David Rosenberg, chief economist at Gluskin Sheff + Associates Inc. in Toronto, testified recently about the American economy before the U.S. Senate Budget Committee. This is an edited excerpt:
When economists discuss their economic outlook, they invariably talk about their GDP growth forecasts. GDP is all about spending – consumer spending, housing spending, business spending, government spending and the like.
But there is also the supply side of the economy, which receives scant attention but is equally important, with the critical inputs being productivity and labour force growth… .
Now what about the labour market? In a speech last March, [current Fed chairman] Janet Yellen said, and I quote:
"The large shortfall of employment relative to its maximum level has imposed huge burdens on all too many American households and represents a substantial social cost. In addition, prolonged economic weakness could harm the economy's productive potential for years to come. The long-term unemployed can see their skills erode, making these workers less attractive to employers. If these jobless workers were to become less employable, the natural rate of unemployment might rise or, to the extent that they leave the labour force, we could see a persistently lower rate of labour force participation."
I also discovered a report by the economists at the Chicago Fed, published last July and titled, "Estimating the Trend in Employment Growth," and here was the conclusion. Again, I quote:
"For the unemployment rate to decline, the U.S. economy needs to generate above-trend job growth. We currently estimate trend employment growth to be around 80,000 jobs per month, and we expect it to decline over the remainder of the decade, due largely to changing labour force demographics and slower population growth."
I can't speak for the committee, but I find that conclusion startling. This is the way I look at the situation. In the past four years, the unemployment rate has declined from 10 per cent to 6.7 per cent. And all it took to accomplish that tremendous tightening of the labour market was average GDP growth of 2.4 per cent at an annual rate.
Only three other times in the past six decades has the unemployment rate fallen this far this fast: in the early 1950s, when growth averaged 6.7 per cent per annum; in the late 1970s when GDP growth averaged 4.8 per cent, and in the mid-1980s when growth averaged 5.2 per cent.
Today we accomplished this feat with only 2.4 per cent growth, which is disturbing because it means that it is not taking much in the way of incremental economic activity to drain valuable resources out of the labour market.
The dilemma is that people are becoming disengaged in the labour market at an alarming rate. In fact, 2.9 million Americans withdrew from the labour force in 2013, more than doubling the 1.4 million jobs that were actually created. There are now a record 92 million Americans in total who reside outside the labour force. Just five years ago that number was 80 million. No doubt there is a demographic element since the first of the baby boomers turned 65 in 2011… the retirement wave is obviously one reason.
But that doesn't explain why it is that the number of people in the 25-54 year age cohort who say they have left the labour market because they are "discouraged" has fallen 18 per cent in the past year. Something is going on here over and beyond the classic argument that people are either retiring or are dropping out of the labour force because of a weak economy.
The causes are open for debate but the facts are not and the facts are that we have a rapidly depleting pool of labour on our hands and it needs to be addressed.
According to the Bureau of Labour Statistics, the available pool of labour shrank 13 per cent in 2013 to 16.5 million, which is the lowest it has been in five years and the decline is unprecedented. If the depletion continues at that rate, we will run out of available workers in this country in just about eight years … .
I look at the data, again from the NFIB survey, and I see that nearly one in four small businesses have "at least one position" open right now that they cannot fill.
Almost 40 per cent say that there have been "few or no qualified applicants" for the jobs being advertised. In other words, this is evidence of an increasing shortage of skilled labour, which in turn is posing a constraint on the sustainability of economic growth.
In conclusion, we do indeed have a cyclical recovery in place, but if aggregate demand expands 3 per cent to 3.5 per cent over the next two years, then we are going to begin to strain scarce supply-side resources in terms of available labour and capital.
Then inflation re-emerges and interest rates begin to rise, potentially sharply, which is the last thing fiscal policy makers need since it was relief from lower debt-service costs that played such a crucial role in allowing the deficit to recede substantially in recent years.
I estimate that if not for the current low interest-rate structure, debt-service charges and the deficit would be $250-billion higher than they are today. But under current OMB projections, net interest charges go from $212-billion in 2013 to $822-billion in 2023, rivalling what the government will be spending on Medicare, accounting for almost the complete deficit at that time, which I can assure you – seeing how this played out in Canada in the early 1990s – will severely impair fiscal flexibility.