Saturday, December 02, 2006

Economic growth or flat labour productivity?

I don't see sunshine and lollipops going into Q4, but November's labour figures make me slightly less bearish than Marc Lee. The fact is, hours worked increased by 1.6% since the end of the last quarter and labour growth still looks healthy (even though much of the net growth in employment was in lower-paying, part-time positions, unlike what we saw from October's net gain in employment of 51,000). Further, as we know, people with jobs spend money.

When October's employment figures came out, I asked why job growth is so out of sync with GDP growth. This still puzzles me, but I'm comforted to know that I'm in good company. TD Economist David Tulk asks a good question:

With just a single month yet to be revealed, 2006 is shaping up to deliver the labour market’s best performance in three years with the expected addition of near 300,000 net new jobs. This stands in contrast to yesterday’s GDP report which shows that economic growth has slowed markedly over the middle quarters of 2006. However, an encouraging development for the final quarter is the pick up in hours worked. Over the first two months of Q4, hours worked have increased by 1.6%, reversing the 0.1% fall observed in Q3. The puzzle is to sort out whether this indicates more economic growth momentum though the fourth quarter of 2006 than suggested by the 0.3% decline in September’s real GDP or a flattening of labour productivity.
Really, the increase in hours worked shouldn't be too surprising, nor should the fact that it hit the right regions in just the right sectors. In October we saw full-time employment rise by 50, 500, putting labour-starved Alberta out of its misery. Well, not quite -– demand is still there -- but Alberta and British Columbia did gain 70 per cent of those new jobs, and November's employment figures tell us that Alberta's woes continue to improve.

Perhaps a productive workforce throughout Q3 and Q4 will be enough to partly offset the economy's bleaker qualities (eg. our less than pretty exports choking on the strong dollar -- which has since improved), and give us less to be bleak about after we witnessed a Q3 GDP growth rate of 1.7%.

In fact, never mind the labour report, maybe the Q3 GDP figure isn't so bad on its own.
Tulk again:

...the details are not as discouraging as the headline number would suggest. While some of the weakness can be traced to the second consecutive quarterly decline in residential investment, the main cause of the deceleration in real GDP growth was a combination of more moderate government spending and falling inventory investment – two of the more volatile components of real GDP. For example, part of the deceleration in government spending from 4.9% in the second quarter to 0.7% in the third was due in part to the one-off effect of the conclusion of the 2006 Census. Meanwhile, the fall in inventory investment likely reflects some unwinding from the significant accumulation in the previous quarter.

As long as firms refuse to fire workers until a recession is in sight, labour growth is a poor indicator of things to come; however, in sum, here's my guesstimate: A slowdown is inevitable, but Q4 has a cushion of labour productivity that some aren't seeing.

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