Scholar Discusses Labor’s Impact on GDP at FTR Conference
By Gwendolyn Brown
Larry Davidson, Professor Emeritus, Indiana University believes we will be stuck at 2% growth for quite a while with 70% of GDP being services and 30% representing goods. According to Davidson, inventory cycles do not look much different than they did in the 1990s.
“Sometimes inventories go up because economies are weak, but sometimes they go up because the economy is about to rebound,” said Davidson.
Davidson cautions that we have had eight years of expansion since the last recession. However, Davidson stated, “The real question is why the expansion period will end and cause a recession. One reason is shocks that cause growth to end (i.e., oil shortages or other shocks that knock the economy sideways or backward.) Unpredictability is impossible to forecast.”
Before most recessions, we see periods of strong growth and then run out of labor and materials. Davidson said, “If you base it on that, I do not see a recession coming.”
With regard to output vs. consumption spending, Davidson said there is a problem relative to the contribution of components to real GDP growth.
“The key to productivity and growth in the future is investment in planned equipment and technology. The problem is that those sectors are not growing. Investment spending is not a large enough share of GDP compared to consumer demand. Private investment peaked out at 20% of GDP, but it is currently struggling to get to 16%–17% of GDP,” said Davidson.
Davidson continued, “Real non-residential fixed is a real loser. The average has gone down and is on a downward trend. People are wondering how that is going to change. The cost of capital and interest rates are virtually nothing yet there is no investment. It’s not the housing part holding things back, it’s the planned equipment component holding things back,” said Davidson.
Employment & Productivity
According to Davidson, there are 13.2 million people (or 4% of 330 million) not looking for jobs anymore. This causes lagging labor force participation, and labor markets to tighten. Davidson defines labor force by individuals who either have a job or are looking for one. The current labor force is down to 63%. This has a major impact on long-term economic growth.
The average length individuals in the U.S. are unemployed has gone from 5–6 weeks to 1–2 weeks. However, long-term unemployed (e.g., individuals who are unemployed 15 weeks or more) is not going down.
Labor output is the “bang for the buck in the economy,” said Davidson. “If people can produce more per hour, we can make more money. Productivity was way down during the recession, went up a bit, and now it is growing at zero percent.”
The capacity utilization rate of factories is not getting back to the kind of levels we need to see. Usage of capacity is not where it should be for growth in the economy.
According to Davidson, “The growth rate is way too low, very close to zero and nowhere near healthy times.”
Productivity growth means wage growth must grow slower or companies cannot make money. However, there are those who argue low wages can be equated to lower productivity.
Consumer Price Index
There has been a downward trend in inflation. The Consumer Price Index (CPI) is showing the same pattern as productivity. It’s all part of the same story. Low wage growth, low productivity and low CPI all equal a low growth rate.
While CPI is growing slowly, money is on an upward trend of 5%–20%. Bank reserves went from $800 billion to $2.5 trillion. The Federal Reserve has announced it would pull some of that money out, it has yet to do so. The Fed has raised the price of bonds and lowered interest rates. According to Davidson, from 2009 to today, credit has essentially been free.
“We are still in a high money, low interest rate regime,” said Davidson.
The U.S. government continues to increase its level of spending with debt share of GDP at 70%. Gross debt is now 100% of GDP (e.g., $20 trillion). The Fed owns $3 trillion of that debt while 6% is owned by foreign governments. The balance is owned by private investors. According to Davidson, gross debt will rise from $21 trillion to $25 trillion in the next five years.
Davidson is optimistic about the return of what he calls “monetary, fiscal and regulatory policy normalcy” that are good for exports and the economy.
“Vigorous public-private sector focus on education, training and retraining for the 21st century could help to resolve labor mismatches,” said Davidson. “The world and U.S. economies will strengthen and increase optimism.”
Davidson notes that the biggest causes for pessimism are lack of labor participation, social chaos, the threat of war, and global protectionism.