America's Schizophrenic Economy

The news about America's economy that dribbled out over the first half of March painted - once again - a picture that only a schizophrenic could create. Real investment (investment adjusted for the declining prices of high-tech and information-related capital goods) continued to roar ahead. Production and sales were consistent with the consensus forecast of real GDP growth at an annual rate of 4% or more. Yet, despite all this, employment remained stagnant: net job creation in the United States continues to stall.

This does not mean that employment in America cannot grow. Roughly 300,000 more Americans are employed in education and health care than a year ago - an annual rate of employment growth of 1.7%. A quarter of a million more Americans are employed in business and professional services than a year ago - a 1.6% annual rate of employment growth. The logic of stagnant employment is not that adding jobs to the American economy is impossible, but that demand growth is insufficient to create more jobs than are lost.

This is easy to demonstrate. Total nominal spending in America grows at 5.5% per year. Inflation is 1.5% per year. And overall productivity growth is 3.5% per year. So the equation is simple: 5.5%-1.5%-3.5% = 0.5%. That 0.5% is all that is left for job growth, because that's all the job growth required to meet demand given the remarkably strong rate of growth of productivity.

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