Many private-sector forecasters are expecting GDP growth to hit a bit of an air pocket in the first quarter of 2011 before growing at a pace above 3 percent for the remainder of the year.1 But the temporary deceleration in GDP Blue Chip forecasters are expecting coincides with an increase in private payrolls of 564,000 from December to March, the fastest pace of growth so far in this recovery.2 How can economic growth slow when employment is picking up? Well, this result is not unusual it turns out. As shown in the figure above, the relationship between private-sector job growth and GDP growth on a quarterly basis has been surprisingly weak over the course of the first two years of the past three economic recoveries (and “surprisingly weak” is an understatement as the correlation between the two series is almost 0). In late 2009 and early 2010, during the current recovery, we saw a combination of good GDP growth but weak employment growth, and wondered, where are the jobs?”
Why is there such a weak relationship between GDP and jobs? The main reason is simply that quarterly changes in employment and GDP are volatile. Short-term numbers have a way of moving up and down a lot. That’s why economists emphasize longer-term averages that smooth out this volatility.
Another reason is that firms adjust the number of hours their employees work in addition to simply adjusting their headcounts. Hours tend to rise and fall before employment does.
A third reason is that the pace of productivity growth can vary greatly from quarter to quarter; the average absolute quarterly swing in nonfarm productivity growth has been 3.1 percentage points over the past 10 years, on an annualized basis. That’s big, and it’s one reason why people who study productivity don’t place too much emphasis on quarterly fluctuations. One interesting facet of the current recovery, though, is how much productivity growth there has been. Firms have been able to produce much more with fewer workers. That's not great for labor demand in the short run, but it is good for our competitiveness in the longer run (productivity growth in manufacturing has been rising at a 3.7-percent annual rate over the past 10 years; productivity in the nonfarm business sector as a whole has grown at a 2.6-percent annual rate).
Finally, it should be noted that both GDP and payroll employment become more accurate with revisions, as more data are received. As I’ve mentioned before, employment data often get revised, and revisions should be part of the discussion. (http://www.esa.doc.gov/Blog/2011/03/30/say-what-thats-not-what-you-told-me-last-month [3])
~Mark Doms, Chief Economist, U.S. Department of Commerce
April 26, 2011
- 1. Expectations are from Blue Chip forecast, April 10, 2011.
- 2. For this blog, one reason we emphasize private payroll growth over total payroll growth is that the 2010 Census greatly impacts the quarterly payroll numbers.
