The Divide Between GDP and Jobs

Economy is growing slowly even as labor market remains strong

By Justin Lahart

The employment-cost index, which measures wages and benefits, rose a seasonally adjusted 0.6% in the second quarter, rising 2.3% from its year-earlier level. Employees install engines at an assembly plant in Pennsylvania Photo: Luke Sharrett/Bloomberg News


Will the real economy please stand up?

Gross domestic product grew at just a 1.2% annual rate in the second quarter, the Commerce Department reported on Friday, not much better tan the first quarter’s 0.8% and well below the 2.6% economists expected to see. Details of the report suggested the economy wasn’t as poky as the headline figure suggested—consumer spending was strong, and there was a big drag from companies cutting inventories that ought to be reversed later.

Even so, the message from the GDP report is that the economy is growing only slowly—a message greatly at odds with labor market readings. In the first six months of this year, the economy gained over one million jobs. If the historical association between GDP and employment growth from before the financial crisis held, about 400,000 fewer jobs would have been added.

Steady jobs growth means higher labor costs for U.S. companies. The Labor Department on Friday reported that its employment-cost index, which measures wages and benefits, rose a seasonally adjusted 0.6% in the second quarter, rising 2.3% from its year-earlier level. Private-sector wages and salaries excluding incentive-paid workers—a category that excludes the distortionary effects of Wall Street bonuses—were up 2.5% from a year earlier. That was the highest since 2008.
One explanation for why GDP figures and labor-market data seem at odds may be that economy’s productivity problem is even worse than believed. Under this view, years of weak investment spending have cut into companies’ efficiency gains, so that even slight increases in demand compel them to hire. With much of the labor markets’ slack already taken in, they must pay up more to get the workers they need.

Or the GDP-labor divide may be driven by a situation where the U.S. economy is experiencing decent domestic demand in a world that is very weak. Manufacturers making globally traded goods see little reason to invest, while American oil producers, facing low prices that have little to do with what’s happening domestically, are retrenching. That cuts into GDP growth, but since these industries represent only a small portion of employment, the effect on job growth is muted.

Either scenario suggests that weak GDP and steady job growth could persist through the rest of the year. That could put the Federal Reserve at a crossroads, where the labor market has heated up to the point where rate increases are merited, but a slow-growing economy suggests it should stay its hand. It would be hard to figure out which path to take.

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