- The Washington Times - Saturday, February 21, 2004

Two very upbeat reports on the U.S. economy were issued last week. The Conference Board reported that its U.S. leading economic index increased 0.5 percent in January. That marked the 10th consecutive month without a decline, and it represented the biggest monthly increase since October. Once again, the growth in the index remained widespread. The only exception has been five consecutive months of declining real money supply, a condition Federal Reserve Chairman Alan Greenspan has attributed to soaring business profits, which have reduced firms’ demands for bank loans to finance rising investment. The Conference Board declared that the continued growth in the leading index “is signaling that strong economic growth should persist in the near term.” That is especially encouraging, given that the 6 percent annual growth rate during the second half of 2003 was the fastest six-month acceleration in nearly 20 years.

Meanwhile, the Fed reported that industrial output expanded by 0.8 percent last month. Over the past four months, total industrial production has increased by 2.1 percent, reflecting an annual rate in excess of 6 percent. Since August, manufacturing output has increased by 2.5 percent, which also translates into a annual growth rate exceeding 6 percent. Nevertheless, employment continues to decline in the manufacturing sector. That is because the productivity of the remaining manufacturing workers has been skyrocketing. Indeed, as the Fed’s industrial production data confirm, U.S. manufacturing output has nearly doubled over the past 25 years. During that same period, the Labor Department reports, the manufacturing industry has shed 4.2 million jobs, or nearly 25 percent of its labor force.

Notwithstanding last week’s favorable news on current economic activity and future economic prospects, the White House felt compelled to distance itself from what the media considered to be too rosy of a job forecast for this year. In fact, the forecast was far rosier than it was reported and believed to be. The problem could be traced a table titled “Administration Forecast,” which appeared on page 98 of the 2004 Economic Report of the President, which was issued Feb. 9. The White House projected that nonfarm payroll employment would increase by 2.6 million — from 130.1 million in 2003 to 132.7 million in 2004. When the report was released, White House Council of Economic Advisers Chairman Gregory Mankiw explained that the 132.7 million figure represented “the [monthly] average number of jobs in 2004 relative to the [monthly] average number of jobs in 2003,” which came in at 130.1 million before subsequent revisions to 129.9 million.

Journalists dutifully — but erroneously — divided the 2.6 million annual difference by 12 and reported that nonfarm payrolls would have to expand each month by nearly 220,000 for the administration to achieve its goal. Considering that nonfarm payrolls had increased by only 184,000 jobs during the last six months of 2003, that would have been a major achievement. But it was not at variance with employment increases for previous economic recoveries.

The problem was that monthly employment would have to increase by far more than 220,000 in order for 2004’s average monthly employment to be 2.6 million higher than 2003’s monthly average. After adjusting for the January re-benchmarking, which occurred after the forecast was made based on data available in early December, monthly payrolls would have to increase by more than 375,000 jobs throughout 2004 in order for 2004’s average monthly total to be 2.6 million above 2003’s. That means that the December 2004 nonfarm payroll total would have to be more than 4.5 million jobs higher than the December 2003 nonfarm payroll.

Once the White House understood this, especially after January’s payrolls increased by a feeble 112,000 jobs, it couldn’t run from its jobs forecast fast enough. But not so fast that it could escape the ensuing political embarrassment.

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