Rewording IMF .pdf documents, not citing them trying to look smart...The recent economic deceleration has little to do with the debt ceiling negotiations. It has more to do with the ongoing hand-off from stimulus to the private sector. In part, the macroeconomic deceleration in growth is the result of the hand-off from stimulus to the private sector. The hiring slowdown is a function of the broader deceleration in macroeconomic growth. Weekly unemployment claims is a somewhat leading indicator relative to macroeconomic activity. Overall employment is a somewhat lagging indicator. The deceleration holds lessons for the larger task of fiscal consolidation--a task that is necessary, even as it will entail pain and sacrifice in terms of reduced short-term economic growth and reduced short-term job creation (reduced from levels that would otherwise occur).
Year-on-year (2010 Q1 to 2011 Q1), one has seen the following:
Change in real GDP: +2.3%
Change in real federal government consumption and investments: +2.1%
Change in real GDP ex. Federal Government: +2.3%
The hand-off began in earnest in 2011 Q1 and has continued. Annualized 2010 QIV to 2011 Q1 figures show that the hand off has sliced about 0.9% off annualized real GDP growth:
Change in real GDP: +1.8%
Change in real federal government consumption and investments: -7.9%
Change in real GDP ex. Federal Government: +2.7%
It should be noted that the figures likely understate the drag created by the hand-off, as a 1:1 impact is utilized, which ignores the reality that direct expenditures by the federal government have a multiplier > 1. For illustrative purposes, the impact is useful.
Weekly Unemployment Claims (12-week moving average):
Change in Private-Sector Non-Farm Employment (6-month moving average):
January 2011 +139,500
February 2011 +159,167
March 2011 +177,000
April 2011 +186,667
May 2011 +179,167
In sum, the data is consistent with the large body of empirical evidence that fiscal consolidation has a contractionary macroeconomic impact and employment growth is closely tied to macroeconomic performance and expectations about future macroeconomic performance.
Austerity/fiscal consolidation will not be painless. Political leaders who argue otherwise are ignoring empirical economic data. Nonetheless, it is necessary. The enhanced growth outlook would be a benefit for the medium-term and beyond (reduced risk premia, reduced debt overhang, etc.). The transition to the more sustainable fiscal position would entail sacrifice, including foregone short-term macroeconomic growth and foregone short-term job creation. The adverse macroeconomic and employment impact of business as usual would, of course, be much worse than the sacrifices during transition (fiscal consolidation).
For shame don, for shame sir.