Scorecard on the Economy: A Guide for Policymakers

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:

• Since January 2001, when President George W. Bush was sworn in, payroll jobs have declined by millions and recovered by millions, but still remain 700,000 below their peak, even after factoring in a recent benchmark revision.[1]
• On the other hand, the household survey reports a record high level of working Ameri­cans in 2004, with 1.8 million more jobs since January 2001.[2]

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.[3]

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.[4]

Unemployment and the Recession.

• Unemployment, a lagging indicator, remained mild throughout and after the 2001 recession, peaking at 6.3 percent. In contrast, unemploy­ment peaked at 7.8 percent after the 1990 recession, and unemployment peaked at 10.8 percent after the 1980 recession.
• After the 1990 recession, unemployment exceeded 6.3 percent (the peak rate after the 2001 recession) for 40 consecutive months.
• The peak unemployment rate after the 2001 recession (6.3 percent) is lower than the aver­age unemployment rate for the 1980s and less than one point higher than the average unem­ployment rate for the 1990s.

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:

• First, the participation rate of women age 20 and above is the same today as it was in 1997 and higher than every year before 1997.
• Second, the decline in total participation rates since 2001 is driven largely by the unprece­dented drop-off in teenagers ages 16-19 who are willing to work, from 52 percent in 2000 to 43 percent in 2004.

Unemployment Claims.

• Initial unemployment insurance claims for October 14, 2004, were at 354,000, and the four-week moving average was 348,500.
• The 25-year average of initial claims is 380,520.
• The Wall Street rule of thumb is that any level of claims below 400,000 signifies labor market strength.[5]

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.

• During the 1980 and 1990 recessions, real hourly earnings declined.
• However, during and after the 2001 recession, real earnings increased--by 2 percent since the recession began in March 2001.
• Real earnings are higher now than they were at the height of the dot-com boom in 2000.
• Personal income is also growing. In the second quarter of 2004, personal income increased more quickly than during any other quarter of the past three years.

Manufacturing. Jobs in manufacturing are on the decline worldwide as a result of new technology, increasing productivity, and strong competition.

• From 1995 to 2002, worldwide manufacturing employment declined 11 percent, which matches the decline of manufacturing employ­ment in the United States over that period.[6]
• Even in China, employment in the manufac­turing sector has fallen--by 15 percent from 1995 to 2002.[7]
• Nevertheless, manufacturing in the United States has rebounded strongly of late. Produc­tion is rising quickly. As measured by the Department of Commerce, manufacturing sales grew at a 6.1 percent annual rate in the second quarter of 2004, which followed a 6.6 percent annual rate of growth in the first quar­ter.
• Manufacturing employment reversed its decline in February 2004 and has since added 70,000 payroll jobs.
• Overall, the manufacturing sector has expanded for 16 consecutive months, through September 2004.[8]

Economic Growth

• Real gross domestic product (GDP) grew at a 3.3 percent annual rate in the second quarter of 2004, following a high 4.5 percent growth rate in the first quarter.
• In 2003, GDP grew by 4.4 percent.
• The average growth rate during the 1990s was 3.26 percent, just under the last quarter's rate of growth and well below the growth rate for 2004 so far.

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.

• Business investment contracted at a 1.14 per­cent annualized rate over the 14 quarters prior to the 2003 tax cuts.
• Business investment grew at a 13.03 percent annualized rate over the three quarters follow­ing the 2003 tax cuts.

Outsourcing and Insourcing

• Today, more than 5.4 million jobs in America are the result of insourcing; i.e., they have been outsourced from other countries into the United States.[9]
• Annually, these insourced jobs account for $307 billion in wages and salaries.[10]
• Insourced jobs pay an average of 19.1 percent more than the average job in the United States.[11]
• Forrester Research estimates that 3.5 million jobs will be outsourced between 2000 and 2015.[12]
• Over the past decade, on average, 7.71 million jobs were lost every quarter as part of the nor­mal flux of the economy.[13] Forrester's estimate would account for less than an average of 1 percent of the jobs lost each quarter.In the first quarter of 2004, just 4,633 workers were laid off as a result of outsourcing--about 2 percent of total mass job layoffs.[14]
• In terms of the industries affected and posi­tions potentially at risk, the use of outsourcing has changed little over the past five years. In other words, this is no rapidly accelerating trend of outsourcing.[15]
• The United States exports more business, tech­nical, and professional services than it imports (offshore outsourcing of service work is synon­ymous with importing those services). In 2003, the trade surplus for these services was $27.0 billion.[16]
• Overall, the United States ran a $57.7 billion trade surplus in all services in 2003.

Health Care

The Uninsured. According to the U.S. Bureau of the Census, 44.9 million Americans went with­out health insurance for some part of 2003.[17]

• The typical family that loses coverage is unin­sured for 5.6 months.[18]
• Only 3.3 percent of all Americans went with­out some kind of health insurance for four or more years.[19]
• In 1996, some 8.8 percent went without health insurance for the entire year. This figure dropped to 8.0 percent by 1999.[20]
• In 1996, 78.2 percent of all Americans had health insurance for the entire year. By 1999, the rate had risen to 80.4 percent.[21]
• Medicaid enrollment has grown in recent years, but the Census Bureau's survey of the uninsured undercounts Medicare enrollment by 18 million, compared to figures from the Centers for Medicare and Medicaid Services.[22]

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 majority of HSA enrollees pay between $51 and $100 per month for coverage--far less than other types of individual insurance would cost.[23]
• Early experience shows major cost savings for small businesses. Some small businesses have been able to cut their health coverage expendi­tures by 20 percent using HSAs while holding employee out-of-pocket expenses steady and actually improving the level of care.[24]

Poverty

The 2001 Recession.

• The poverty rate for 2003 was 12.5 percent, which is higher than for recent years but still bet­ter than the poverty rate for 1998 of 12.7 percent and the poverty rates of the previous 15 years.[25]
• Poverty always rises with recessions, but the increase in poverty stemming from the most recent recession was about half the increase of each of the previous two recessions.[26]
• In previous recessions, child poverty increased significantly, but during the most recent reces­sion, it increased only slightly. The 1980 reces­sion caused a 5.5 percentage point jump in child poverty, and the 1990 recession caused a 2.7 percentage point jump, but the 2001 reces­sion caused only a 1.6 percentage point increase in child poverty.[27]

Poverty in America.

• More than half of all poverty "spells" (time spent in poverty) last less than four months, and about 80 percent last less than a year.[28]
• Very few people--only about 2 percent of the total population--are chronically poor in America, as defined by living in poverty for four years or more.[29]
• About 13 percent of poor families and 2.6 percent of poor children experience hunger at some point during the year. In most cases, their hunger is short-term; 89 percent of the poor report that their families have "enough" food to eat, while only 2 percent say they "often" do not have enough to eat.[30]
• About 38 percent of all households in the lowest income quintile (that is, the bottom 20 percent of earners) rose to a higher quintile within three years. An almost equal percent­age (34 percent) of all households in the top quintile fell within three years.[31]

Income Inequality.

• According to the uncorrected Census numbers, the top 20 percent of earners (top quintile) earned $14.20 of income for every $1 of income earned by the bottom 20 percent.[32]
• However, the Census figures do not account for benefits provided by employers and the government, taxes, differing household sizes among the quintiles, and differing work hab­its among the quintiles.
• After accounting for benefits and taxes, the income ratio between the top and bottom quintiles drops to $8.56 for every $1.[33]
• After also accounting for household sizes, the income ratio between the top and bottom quintiles drops to $4.21 for every $1.[34]
• Finally, accounting for hours worked (i.e., assuming that all non-elderly adults work equal amounts) reduces the income ratio between the top and bottom quintiles to $2.91 for every $1.[35]
  

Poverty and Taxation.

• Households in the top income quintile provide one-third of all labor in the economy.[36]
• Households in the top income quintile pay 82.5 percent of total federal income taxes and two-thirds of federal taxes overall.[37]
• Households in the bottom income quintile pay 1.1 percent of total federal taxes.[38]
• Nearly 40 million tax filers--about one-third of the total--pay no income taxes. Nearly all of these zero-tax filers are low-income individu­als and families. Many of them actually receive money for filing taxes through the child tax credit or the earned income tax credit.[39]

The Tax Cuts

• The expanded child tax credit--recently extended by Congress and the President--ben­efits the parents of over 47 million children.[40]
• In 2001 and 2003, Congress and the President cut taxes on married couples to reduce the "mar­riage penalty"--the premium that a married couple paid in taxes above what the couple would have paid if they had filed separately.
• Congress and the President extended the mar­riage penalty fix in 2004, benefiting 33 million joint-filing couples--mostly couples in which both spouses work and the second earner con­tributes at least 30 percent of total income.[41]
• In 2001, Congress and the President created a new 10-percent tax bracket for low-income workers, reducing their marginal tax rate from 15 percent. In 2003, Congress and the Presi­dent expanded the 10 percent bracket, and in 2004, Congress and the President extended the 2003 expansion, which was due to expire. That extension will benefit 80 million taxpayers.[42]
• The Bush tax cuts, even if made permanent and combined with indexing the Alternative Minimum Tax to inflation (essentially another tax cut), only return the tax burden to its his­torical level as a proportion of the economy (about 18.4 percent of GDP).[43]
• Conversely, allowing the Bush tax cuts expire would raise the tax burden to historically unprec­edented levels (24.7 percent of GDP by 2045).[44]

Conclusion

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.