Another noteworthy news from the latest employment report is that the boom in mining (including oil extraction) employment continued. Whereas overall employment rose 1.5% and overall private sector employment rose 2% in the year to January, mining employment gained as much as 13.4%. While it even after that gain was only 0.6% of total employment, its increase was 4.6% of the total increase in employment.
And that's only counting the direct employment in that sector. Add to that the jobs created by the demand from all those newly hired workers. The inflow of all those workers into the state who has benefited the most from the mining boom, North Dakota, has also created a construction boom in that state.
Though not the only factor, the direct and indirect effects of this mining boom is therefore an important factor behind the recent uptick in U.S. growth.
With both the manufacturing and the non-manufacturing surveys indicating increased expansion and with construction spending and employment increasing, it seems clear that the U.S. economy has started to go from the ""recovery" that feels like a continued recession for most people" state it has been in since the summer of 2009 to something resembling a real recovery, though still nowhere near as vigorous as for example the 1983-84 recovery.
What are the causes of this turnaround? In part it reflects the fact that growth is the natural state of the economy and that the factors that depressed it are dissipating and in part it reflects a credit-driven investment boom. Fixed business investments rose 7.5% in real terms in the year to the fourth quarter financed by a 11.4% gain in commercial & industrial loans. The fact that it is credit-driven indicates that it is an early stage of a classical Austrian business cycle scenario, but with the level of investments still below the peak levels of previous expansions, there is room for further expansion.
One aspect that makes the upswing look sounder is that it has happened while government spending has declined. The category government purchases (spending excluding transfer- and interest payments) has dropped from a post-1992 peak of 21.1% of GDP in the third quarter of 2009 to 19.7% in the fourth quarter of 2011, mostly because of spending cuts at the state and local levels.
This makes what Krugman wrote a few months ago especially interesting:
"Basically, government has been shrinking for the past year — in practice, fiscal policy has been doing exactly what Republicans say it should be doing. Where’s my confidence fairy?"
Right here, it seems.
Dean Baker criticizes the New York Times for reporting Germany's unemployment rate as 6.7% instead of 5.5%. The 5.5% rate refers to those who have no job at all, while the 6.7% rate also includes those who have only apart-time job but would want to have full-time employment instead. While there is a case for including those who have fewer hours than they want to, it becomes misleading to include them while making comparisons between countries because other countries only include those who are so to speak full time unemployed.
I agree with Baker on this point, and could add that numerous other media outlets make the same mistake as New York Times. But he is actually wrong to assert that the German government reports the higher number as its official rate. Obviously, the German government reported it, as they are the source of both numbers, but the number specified in its official press release on employment and unemployment is in fact 5.5% and only (for the overall unemployment rate) 5.5%. The same goes for the Eurostat release on unemployment in the 27 EU countries including Germany. That makes it all the more puzzling why so many media outlets insist on using the higher number for Germany, and only Germany.
Interesting Wall Street Journal editorial which discusses why European growth has been weak for so long-namely demographics and excessive government spending. The article mentions Germany and Sweden as two countries that are "better run", which is basically true, but the point that could have been added was that their better relative performance is mostly because they have implemented tax- and social benefits cuts.
Germany by the way is an example of how countries in the short run can compensate for the effects of a shrinking working age population by employing a higher percentage of the people in that age group. They still have room to increase the employment rate for a few more years but with a 5.5% unemployment rate there is a limit to that. Perhaps Germany should encourage some of those newly unemployed Southern Europeans to learn German and move to Germany?
It is pointed out by Brad DeLong that the British economy has fared worse than even during the 1930s, since 2008.
The numbers are even worse if you adjust for the fact that the British population has increased by more than 2% during the period, though population increased almost as much in the 1930s as well.
DeLong of course blames Cameron's austerity policies, but there is a problem (actually there are several). That would suggest that the slump is demand driven, and if that had been the case we would have seen price inflation fall. But as it happens, inflation has increased the last few years and is at an annual average of 3.6% the last 3 years the highest since the early 1990s, and also significantly above the alleged 2% target of the Bank of England.
British inflation has also been a lot higher than in almost all other advanced economies. For example Sweden, whose economy has fully recovered even on a per capita basis, had an average inflation rate of 1.75% during the last 3 years.
The part of the austerity package that involved higher taxes (mainly a higher VAT) is really the only part that can explain this since they represent a negative supply shock that both raise price inflation and reduce real output, but that should have largely been cancelled out in part by the reduction in real disposable income from the tax increases and in part by the spending cuts.
According to preliminary estimates, China's GDP in 2011 was 47.156 trillion yuan, which at the current exchange rate of 6.3138 translates into roughly $7.47 trillion.
By comparison, tomorrow's GDP report for the United States will likely show that 2011 GDP was roughly, or slightly over $15 trillion. That means that China's economy is now nearly half as big as the U.S. economy.
This in turn means that China's economy could become bigger even sooner than previously thought. If the economic growth gap is 6% per year(lower than the average rate the last decade) and real appreciation is 2.5% per year (again, a lot lower than the average rate the last decade) than that would be sufficient for China's economy to become bigger by 2020. If the growth gap and/or real appreciation is closer to the average rate for the last decade, it could happen even sooner.
It is true that per capita income in China would still be a lot lower since China's population is more than 4 times as big. And in per capita terms, China might never surpass America. However, the fact that average income is so low is reason to believe thatv the "catch up" effect will continue to fuel growth in China. And so note that per capita income of one fourth of the U.S. level means that it would still be a lot lower than in the other majority Chinese countries (Hong Kong, Macao, Taiwan and Singapore).
Given the fact that bond yields of most of the euro area countries that were downgraded by Standard & Poors actually fell (contrary to what one might expect), similar by the way to how U.S. treasury yields dropped after they got downgraded by S&P, one can ask if S&P and other credit rating agencies have become irrelevant.
The short answer is: no thay haven't, though they should.
First of all we must realize that the move was expected and therefore already more or less priced in before the formal announcement after Friday's closing, so big changes wasn't to be expected. And other factors, for example ECB bond buying was active in pushing down yields.
And secondly, we have a really good reason to expect ratings to matter: namely that regulation requires many fund managers to only hold bonds that have sufficiently high ratings. It was because of this that Portuguese bond yields (already the second highest after Greece's) soared, as the downgrade forced many bond holders to sell.
But this is clearly something that should be changed. The credit ratings of credit rating agencies shouldn't in any way be encouraged or be made a mandatory standard by governments. They shouldn't play any role in legal accounting rules, nor in rules of which securities funds should invest in. This is both because it is principally wrong for governments to give private institutes such priviligies and because of their awful track record (to the extent they've been "right" it has almost always been because of the self-fulfilling prophecy mechanism).
So unfortunately, the incompetent credit rating agencies matter. But they shouldn't.
Currently, there seems to be a positive correlation between current account balances and economic growth. Countries with big deficits like Greece, Spain and Britain are performing really bad, while surplus countries like Hong Kong, Singapore, Germany and Sweden are performing really good. And China with its large surplus are outperforming India with its deficit.
There are exceptions to this rule, of course. While having roughly as large (proportionally) a current account surplus as its northern and northern neighbors growth in Denmark has been very weak, and another surplus country, Japan has also had weak growth. Similarly, Turkey's economy has had extremely high growth even as it has a very large current account deficit. But despite these exceptions, surplus nations seems to be generally doing better right now.
This might seemingly vindicate mercantilism against non-mercantilist economics that says that we should expect higher growth in deficit countries because they get to invest the savings of the surplus nations in in their economy, creating jobs and production in the deficit countries.
But as it happens, non-mercantilist economics doesn't say that that deficits, or more accurately the capital inflows that are the flip side of them, will necessarily strengthen an economy. It will if it goes to finance sound investments , but not if it finances excess consumption or malinvestments. Even in the latter cases it might provide a short-term boost to economic growth (Turkey's boom for example contain some unsound elements), but once the unsuatainablity of the excess consumption or malinvestments become evident for investors, it will weaken the economy.
So the lesson is not that it is good to have a surplus or bad to have a deficit in the current account balance. The lesson is that it is bad to have excess consumption or malinvestments while good to have sound investments. This is escpecially true considering that surplus countries during problems in deficit countries are hurt too. Though still stronger than the deficit countries, growth in the surplus countries have weakened too because of falling exports and furthermore the surplus countries are likely too lose much of their formal export earnings because of inflation, formal defaults or both.
It has been suggested by some Keynesians that space aliens would solve economic problems because that would allow this world to run an aggregate current account surplus, something that is impossible without life on other planets. The problem is that (intelligent) space aliens might not exist, and even if they do exist they may not know of us, and even if they exist and know of us they seem to think (if they exist and know of us, given the fact that we're not being contacted) that it would be impossible or inappropriate to openly contact us.
However, the undeniable problem of unavailability (whether due to non-existence, ignorance, inability or unwillingness of the aliens) of space aliens can be solved using this scheme where we simply sell a lot of goods to an entity called "Space Alien" , goods that can then be shipped to say somewhere in the Pacific or Atlantic Oceans, where we then sink the ships (after having evacuated all human crew members, of course). The "Space Alien" entity will "pay us" with IOU's or something similar, providing us with whatever demand needed to prop up the economy according to Keynesian analysis.
Obviously, this entity will never ever pay back the money, but neither will for example war spending against perceived terrestrial or extraterrestrial threats, so there is really nothing that a Keynesian could object to this scheme.
One day we are told that the employment rate in Germany has reached a new all time high and that the unemployment rate is the lowest since the reunification, the other we see that industrial production continues to fall in Germany.
In part this could perhaps be explained by growth in the service sector, and in part it reflects a drop in Germany's working age population. Still, employment growth is extraordinarily high considering the production growth numbers.
Some talk of "jobless recovery" in some periods of times in some countries. But Germany by contrast seems to have a jobfull slump or at least a jobfull stagnation.