October 21, 2004 | Center for Data Analysis Report on Economy
The U.S. economy has displayed a remarkable resilience following the 2001 recession. The economic slowdown of late 2000 that turned into a fully developed recession in early 2001 worsened with the terrorist attacks and corporate scandals late in the year.
This economic "perfect storm" produced a sluggish economy that many experts, including Federal Reserve Chairman Alan Greenspan, expected to remain sluggish or to worsen in 2002 and 2003. Instead, the economy burst out of its post-recession doldrums to record some of the best economic numbers of recent memory. Indeed, so robust has the economy been since the middle of 2003 that Chairman Greenspan, in his own understated fashion, paid the economy high praise by calling it "resilient."
The effectiveness of U.S. policies since 2001 is behind some of this resilience and led to the shallowest recession in modern American history. Today, business investment continues on an unprecedented expansion, and more Americans are working than ever before. Still, myths of economic weakness are rampant, driven by political hype about outsourcing, deficits, and oil prices.
Challenges remain for the next President, but the fundamental strength of the economy has kept America prosperous and offers the best promise for continuing growth in the years ahead. This paper presents a basic statistical overview of the American economy and prosperity that Americans enjoy today.
Jobs, Employment, and Income
Three main indicators inform the issue of employment in America: the overall growth in the number of people employed, the unemployment rate, and labor compensation. Naturally, a net increase in employment is seen as progress, but this statistic is sensitive to population and uninformative about willingness to work. Instead, economists have long believed that the key measure of employment is the percentage of people who are employed out of the entire population of potential workers. However, many people simply do not want to work in the formal labor force, either because they are studying for advanced degrees, are retired, or are caring for other matters in the home.
Thus, the unemployment rate is the best way to assess economic health. Another useful indicator is labor compensation, which for many observers represents the quality of jobs.
Jobs: Payroll or Household? The government provides many measures of job creation, but the two best known are the payroll survey from the Bureau of Labor Statistics (BLS) and the household survey from the Bureau of the Census. As widely reported, the two surveys are telling different stories:
Yet both surveys may be correct because they count jobs differently. Their counts are different in part because the household survey counts all jobs--not just payroll jobs--including a growing but hard-to-define class of new economy workers who are not on payrolls, such as part-time consultants, eBay entrepreneurs, and real estate agents.
In contrast, the payroll survey's name says it all. While payrolls provide a much larger sample size, this does not guarantee accuracy. In August, the BLS acknowledged that the survey has sample problems: It counts workers twice when they change jobs, which the BLS estimates accounts for about 250,000 of the difference that has opened up between the two surveys since 2001.
Moreover, this BLS analysis may be conservative: A Heritage Foundation analysis estimates that this flaw may result in an undercount of as many as 1 million jobs.
Unemployment and Discouraged Workers. The unemployment rate is the preeminent measure of the intensity of labor demand. When the rate dips below what economists consider the "full-employment" rate of 5 percent to 5.5 percent, the labor market is likely overheating, driving up inflation.
Over the past year, the unemployment rate has dropped in every region of the country and in 45 states. Moreover, non-farm payroll employment has increased in 47 states over the past year.
Still, some critics contend that the current low rate of 5.4 percent is a mirage because it neglects to include all the discouraged workers. The problem with this argument is that the BLS counts discouraged workers and even publishes an alternative "underemployment rate" called U-4, which is barely higher than the official rate. There are no more discouraged workers today than there were in the mid-1990s.
Labor Force Participation. The fallback critique is that labor force participation has declined from a peak of 67.2 percent in January 2001. That is true, but most of the decline was due to 9/11, not the recession. Labor force participation was 66.8 percent in October 2001, then 66.0 percent in August 2004. Analysts need to consider the reality that labor supply has changed, not just labor demand.
Two other points shed light on participation:
Real Earnings and Income. Worker pay is a sign of job quality. The Labor Department's measure of real hourly earnings is one of many pay statistics and includes all monetary compensation. However, it excludes benefits and, unlike other measures, only counts earnings for non-executive workers.
Tax Cuts and Business Investment. The 2003 tax cuts reduced taxes on business investment. When businesses invest in facilities, equipment, computers, software, and other inputs, they both demonstrate their belief that future growth will be strong and create the preconditions for economic expansion and job creation.
Outsourcing and Insourcing
The Uninsured. According to the U.S. Bureau of the Census, 44.9 million Americans went without health insurance for some part of 2003.
Health Savings Accounts. Health Savings Accounts (HSAs) were enacted as part of the Medicare Modernization Act of 2003 and took effect on January 1, 2004.
The 2001 Recession.
Poverty in America.
Poverty and Taxation.
The Tax Cuts
The economy has added more than 1.5 million payroll jobs over the past year and nearly 2 million jobs on the household survey. Most indicators point toward continued growth. Output is booming, the manufacturing outlook is positive, business confidence is high, and productivity continues to set records.
Even such favorites among economic pessimists like data on long-term unemployment, manufacturing employment, and worker discouragement are showing marked improvement--in addition to which the poverty rate is low by historical standards. Unfortunately for the pessimists, these are the facts that frame the debate on the economy today.
Tim Kane, Ph.D., is Research Fellow in Macroeconomics in the Center for Data Analysis, Andrew Grossman is Senior Web Writer and Editor, Rea S. Hederman, Jr., is Manager of Operations and a Senior Policy Analyst in the Center for Data Analysis, and Kirk A. Johnson, Ph.D., is Senior Policy Analyst in the Center for Data Analysis at The Heritage Foundation.
Payroll employment, as measured by the Current Employment Statistics survey from the BLS, peaked in March 2001 at 132,507,000 and reached its recent low in August 2003 at 129,789,000. Since then, the payroll survey has rebounded, hitting 131,567,000 in September 2004 after 13 straight months of gains. Additionally, the BLS announced that payroll numbers from March 2004 and on will be revised upward by an estimated 236,000 along with January 2005 data. Factoring in this change, payrolls are only 704,000 off their peak. See U.S. Department of Labor, Bureau of Labor Statistics, "The Employment Situation: September 2004," October 8, 2004.
According to the Current Population Survey, also known as the household survey, 139,480,000 Americans were employed in September 2004--not far from the survey's high of 139,681,000 in August 2004.
Tim Kane, Ph.D., "Diverging Employment Data: A Critical View of the Payroll Survey," Heritage Foundation Center for Data Analysis Report No. 04-03, March 4, 2004, at www.heritage.org/Research/Labor/CDA04-03.cfm.
E. Hilsenrath, "Latest Data Suggests the Job-Market Is Improving,"
CareerJournal.com, November 21, 2003, at www.careerjournal.com/salaryhiring/hotissues/
20031121-hilsenrath.html (October 13, 2004).
Joseph Carson, "Manufacturing Payrolls
Declining Globally: The Untold Story," AXA Advisors, LLC, October
10, 2003, at
Maufacturing_Payrolls_Declining.html (October 13, 2004).
U.S. Department of Labor, Bureau of Labor Statistics, "Business Employment Dynamics: Fourth Quarter 2003," August 3, 2004.
U.S. Department of Labor, Bureau of Labor
Statistics, "Extended Mass Layoffs Associated with Domestic and
Overseas Relocations, First Quarter 2004 Summary," June 10, 2004,
www.bls.gov/news.release/reloc.nr0.htm (October 13, 2004).
U.S. Government Accountability Office,
"International Trade: Current Government Data Provide Limited
Insight into Offshoring of Services," GAO-04-932, September
22, 2004, at www.gao.gov/new.items
/d04932.pdf (October 13, 2004).
U.S. Department of Commerce, Bureau of
Economic Analysis, "Foreign Direct Investment in the United States:
Detail for Historical-Cost Position and Related Capital and Income
Flows, 2003," and "U.S. Direct Investment Abroad: Detail for
Historical-Cost Position and Related Capital and Income Flows,
2003," in Survey of Current Business, Vol. 84, No. 9
(September 2004), p. 66, Table 4, and p. 107, Table 4, at www.bea.gov/bea
/pub/0904cont.htm (October 13, 2004).
Carmen DeNavas-Walt, Bernadette D. Proctor, and Robert J. Mills, "Income, Poverty, and Health Insurance Coverage in the United States: 2003," U.S. Department of Commerce, Bureau of the Census, P60-226, August 2004, at www.census.gov/prod/2004pubs/p60-226.pdf (October 13, 2004).
Shailesh Bhandari and Robert Mills, "Dynamics
of Economic Well-Being: Health Insurance 1996-1999," U.S.
Department of Commerce, Census Bureau, P70-92, August 2003, p. 10,
70s/p70-92.pdf (October 13, 2004).
Ibid., p. 2.
Ibid., p. 4.
See Derek Hunter, "Counting the Uninsured: Why Congress Should Look Beyond the Census Figures" Heritage Foundation WebMemo No. 555, August 26, 2004, at www.heritage.org/Research/HealthCare/wm555.cfm.
eHealthinsurance, "Health Savings Accounts
Fact Sheet," April 2004, at
October 13, 2004). See also Derek Hunter, "New Data on Health Insurance, the Working Poor, and the Benefits of Health Care Tax Changes," Heritage Foundation WebMemo No. 492, April 28, 2004, at www.heritage.org/Research/HealthCare/wm492.cfm.
U.S. Department of Commerce, Bureau of the Census, "Historical Poverty Tables," Table 2: Poverty Status of People by Family Relationship, Race, and Hispanic Origin: 1959 to 2003, revised August 26, 2004, at www.census.gov/hhes/poverty/histpov/hstpov2.html (October 13, 2004). See also Robert Rector, "Understanding Poverty and Economic Inequality in the United States" Heritage Foundation Backgrounder No. 1796, September 15, 2004, at www.heritage.org/Research/Welfare/bg1796.cfm.
Rector, "Understanding Poverty and Economic In
Ibid., p. 3, Figure 1.
Mark Nord, Margaret Andrews, and Steven Carlson, "Household Food Security in the United States 2002," U.S. Department of Agriculture, Economic Research Service Food Assistance and Nutrition Research Report No. 35, October 2003, at www.ers.usda.gov/publications/fanrr35/fanrr35.pdf (October 13, 2004).
Bhandari and Mills, "Dynamics of Economic Well-Being," p. 3, Figure 1.
Carmen DeNavas-Walt, Robert W. Cleveland, and Bruce H. Webster, Jr., "Income in the United States: 2002," U.S. Department of Commerce, Bureau of the Census, P60-221, September 2003, p. 25, at www.census.gov/prod/2003pubs/p60-221.pdf (October 13, 2004).
Robert Rector and Rea S. Hederman, Jr., "Two Americas: One Rich, One Poor? Understanding Income Inequality in the United States," Heritage Foundation Backgrounder No. 1791, August 24, 2004, p. 5, Chart 2, at www.heritage.org/Research/ Taxes/bg1791.cfm.
Ibid., Table 1, p. 7.
Ibid., Chart 6, p. 11.
Ibid., pp. 10-11.
Congressional Budget Office, "Effective Tax Rates Under Current Law 2001-2014," August 2004, pp. 10-11, Table 2, at www.cbo.gov/ftpdocs/57xx/doc5746/Report.pdf (October 13, 2004).
Scott Hodge, "40 Million Filers Pay No Income Taxes, Many Get Generous Refunds," Tax Foundation Fiscal Facts: Putting a Face on America's Tax Returns, June 5, 2003, at www.taxfoundation.org/ff/childcredit.html (October 13, 2004).
Rea S. Hederman, Jr., "One Cheer for the Tax Extender Package," Heritage Foundation WebMemo No. 572, September 23, 2004, at www.heritage.org/Research/Taxes/wm572.cfm.
Congressional Budget Office, "The Long-Term Budget Outlook," December 2003, p. 56, at www.cbo.gov/ftpdocs/49xx/ doc4916/Report.pdf (October 13, 2004).
Ibid., pp. 45 and 57.