This is In Real Terms, a column analyzing the week in economic news. Comments? Criticisms? Ideas for future columns? Email me, or drop a note in the comments.
Three decades from now, when the robot that will by then be writing FiveThirtyEight’s economics column looks back at the year 2016, what will it say about today’s economy?
One possibility is that there won’t be much to say at all — that 2016 won’t look particularly significant in retrospect, at least economically. (Politically is another matter.) We aren’t in a recession. Job growth is steady. The stock market is less jittery after its “Brexit”-induced panic. At least so far, 2016 is shaping up to be yet another year of positive but underwhelming economic growth.
But it is also possible that 2016 will be remembered another way: as the calm before the storm.
By “storm” I don’t mean a recession or a financial collapse or any other short-term economic disaster. There is little reason to expect such a crisis and, in any case, economists are terrible at predicting them. Rather, the storm, if it comes, will be the result of several long-term trends — rising health-care costs, falling employment rates — that could intertwine to have major consequences for the country’s fiscal and economic future. The problem for policymakers and politicians is that it’s hard to know with much confidence how those trends will play out.
Take health-care spending: In the 2000s, the runaway cost of health care was a looming crisis for a country with a fast-aging population — until the recession hit and that growth slowed dramatically. Now, according to new estimates published this week in the journal Health Affairs, spending is accelerating again. The U.S. will spend more than $10,000 per person on medical care this year, up 13 percent in the past three years before adjusting for inflation. What will happen next is unclear; total spending will almost certainly rise due to the aging of the baby boom generation, but the Health Affairs article estimates that the growth rate will stay below its mid-2000s peak. But no one is really sure why spending has slowed — the Obama administration, unsurprisingly, credits “Obamacare,” but other experts are skeptical — so no one can rule out another surge in spending.
Or take the labor force participation rate, which measures the share of adults who are working or actively looking for work. Retiring boomers (them again) mean that the participation rate will probably continue its 15-year slide. But economists don’t know how rapid that slide will be. The Congressional Budget Office this week released a set of long-term forecasts that ranged from a gradual decline to a steep drop. The gap between the most extreme forecasts translates into more than 10 million people in or out of the labor force.
There are similar question marks surrounding productivity and interest rates, as well as other issues, such as immigration, that the CBO doesn’t directly address. Any one of those trends could have significant consequences; together, their impact could be much larger. For example, the CBO expects the national debt, which is now about three-quarters the size of the overall U.S. economy, to grow to 141 percent of gross domestic product over the next 30 years. But if participation, productivity and other trends all turn out better than expected, the debt might top out at about nine-tenths the size of the economy over the next 30 years, high by historical standards but lower than it was after World War II. On the other hand, if trends go the other way, the debt could end up nearly twice the size of the economy, an unprecedented level.
Projecting trends three decades into the future will always carry a high degree of uncertainty. But that is especially true right now because there are fundamental questions about the direction of the U.S. and global economies. A growing group of prominent economists believe that for a variety of reasons — aging populations, lower birth rates, rising inequality, changing patterns of technological advancement — the U.S. and other rich nations have entered a period of prolonged slow growth known as “secular stagnation.”1 If that’s right, productivity growth and labor participation will probably stay low, and the debt will grow more rapidly. (On the plus side, interest rates will also stay low, so the debt will be more affordable.) But the secular stagnation thesis is far from proven, and many economists remain skeptical.
Between now and Election Day, we’re likely to hear a lot about “uncertainty” and its effect on the economy. It’s certainly plausible that some companies would hold off on investments until they find out who will be sitting in the Oval Office. But the real uncertainty isn’t about Trump vs Clinton or how “Brexit” will play out. It’s over much longer-term trends that will, to no small degree, determine the country’s economic and fiscal future.
The stock market still isn’t the economy
When the stock market took a dive in January (“Sell everything,” was the Royal Bank of Scotland’s advice), I reminded readers that for all the attention it gets, the stock market is not the economy. When the United Kingdom’s surprising decision to leave the European Union set off another market crash last month, I offered similar advice: “Most ordinary investors are probably best off logging out of their E-Trade accounts and tossing out their 401(k) statements, at least for a couple of weeks.”
Sure enough, markets calmed down after both bouts of panic, and this week, both the S&P 500 and the Dow Jones industrial average hit all-time highs. And yet my message is still the same: Unless you’re a professional investor, don’t waste too much time fretting about the markets.
To be clear: The lesson of the past few months isn’t that markets always rebound from big drops. (They don’t, at least not in the short term.) And the lesson certainly isn’t that I’m any kind of market prognosticator. (I’m not, which you can tell by the fact that I’m at work and not on a yacht in the Caribbean.) It’s that markets are, by their nature, more volatile than the economy itself, which has continued chugging along through all the all-caps headlines. That’s just as true now that markets are up as it was when they were down.
Number of the week
Last week’s jobs report brought mostly good news, with the Bureau of Labor Statistics reporting that U.S. employers added 287,000 jobs in June, well above economists’ expectations. But the BLS also revised down its estimate of job growth in May from an already-lousy 38,000 jobs to a truly terrible 11,000. May’s numbers look worse, and June’s better, because of a six-week-long Verizon strike that temporarily idled about 35,000 workers. But that doesn’t come close to explaining the May swoon.
Taken on its own, the May figure could probably be dismissed as a statistical quirk. The monthly payroll number is based on a survey of businesses, and it carries a wide margin of error. But other sources of data also suggest May was a bad month for the job market. A separate survey of households, also part of the monthly jobs report, was also lousy. And yet another BLS survey, released this week, showed that hiring slowed slightly in May and that job openings — a key sign of employer confidence in the economy — dropped steeply.
The slowdown, assuming it’s real, is a bit of a mystery. May came before the “Brexit” vote, and there weren’t any other news events that would be likely to cause such a big change in direction. The decline in hiring wasn’t heavily concentrated in one industry, although real estate took a particularly big hit in job openings. Some economists pinned the blame on the weather, which is basically the economics equivalent of a shoulder shrug. Fortunately, the slowdown appears to have been short lived, and not indicative of any larger trend.
Elsewhere
Rigid zoning rules are making it harder for Americans to move to cities with better job opportunities. That could be contributing to rising income inequality, writes Conor Dougherty.
Paul Overberg digs into Census population projections to identify states where senior citizens will soon outnumber children.
Greg Ip says proposals for a universal basic income (one of our favorite topics) make little sense amid declining labor force participation.
JP Morgan Chase CEO Jamie Dimon says the bank is giving raises to its lowest-paid employees. Annie Lowrey is not impressed.