually cope with changes in industrial composition. During normal times, industries decline and grow, and displaced workers move to new sectors. For example, manufacturing jobs declined steadily as a share of total employment in the 1990s, yet the normal unemployment rate remained very low.

The real problem today is that jobs are scarce in just about all sectors. An important study, published in 2010 and recently updated, showed that workers who have lost jobs in construction and finance have been leaving the ranks of the unemployed at almost the same rate as those laid off in less troubled industries. The problem isn’t about particular sectors; it’s about a general lack of hiring.

What about declining geographic mobility? Today, about 11 million families are underwater on their mortgages, which means they owe more than their homes are currently worth. This could make it harder for them to sell their homes and move to jobs in other regions.

But the argument that such “house lock” is a source of high unemployment runs into two empirical walls. First, jobs are not plentiful anywhere. In the most recent data, the unemployment rate in every state was above its level before the recession. So our unemployment problem wouldn’t go away if only people could move more easily.

Second, if house lock were an important factor, we would expect to see greater declines in labor mobility in states with more underwater mortgages, and among homeowners compared with renters. A study scheduled for publication in The Journal of Economic Perspectives finds no support for either of these hypotheses.

Narayana Kocherlakota, the president of the Federal Reserve Bank of Minneapolis, made waves last August when he pointed to a recent climb in posted job vacancies as evidence that current unemployment is mainly structural. Normally, there wouldn’t be this many vacancies until unemployment were closer to normal. Therefore, he argued, a severe mismatch between unemployed workers and the skill requirements or location of available jobs had raised the normal unemployment rate by as much as three percentage points.

But this analysis misses the fact that early in recoveries, vacancies typically rise relative to unemployment. Also, as discussed by Peter A. Diamond in his recent Nobel prize lecture, businesses that are relatively more plentiful today — for example, larger companies and those outside of construction — tend to post their vacancies more consistently. Thus, the changing composition of companies helps explain the unusual rise in vacancies.

When experts weigh the evidence, they come down strongly on the side that normal unemployment has not risen greatly. Once a year, the Survey of Professional Forecasters asks respondents for their estimate of the natural unemployment rate. In the third quarter of 2010, the median estimate was 5.78 percent, almost exactly one percentage point higher than in the third quarter of 2007, just before the recession started. (The highest estimate was 6.8 percent.) And the Congressional Budget Office uses 5.2 percent as its estimate of the natural rate.

All of this suggests that most of our high unemployment is still the consequence of low demand. Consumers remain hesitant to spend because unemployment and debt are high. Companies are unwilling or unable to invest because customers are few and credit is still tight.

This diagnosis suggests that the appropriate remedy is to stimulate demand. In February, I suggested a number of steps the Federal Reserve could take. Some additional fiscal measures would also be useful. More public investment (as the president has advocated), additional aid to state and local governments, and a cut in payroll taxes for employers would all help. Given the severity of the long-run budget problem, short-run fiscal stimulus should only be undertaken as part of a comprehensive package of gradual spending cuts and tax increases. That would give the economy the jolt it needs, while providing reassurance that the United States will remain solvent over the long haul.

 

REGARDLESS of the cause of extended high unemployment, it is a disaster for families, the economy and government budgets. Thus, if I am wrong, and more unemployment is structural than the current evidence suggests, this is no excuse for washing our hands of the problem. Only the nature of the needed policy response would change. Instead of focusing on increasing demand, we would need policies to help workers and jobs find one another, measures to move workers to where the jobs are (or vice versa), training programs and better education.

And even though today’s unemployment appears mainly cyclical, it could turn structural. The longer that unemployment remains high for cyclical reasons, the more likely that job prospects for unemployed workers will be permanently damaged. In a number of European countries in the 1980s, for example, prolonged recession appears to have caused normal unemployment to rise sharply. Getting cyclical unemployment down quickly is the surest way to prevent that from happening in the United States. 

Christina D. Romer is an economics professor at the University of California, Berkeley, and was the chairwoman of President Obama’s Council of Economic Advisers.

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