- The Washington Times - Monday, November 3, 2003

Sometimes economic relationships don’t make sense, and this is one of those times.

Economic growth in the third quarter of this year leaped to a 7.2 percent annual rate, beating the consensus forecast by more than a percentage point. The impressive rise in real gross domestic product (GDP) was broad-based, buttressed by a surge in consumer and business spending and exports. Low interest rates and the latest tax cut are doing their work.

But at the same time jobs failed to rise. Average monthly payroll employment in the third quarter was 146,000 less than in the second quarter, and employment as measured by the government’s household survey was down by 79,000.

Does this make sense? How can we have a booming 7.2 percent rise in real output with no rise in jobs? Has this ever happened before? An examination of post-World War II data is revealing.

Out of the 227 quarters since the beginning of 1947, there have been 38 quarters when economic growth was 7.2 percent or more. In all of those 38 quarters except one, the number of payroll jobs rose. The one exception is the third quarter of this year. If the GDP and job numbers are right, the closely linked output-employment relationship has gone badly out of whack. Or should we suspect the data rather than the behavior of the economy?

Both the third-quarter GDP and payroll jobs numbers are subject to revision, and it’s possible that revised data will bring the output-employment relationship into a more sensible alignment. Revisions in the monthly payroll employment data are typically not large enough to alter dramatically the recent trend in jobs. That’s not to say the revised employment data will necessarily make economic sense or be free of measurement error. But the more likely candidate for a sizable revision is the GDP data.

The average size of the revision between the advance and final estimate of quarterly GDP growth is less than a percentage point. According to the Bureau of Economic Analysis, which produces the GDP data, the 7.2 percent third-quarter growth rate, in their own words, “is not likely to be revised below 6.6 percent or above 8.1 percent in the next two releases.”

But even assuming the worst case, a downward revision to 6.6 percent, it still strains belief that so big a rise in GDP would not boost quarterly employment, measured by either household or employer survey. Employment is a coincident cyclical indicator and ordinarily would have risen in so strong an economy.

Productivity data also express the relation between output and employment. Third-quarter data on productivity have not yet been released, but from the available numbers on jobs, hours worked and GDP, it’s apparent that output per worker hour jumped by close to double digits in the July-September quarter. As in recent quarters, it accounted for virtually all the rise in output, thus restraining job growth.

No matter how large the economic cup grows, productivity seems to fill it up. Certainly economic efficiency is desirable. But are the numbers in sync with what’s happening?

The revolution in information technology together with improved business practices and a more educated work force have helped boost average productivity growth since the mid-1990s to around 3 percent annually. During cyclical recoveries, productivity growth typically accelerates, as it has in recent quarters. But when it pushes double digits and depresses measured employment in the face of burgeoning demand, one has to wonder about the accuracy of the underlying data.

Based on historical experience, it’s uncertain whether data revisions in the months ahead will restore a sensible relationship between third-quarter output and employment. But we’ll see. Economic growth is expected to remain robust in the quarters just ahead, though slowing slightly to the 4 percent to 5 percent range. Data revisions and relationships will need watching. If anomalies in the key output-employment relation continue, it may be time for a technical review of the data.

Alfred Tella is former Georgetown University research professor of economics.

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