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 coincident to slightly lagging 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).
GDP:
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):
Period Ending:
4/9 398,333
4/16 398,917
4/24 406,167
5/1 407,667
5/8 410,167
5/15 414,583
5/22 416,000
Change in Private-Sector Non-Farm Employment (6-month moving average):
Period Ending:
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).
