The Paradox of Job Growth in a Stalled Economy
Despite a slower than expected first quarter, many businesses continue to show signs of optimism for the year ahead. Advance GDP estimates are based on measures of aggregate National Income, which from January to March slowed to a meager 0.1 percent annualized pace. While this estimate paints a bleak picture, employment figures had a strong showing, implying that most businesses were actually optimistic about the next three quarters. So are business owners irrationally confident or is the first-quarter GDP estimate just plain off the mark?
Because economic activity fluctuates seasonally, quarterly GDP figures are adjusted to estimate the annual growth rate. The degree of correction, however, is based on an average winter, and the string of blizzards that crippled the Northeast and Midwest this winter was one of the worst in history.
Employment figures are also seasonally adjusted, but the long-term nature of hiring decisions makes these numbers typically much less volatile. Training new employees requires significant time and investment, so boosts in employment are generally driven by long-term optimism. This must be why businesses have added 207,000 jobs on average each month since last September (faster than the 198,000 average monthly pace in the previous 12 months). April’s hiring activity added 288,000 new jobs and reflects a confidence that businesses will continue to grow despite recent weather-related setbacks. If businesses believed that the first-quarter’s stalled growth indicated a faltering recovery, hiring would likely have declined sharply.
Despite volatile quarterly estimates, the economy’s underlying growth rate remains unchanged at 2.5 to 3.5 percent, so a growth spurt is likely for second-quarter GDP estimates to make up for lost ground. In fact, it wouldn’t be a surprise for second-quarter GDP estimates to be between 5 and 7.25 percent. But remember, this would only be a different side of the same coin. Strong second-quarter numbers will not accurately indicate the actual acceleration of the economy, but rather will reflect a normalizing of an artificially under-performing first quarter. The labor market, just as it resisted shrinking throughout the winter slump, will continue to be calibrated to the pulse of the U.S. economy in the second quarter.