Phantom Limb Keynesianism

The US economy continues to slide into double dip recession under the savage austerity of income tax increases, payroll tax increases, and deep spending cuts.


But like the pain in a phantom limb that his been removed by surgery, the press has a hard time refraining from blaming the austerity for a slowdown that never happened:

Payrolls rose by 195,000 workers for a second straight month, the Labor Department reported today in Washington. The median forecast in a Bloomberg survey projected a 165,000 gain after a previously reported 175,000 increase in May. . . .

Revisions to the prior two months’ payrolls reports added a total of 70,000 jobs to the employment count in April and May. . . .

Retailers added 37,100 jobs in June, with most of the increase coming from more hiring at motor vehicle dealerships and home-improvement outlets.

Automakers are one standout in the recovery, enjoying gains in sales fueled by improved confidence and cheap credit. New cars and trucks sold in June at the fastest pace since 2007 as American drivers replaced aging vehicles and a rebound in housing construction moved trucks off dealer lots. That helped new car sales beat estimates last month, giving a lift to General Motors Co. (GM) and Ford Motor Co. (F) Brisk sales are boosting hiring at dealerships.

‘It’s Crazy’

“We would take 10 sales people in a heartbeat,” said Don Hicks, owner of Shortline Auto Group in Aurora, Colorado, which employs about 150 people at four dealerships. “If they were available and trained, or trainable, we’d take another five or six technicians. It’s crazy trying to find people.”

Industry sales climbed to a 15.9 million annualized pace, exceeding the 15.5 million median estimate of economists surveyed by Bloomberg. That’s the best monthly pace since 16.1 million in November 2007 and compares to 14.3 million a year earlier, according to data from Ward’s Automotive Group.

“We’re a little island of prosperity,” Hicks said. “We’re leading the country out of recession.”

Other manufacturers aren’t doing as well as the recovery continues to struggle against crosscurrents. Americans are feeling the effects of a two percentage-point increase in the payroll tax that took effect in January and growth is being restrained by weakness overseas and federal budget cuts that began in March.  [italics added.]

Jobs growth in 2013 (201,800/month) continues to run ahead of the 2012 pace. Average weekly hours are steady at 34.5.  Hourly wages continue to rise about 2% per year. All this data suggests roughly 4% nominal income growth.

And it’s interesting to note that the US economy’s headwinds included not just fiscal austerity, but weakness in both Europe and the emerging markets.  The acceleration in job growth in 2013 is a testament to the power of “monetary offset.”

PS.  After the first quarter I predicted second quarter growth would slow somewhat, as monetary offset cannot surgically target a specific quarter, and the sequester kicked in in Q2.  Job growth did slow from 207,000/month to 197,000/month, but that’s less of a slowdown than even I expected.

PPS.  Oh, and about that UK “double dip recession.”  Never happened.  New data revised it away.  And notice that the UK jobs data never showed a double dip recession.

Macro:  It’a all about employment, hourly nominal wages, and aggregate nominal income.  Forget about the dodgy RGDP data.

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About Scott Sumner 492 Articles

Affiliation: Bentley University

Scott Sumner has taught economics at Bentley University for the past 27 years.

He earned a BA in economics at Wisconsin and a PhD at University of Chicago.

Professor Sumner's current research topics include monetary policy targets and the Great Depression. His areas of interest are macroeconomics, monetary theory and policy, and history of economic thought.

Professor Sumner has published articles in the Journal of Political Economy, the Journal of Money, Credit and Banking, and the Bulletin of Economic Research.

Visit: TheMoneyIllusion

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