In the midst of the political turmoil here in America, following the assassination attempt against Donald Trump and Joe Biden’s decision to abandon his re-election bid, there was a more muted but still relevant debate over how strong—or weak—the U.S. economy really is.
Among the pessimistic voices was Ryan McMaken over at the Mises Institute, who presented the recent U.S. employment numbers as a “flattening” of the trend. A Forbes Magazine story concurred, as did the NBC News.
Piling on the negative view of the U.S. labor market, some analysts and commentators have suggested that government is the driving force behind the low unemployment rate that the U.S. economy has enjoyed since recovering from the pandemic-related shutdown. Back in February, Caleb Naysmith with Yahoo Finance reported:
In 2023, the U.S. job market experienced a trend where nearly 25% of all job gains were attributed to government positions, underscoring a significant reliance on public sector employment to sustain economic growth.
Other commentators have echoed the same argument. Does this mean that the U.S. economy is weakening and that government has been holding it up for some time with artificial jobs growth?
I hate to say it, but my fellow conservatives and libertarians who would answer yes to both questions, are actually wrong. There is no decisive trend of weakening in the U.S. economy; what we are seeing currently is a slowdown in overall activity that is normal for an economy operating at the peak of its productive capacity.
Think of it as a car traveling down the road at top speed. The only change the driver can make to its current operation is to slow down.
At this point, there is nothing that suggests the U.S. economy has a recession ahead of it. We will have a better idea of that on Thursday the 25th when the Bureau of Economic Analysis releases its advance estimate of GDP for the second quarter; until then, let us take a look at where the labor market is.
The most important variable there is the unemployment rate. This is the one that has ticked up recently and inspired comments about a weakening economy. Figure 1 reports the unemployment rate for U.S. workers aged 16 and up. The numbers are not seasonally adjusted, which means that they are as ‘raw’ and close to reality as they can get.
The red function is the unemployment rate for 2024; the other years are included for comparison:
Figure 1
If we viewed the red function in isolation, we would have the picture of an economy that is quite possibly heading into a recession. The context of other years—excluding 2020 and 2021 due to the pandemic—tells us a very different story, in two parts. The first is that we are wrong to focus on the high June number; the real story here is the low figure for April. It happens every year that unemployment declines in the spring from a higher rate in the winter months.
It is also a regular phenomenon that unemployment increases again in the summer months, when high-school kids and college students are out of class.
Some economists would point out here that if we use seasonally adjusted numbers, we clear the data of these seasonal variations. However, the seasonally adjusted numbers fluctuate pretty much like the unadjusted numbers do, only with a smaller amplitude. Therefore, they actually tell us less about the long-term variations in the economy than the ‘raw’ data can do.
With that said, the 2024 line in Figure 1 is higher than the green dashed 2023 line. The fact that unemployment is higher this year than it was last year is, again, attributable to the peak performance of the economy. Over the past 12 months, the production, distribution, and sales of goods and services likely stretched the U.S. capital stock and labor force to the point where it simply was not possible to expand economic activity more. At that point, the marginal cost of producing and delivering goods and services is so much higher than the marginal cost of ‘second to last’ items they produced that it is no big sacrifice for businesses to reduce their production and delivery volumes a little bit. With high enough marginal costs, it may in fact improve their bottom lines to do so.
This is the adjustment we have been witnessing over the past couple of months.
But what about government’s role in the labor market? Is it not true that government has driven the high employment rates recently by going on a massive hiring spree?
Figure 2 dispels this myth, but only to a point. Figure 2 reports the government employment ratio for the U.S. economy, i.e., the rate that compares government employment to private-sector employment. Specifically, the value on the vertical axis is the number of government employees per 1,000 people employed in the private sector (GER).
Please note that we are once again using numbers that are not seasonally adjusted; hence the high amplitude in the light gray function.
Figure 2
The first red arrow indicates the post-World War II period when government expanded relative to the private sector. The GER rose by more than 50%, from below 160 to just above 240. This is an astounding expansion of government payrolls which ended only when President Reagan’s policies for economic growth and limited government kicked in. As the second arrow shows, from his presidency all the way through President Clinton’s two terms in office, the GER fell by about a quarter, to an average just above 180.
After the ho-hum economic years under President Bush Jr., the GER had crept up toward 200. Then came President Obama, whose inability to work on budgets with a Republican-led Congress actually put reasonable limits on the growth in government spending. As a result, the GER fell again, and continued to do so through President Trump’s first term.
On the other side of the pandemic, in 2022-2024, we see a flattening and a weak turn upward of the GER. It could be a temporary phenomenon, as it was during the recessions in the early 1990s or 2000s, but it could also be a break in the downward trend.
We need more data to make the call. Therefore, at this point, I am not ready to cry ‘recession’ as far as the U.S. economy is concerned, but if the GDP numbers out on Thursday tell a different story, I will be the first to admit as much.
