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WebMemo #379 on Taxes

December 5, 2003

Strong Economic Growth Continues

By

The November employment report -- continuing the string of good economic news -- shows increasingly strong economic growth with low inflation and remarkably high worker productivity.

 

The Bureau of Labor Statistics reports:

  • The unemployment rate declined for the second straight month, dropping this past month from 6.0 percent to 5.9 percent,
  • The job growth trend continued with October's numbers revised upward to 137,000 new jobs reinforcing indications of a growing recovery. The number of new jobs in November, 57,000, will probably be revised upwards like the previous three months. 

Overall, economic indicators have been very robust and paint an encouraging picture.

 

New Jobs

 

Productivity

The productivity growth of the third quarter was outstanding at 9.4 percent, the most growth in twenty years. More significant is that there has been job growth even with record productivity growth. Productivity growth this high is far above normal business activity, however as the productivity gains ease, continued job growth will follow as these numbers indicate strong demand. Productivity is key to increasing overall wealth because it allows goods to be produced in a more efficient manner.

 

Manufacturing

There is continuing good news coming from the manufacturing sector. Manufacturing is having some of its best months in 20 years and demand for new goods is increasing. The downturn in manufacturing jobs slowed dramatically over the past months indicating that job losses in that sector have peaked and are declining. 

 

The Commerce Department gave manufacturing sector more good news by announcing that new factory orders were up 2.2 percent, the highest increase in fifteen months and the fifth increase in the last six months. Business inventories continued to decline as well indicating that demand is outstripping output. This increase in demand of manufacturing goods points to a growth in manufacturing jobs in the near feature.

 

Payroll & Household Survey Comparison

The November employment report again highlighted differences between the payroll survey and the household survey. The payroll survey contained moderate job growth while the household survey featured another drop in the unemployment rate. Additionally the household survey showed a much more substantial growth in jobs than the payroll survey, which continues a trend of large differences that labor economists have been tracking for over a year

 

While there are many differences between the payroll or establishment survey and the household survey (both conducted for the Bureau of Labor Statistics under contract by the Census Bureau), the two surveys generally have tracked each other over the last fifty years have shown the same trends in job gains or losses. Thus the widening gap between the two surveys has been a bit puzzling especially since over the last decade the payroll survey has shown more employment growth than the household survey. 

 

Both surveys are used to estimate employment with some variation in their purpose. The establishment survey seeks to measure not just employment but also hours and wages. The household survey measures the demographics of employees as well as their working status. 

 

There are other structural differences such as what constitutes employment and the coverage of the survey. The household survey covers the prison population and agricultural workers while the establishment survey does not. The household survey is also more likely to count self-employed workers than the establishment survey.

 

Small Business and Self-Employment Growth
While the payroll survey has generally been viewed as more accurate in counting the overall employment, there is strong evidence that the payroll survey's accuracy diminishes in periods of economic transition[1]. Hence it tends to overstate employment in downturns and understates employment in upturns.

 

Economist James Smith of the University of North Carolina says, "When you're at a turning point in the economy, you get a lot of new business startups. … They don't show up in the payroll data for about a year". [2]

 

A primary failing of the payroll survey is its inability to estimate self-employed workers. Some reports show that the number of self-employed workers could have increased by over 400,000 in 2003. The income of the self-employed has also seen a sharp increase indicating that these workers are earning income.

 

On December 1, a Wall Street Journal stated, "The Commerce Department reported Wednesday that proprietor's income, excluding the farm sector, was up 8.6% from a year earlier. By contrast, the wages and salaries of individuals on corporate payrolls were up just 2.3%. While business-formation data is spotty, it is clear that individual business owners are seeing strong growth in their own income."[3]

 

Continued Upward Revisions

The payroll survey's inability to capture the rise of the self-employed is due to its structure. The BLS interviews existing firms while the Census Bureau interviews workers directly. As a result, Census can capture job growth sparked by job hiring in small businesses better than the payroll survey can. Haseeb Ahmed of Economy.com believes that the payroll survey's undercounting of small business employment will lead to an upward revision of the payroll survey employment numbers, similar to the revision in the early 1990's when revisions to the payroll survey doubled the number of job gains.[4]

 

Both surveys measure the employment status of the U.S. economy. However, both surveys have their flaws and at times present a picture that is wildly divergent from the real economic situation. With the growth of small business and the self-employed, it is quite likely the payroll survey will be revised upward erasing part of the divergence with the household survey.



[1] Nardone, Thomas, Bowler, Mary, Kropf, Jurgen, Kirkland, Katie and Wetrogan, Signe "Examining the Discrepancy in Employment Growth between the CPS and the CES" October 17, 2003, paper to Federal Economic Statistics Advisory Committee (FESAC).

[2] Smith, James, as quoted by the Raleigh News Observer, October 1, 2003

[3] Hilsenrath, Jon "The Self-Employed Boost U.S. Economic Recovery", The Wall Street Journal, December 1, 2003.

[4] Ahmed, Haseeb "Perhaps a Not-So-Jobless Recovery After All", Economy.com, September 9, 2003.

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