Wednesday, April 09, 2014

Goldman's Hatzius: "Rays of Light"

by Bill McBride on 4/09/2014 11:09:00 AM

A couple of excerpts from a research note by Goldman chief economist Jan Hatzius: "Rays of Light on the Supply Side"

First, on the outlook:

US economic growth is accelerating as the economy bounces back from the inventory and weather-related weakness of the first quarter. Our current activity indicator (CAI) is up a preliminary 3.6% in March, well above the 2% pace of the prior three months and consistent with our forecast for a rebound into the 3%-3.5% range for real GDP growth in the remainder of 2014.
And on the labor force participation rate:
[T]he labor force participation rate has risen by 0.39 percentage points since December, the biggest increase over a three-month period since 2007. The main reason for the increase has been a significant pickup in the gross flow of individuals from inactivity to employment (and to a lesser degree unemployment). We view this as a potentially promising sign that labor demand is picking up sufficiently to pull discouraged workers back into the labor force.

The increase in labor force participation is especially encouraging because the expiration of emergency unemployment benefits at the end of December should have acted to reduce participation. We have received questions whether the impact might have gone the other way. Some argue that the loss of benefits might have forced some workers to seek employment, and that this could have increased participation. But this assumes that prior to year-end there were a significant number of individuals who told the unemployment benefit office that they were actively seeking work but said the opposite in the household survey. We find this hard to believe; most people would probably be reluctant to tell "the government" that they are not actually seeking work when doing so is a prerequisite for drawing benefits.
CR Note: My expectation at the beginning of the year was the participation rate would mostly hold steady (returning workers would offset demographics in 2014). So far (just three months) that looks about right. I also expect a pick up in GDP after Q1.

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