The Interesting Thing Is That the Drop Was Not "Instantaneous"...
Bookmarked at for 2007-03-01

The Domestic Macroeconomic Outlook: February 28, 2007

It looks like I'm not going to get to give my short talk on the domestic macroeconomic outlook up at Lake Tahoe this weekend:

That's too bad, because such talks quickly grow stale.

One of the major points of my schtick is that the macroeconomic outlook rarely changes suddenly, so that 90% of the time it is perfectly OK to say, "things are like they were, only three months ago." Nevertheless such talks have a very short half life: people like to know how the most recent news affects things, even if the usual answer is "not much"--except, of course, for those turning points where things do change a great deal, and which we usually see clearly only in retrospect.

I was going to hit three points:

The Great Moderation:

  • The business cycle is smaller than it used to be
  • Fewer recessions in industrial production
    • Largely good luck
    • But are there structural causes--better financial intermediation, et cetera?
    • We don't really know
  • Shallower recessions in industrial production
    • The Federal Reserve is doing a much better job of responding to recessions in real time
    • In large part the Federal Reserve has not let itself get wedged into a situation where it feels it can't respond to recession because inflation is still uncomfortably high
    • Major but still low-probability risk: a steep fall in the dollar accompanied by substantial import price passthrough wedges the Federal Reserve
  • Industrial production matters less for the economy as a whole
    • It used to be that fluctuations in the harvest were a really big deal for the macroeconomy
    • Someday, somebody will write: "it used to be that fluctuations in industrial production were a really big deal for the macroeconomy"--but not today, not quite yet

Productivity and Its Contents

  • The alarmingly large productivity gains of the early 2000s appear to have been one-off benefits from restructuring
  • However, the Silicon Valley-driven productivity speedup of the 1990s is still with us, as strong as ever
    • In the late 1990s the gains went to established high-tech companies and to dot-commers and their VCs
    • Since 2000 the gains have gone to companies that use computers and communications, and as competition sets in to their customers
    • The productivity future looks like the recent past--and you don't have to say "biotech, nanotech" in order to reach that conclusion

Factor Shares and the Strength of the Labor Market:

  • Rising profit shares because the labor market has been weak
  • The unemployment rate has been giving bad signals of labor market relative strength
    • Lots of people not in the labor force nevertheless appear to be pretty easy to hire
    • Unless the Federal Reserve allows the unemployment rate to fall further, wage picture looks grim--which means profit picture looks very bright
    • Political implications of still further increases in income inequality
  • Any connection between globalization and labor market weakness?
    • Hard to build a sensible model in which there is
    • But that may reflect economists' limited imagination--lots of people out there in the world think they see it happening

Pictures from playing with Economagic: