Rss Feed
Tweeter button
Facebook button

Another Way To Look At The Health Of The Economy?

Would an economic metric that looks at GDP per employee be useful to gauge the economy? What clues could it provide on the health of the economy?

The St. Louis Fed posted in part:

Some underlying long-term trends in the U.S. economy may blur our understanding of the current situation. Specifically, labor force participation has declined significantly since the early 2000s, mostly due to demographic trends, such as the baby boomer generation entering retirement.

One way to account for the effects of a changing labor force on output is to express real GDP in terms of the labor force, as shown in the figure below.

When divided by the labor force rather than population, real GDP still displays a severe contraction during the Great Recession but recovers differently. Though output was still slightly (less than 2 percent) below the prerecession trend as of the second quarter of 2018, the average growth rates for the two periods are the same: 1.7 percent annually. As in the previous figure, output appears less volatile in the period after the Great Recession.

The main concern using GDP per employee is that GDP includes spending from government transfer payments – and generally those receiving transfer payments are not employed. Transfer payment year-over-year rate of growth is currently 4.0% but the rate of growth spiked to over 30% during the Great Recession. This is a significant reason why GDP per capita looks worse than GDP per employee during recessions.

Using a twist on the St. Louis Fed’s metric, the graph below displays the year-over-year rate of growth of GDP per employed population – red line) vs. GDP per capita (blue line)

As shown on the above graph, the rate of growth per employee generally grows at a slower rate than per capita GDP. This is no surprise as in good times (when GDP is growing), employment grows faster than population – and in bad times (when GDP is contracting), business dumps employees.

Population rate of growth (although slightly trending down) remains almost a constant.

I should point out that to normalize GDP to the total population can be thought of as a measure of how the nation as a whole is growing. Normalizing to the employed population relates GDP changes to productivity.

Using rate of year-over-year growth of GDP per employed population – how did the USA fare against other economies?

In this grouping of economies, only Germany (red line) is doing better than the USA (heavy turquois line) [note that China does not publish enough information to create this metric].

This metric is partially showing how well business is utilizing the labor force – and in a rough way looks at productivity growth if one eliminated government transfer payments from GDP. (see red line in graph below):

The above graph suggests productivity growth is roughly 0.9% per year. This analysis also suggests for the last two years, the health of the economy has been improving.

My usual weekly wrap is in my instablog.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Article source: