Wednesday, November 22, 2006

Forecast downshift 

I'm glad I don't have to explain government forecasts (had a small bit of this in Ukraine a decade ago), because I don't think I could have made this statement with the Administration's latest economic forecast.

�The combination of lower energy prices, a tight labor market, and strong underlying fundamentals is producing a solid economy for America�s workers,� said Edward P. Lazear, Chairman of the Council of Economic Advisers. In the past year, hourly wages have increased 2.8 percent after adjusting for inflation, which is well above the historical average and amounts to about $960 for a full-time production worker. We expect real wage growth to continue.�

The Administration releases an economic forecast twice a year. The new economic forecast � which will be used for the President�s Fiscal Year 2008 budget � is similar to the consensus of professional economic forecasters and the Administration�s past forecasts.

"The economic forecast clearly reflects the fact that the U.S. economy is moderating to more sustainable growth levels, firmer labor markets and steady inflation rates. As we continue working toward pro-growth polices in the areas of retirement and energy security as well as worker competitiveness, we will achieve long-term U.S. economic strength, which will improve the standards of living for future generations of Americans," said Treasury Secretary Henry M. Paulson.

...The forecast shows a strong labor market with both the unemployment rate and monthly payroll job growth slightly lower than previously projected. Last month the unemployment rate dropped to the lowest rate in over five years, and it currently stands at 4.4 percent. The lower-than-expected unemployment rate has reduced the projected annual average to just 4.6 percent in 2006 and 2007. The new forecast projects payroll growth to average 129,000 jobs per month next year.

The previous averages were 175k in 2004, 165k in 2005, and 164k for the last twelve months to October 2006. 129k is a pretty significant downshift, and it requires something a little more deep than what is in that report.

I think we should take Edward Hugh's comments very seriously about the demographics: If labor growth in America is due to growth in the number of Hispanic workers, their birth rates declining would be a troubling sign. I looked up the data for the last three years of civilian labor force by race.

White 0.7% per year
Black 1.3%
Hispanic and Latino 3.2%

White workers are about 75% of the population, with blacks and Hispanic/Latino about even for the rest. Hispanic and Latino workers are disproportionately in the building trades, so the recent housing slump likely has harmed them more than other ethnic groups.