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Another Way To Look At The Health Of The Economy?


Would an economic metric that looks at GDP per employee be useful to guage 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.

real GDP per LFPreal GDP per LFP

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 recieving 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 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.

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].

One other way of looking at GDP is to normalize it to the total population, which we have not discussed here. This 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.

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.

Other Economic News this Week:

The Econintersect Economic Index for August 2018 improvement cycle continues and remains well into territory associated with normal expansions. Our index is now at the highest level since December 2014. There are continuing warning signs of consumer over-consumption.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



This article appears in: Investing , Economy



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