Posts by Gad LevanonOctober 24, 2016 | No Comments » More on: Economic Indicators & Forecasting
Even as the US economy continues to expand, largely on the back of solid household spending, the corporate profits environment is turning south after several years of exceptional performance (chart 1). This profits recession has led many to believe that an economic recession may be around the corner. However, while a return to substantial corporate profits growth is unlikely in the foreseeable future, we don’t believe this decline signals an imminent recession for the economy as a whole.
Source: Bureau of Economic Analysis. Shaded areas are periods of recessions.
But let’s take a step back first. How did corporate profitability perform so strongly in the first five years after the financial crisis, despite the mediocre growth recovery? Part of the answer lies in a period of remarkable cost-cutting that began in the late 1990s and continued through the Great Recession, which saw U.S. workers replaced with technology (productivity growth) or less expensive labor located in emerging countries (offshoring). Likewise, there is growing evidence that increased industry concentration in many U.S. sectors drove rising profitability over the past decade.
Two additional factors contributed to the high profitability rates of US corporations during the post-crisis years. First, as a result of high unemployment, wage growth was historically low between 2009 and 2015. Second, interest rates have also remained historically low ever since the Great Recession, thus reducing the cost of financing. Corporate profits soared from the confluence of all these forces.
But periods of very high profitability tend not to last very long, and it seems that U.S. corporate profits peaked in the second half of 2014, and are now on a downward trend. Some of the trends that contributed to high profits earlier have reversed themselves in recent years. Offshoring activity has declined substantially from the previous decade, productivity growth has been anemic in the last six years, and tighter labor markets are beginning to accelerate wages. On top of that, the appreciation of the U.S. dollar lowers profits generated in other countries.
The recent decline in profits has raised the alarm about the possibility of a recession. In almost every expansion since 1959, a recession followed less than two years after a peak in corporate profits (chart 2). We are now about two years removed from the 2014 peak. Is a recession therefore imminent?
Source: Bureau of Economic Analysis. Shaded areas are periods of recessions.
As the current economic growth trend is only about 1.5 percent and corporate profits are declining, the probability of a recession is indeed higher than in most periods of expansion. Investors and executives do not like to see profits declining, and we could be approaching a watershed moment that decisively shifts companies into a cost-cutting mindset, followed by drop-offs in spending and investment. And indeed, business investment fell by one percent over the last four quarters—the first decline over four quarters in a non-recessionary period in 30 years. And remember, it takes much less to move the current growth rate of 1.5 percent into negative territory than dropping from three percent—the average postwar growth rate during an economic expansion—to zero.
But all that said, The Conference Board Leading Economic Index® (LEI) for the U.S. has yet to show any signs of looming recession. The household and government sectors seem able and willing to continue to spend, and thus offset the lower spending of the business sector. In addition, partly as a result of the very mild expansion, the US economy has yet to develop the sort of obvious bubbles or over-spending and -leveraging that triggered previous recessions.
If a recession does occur, corporate profits will plummet, as they always do when demand contracts. However, even if the US economy manages to avoid a recession in the coming years, the outlook for corporate profits remains negative. Economic growth is likely to remain slow and the labor market is only getting tighter. Having fallen back down to Earth from the antigravity era of 2011–14, the sustained headwinds now squeezing corporate profits should incentivize business leaders to find new ways to increase the productivity of their existing workers. The urgent question is how—and the answers may determine the shape of U.S. economic performance for years to come.
July 15, 2016 | No Comments » More on: Economic Indicators & Forecasting
This post was written by Gad Levanon, Chief Economist, North America and Frank Steemers, Research Assistant.
One of the surprising features of the US economy in recent years has been rapid employment growth despite only modest economic growth. While GDP in the current economic expansion has been growing much more slowly than in previous expansions, employment growth has been quite robust (chart one).
Much has been written about this topic in recent years. In this blog we are looking at rapid employment growth by considering the share of shrinking industries in the economy. When a small share of industries are shrinking, overall employment growth tends to be higher. This blog examines the share of industries that have been shrinking in each of the past 25 years. We look at all 4 digit NAICS Code industries (there are about 240 of them), and for each year we plotted below the share of the industries that experienced an employment decline. We divided the industries into manufacturing and non-manufacturing.
In Chart Two, it is important to look beyond the spikes around recession years. There is obviously a jump in the number of shrinking industries in recession years. It may be more useful to compare numbers over time in non-recessionary years. Let’s start with manufacturing industries. Recently, the number of manufacturing industries with declines in employment in recent years has been the lowest since at least the early 1990’s. In 2015, only 21% of manufacturing industries experienced a decline in employment. Between 1991 and 2010 that share never dropped below 32%, and between 1999 and 2010 it never dropped below 55%.
Why have so few manufacturing industries experienced a decline in employment in recent years? It has certainly not been due to strong demand. As mentioned above, economic growth has been unusually weak in the current expansion. The answer is probably a combination of a slowdown in productivity growth, lower offshoring activity and slower import penetration from foreign competitors.
When employers in a certain industry are able to maintain production with fewer workers due to technological improvements or other reasons, the number of workers in that industry is more likely to shrink. At The Conference Board we have been writing a lot about the slowdown in productivity growth. See here and here for example. Many others have been writing about this as well. One reason for this lack of productivity growth is a lack of innovation and – what economies like to call – creative destruction.
Similarly, when employers shift production to other countries, the number of domestic workers shrinks. There are no official measures of the number of jobs lost to offshoring. One related data source that existed until 2012 was the Mass Layoff Statistics from the Bureau of Labor Statistics. One of the measures from that survey was mass layoffs due to movement of work to overseas locations. In 2012 that number was a fraction of the 2004 level (Chart Three), suggesting that offshoring activity slowed down significantly in the past decade .
In the non-manufacturing sectors there also are fewer shrinking industries now compared with 2001-2010 period, but the change is much less dramatic than in manufacturing.
One possible conclusion is that between the late 1990s and the start of the Great Recession the combination of rapid technological change, offshoring and import penetration caused a major disruption to US manufacturing, and a smaller one to non-manufacturing, but that this disruption is largely over by now. That is one of the reasons for the robust employment growth in this expansion despite modest economic growth.
Will we see more shrinking industries in the future? It is hard to predict future productivity growth and offshoring activity, but the tightening of the labor market is a factor that is likely to increase the number of shrinking industries. Faster labor cost growth and declining corporate profits in the US are likely to push more businesses to further automation and offshoring, though the scope for more offshoring appears much more limited than 10-15 years ago.
In case you are wondering which industries are still shrinking in recent years, the list is below. The majority of these industries have been constantly shrinking for one or two decades.
Here are the industries that were mostly shrinking in 2011-2015:
Electric power generation
Paper and paper products
Printing and related support activities
Computer storage devices, terminals, and other peripheral equipment
Electricity and signal testing instruments
Wholesale and retail
Paper and paper products
Book stores and news dealers
Office supplies, stationery, and gift stores
Publishing industries, except Internet
Video tape and disc rental
U.S. Postal Service
 It was probably lower than in the 1980s as well. The shift in industry classification makes comparisons to the 1980’s problematic, but from looking at the data it seems that the number of shrinking industries throughout the 1980’s was higher than in recent years.
 According to a TD Economics report from 2012, the overall magnitude of job losses due to offshoring was large: “Of the 5.3 million manufacturing jobs lost since the turn of the century, we estimate that roughly 1 million were from the direct effects of offshoring to low-cost China.”
Don’t be surprised if inflationary pressures build up steam as the economy gets increasingly constrained by the supply sideApril 15, 2016 | No Comments » More on: Economic Indicators & Forecasting, Procurement & Supply Chain Strategy
In the weeks after the Fed raised interest rates in December, global financial markets trembled and inflation expectations, as measured by the bond market, declined significantly. On February 9, market-based inflation expectation over the next five years fell to just 0.93 percent, the lowest level since the Great Recession. This drop in inflation expectations fueled calls for halting the rate hikes, with a growing cohort of economists and market participants questioning the wisdom of raising rates in the first place.
December 17, 2015 | No Comments » More on: Economic Indicators & Forecasting
With the Fed raising rates this week, the monetary policy debate on the next step will commence, focusing on whether or not the Fed made a mistake in raising rates too soon, and what it should do going forward.
August 17, 2015 | No Comments » More on: Economic Indicators & Forecasting, Labor Markets, Looming labor shortages, Measuring social impact, Productivity & competitiveness, Sustainability, innovation & growth
In recent years, official estimates of labor productivity growth have shown a significant slowdown. But many argue that the government has failed to correctly estimate productivity. This argument was made recently in a Wall Street Journal article featuring Hal Varian, Chief Economist of Google. The piece prompted an elaborate discussion in the blogosphere.
Mismeasurement of productivity likely results from mismeasurement in any of the three components used to construct productivity measures:
- The number of actual dollars being exchanged for production
- The real value of production, which adjusts the dollars paid for production for price changes and quality improvements
- Labor input or number of hours worked, which is used to calculate real value of production per worker or hours of work
Most of the mismeasurement discussion has to do with the second point, the real value of production, and rightly so. Measurement issues with the actual number of dollars being exchanged for production or with labor input do not explain the productivity slowdown.
July 24, 2015 | No Comments » More on: Economic Indicators & Forecasting
One big question regarding the US economy is whether wage growth is accelerating. You might think that this is a pretty straightforward question to answer, but it’s not. There are many measures of wage growth, and they don’t all point in the same direction. For example, we can compare the year-over-year wage growth in recent years (Chart 1)according to four different measures, three from the US Bureau of Labor Statistics: the Employment Cost Index (wages and salaries), average hourly earnings (Establishment Survey), median weekly earnings (Current Population Survey), and the new Atlanta Fed Wage Growth Tracker. Some of these measures show a significant pickup, but some show no acceleration at all. What should we make of this?
July 14, 2015 | No Comments » More on: Economic Indicators & Forecasting
- The tightening of the labor market, leading to higher turnover and faster compensation growth, and
- Significant slowdown in labor productivity growth.
Looking forward, we believe labor productivity growth is unlikely to bounce back to the rates seen 10-20 years ago. We expect the labor market will continue to tighten, given the historically low trend in labor force growth in the next 15 years.
March 30, 2015 | No Comments » More on: Economic Indicators & Forecasting
Six months after our major report on looming labor shortages in the US and other advanced economies, it’s time to take stock. How is the labor market doing, where is it going, and what does it all mean for employers, workers and even for families?
If anything, our projection of rapidly tightening labor markets was too conservative. Employment growth in the past six months has been exceptionally strong, averaging almost 300,000 new jobs every month—this despite GDP growth that is still growing at just 2.5 percent, well below the rate in previous expansions.
March 26, 2015 | No Comments » More on: Economic Indicators & Forecasting
In the past year, indicators of the perceived difficulty in recruiting qualified workers have suggested that it has become as hard to recruit qualified workers now as during 2007, the last pre-recession year, in which the US labor market was quite tight. These measures are somewhat surprising, since most indicators related to labor market tightness, such as the unemployment rate, quit rates, and wage growth suggest that the labor market is not as tight as it was around 2007.
March 18, 2015 | No Comments » More on: Economic Indicators & Forecasting, Energy & Sustainability, Growth, Productivity & Competitiveness, Labor Markets, Productivity & competitiveness, Sustainability, innovation & growth
A few weeks ago, we posted a blog describing the impact of the drop in oil prices on the labor market. Since then, we’ve learned more. Today we draw on new data and our expanded analysis to update and add to our previous results.
Generally speaking, jobs related to oil and gas are declining, though still moderately. The February employment report from the Bureau of Labor Statistics shows a more visible decline here, but one that is still moderate for the two most related industries: oil and gas extraction and support activities for mining. Jobs declined by about 2% in these two industries between December 2014 and February 2015.