Low Quality Growth

Last Friday’s jobs report showed nonfarm payrolls up 216,000 in December, beating the consensus expected 175,000. Many are arguing that this was a huge number proving that the economy is not going into recession. But digging deeper into the data brings some doubt. In fact, it looks like the US is seeing low quality growth.

For example, yes, nonfarm payrolls came in better than expected in December, but not after adjusting for downward revisions of 71,000 to prior months. These downward revisions have now happened in ten out of the eleven past months. Over the past three months, private payrolls have increased a moderate 115,000 per month, tying for the slowest three-month pace of job gains since the COVID reopening started back in 2020.

What’s more, average hours worked by employees also fell by 0.2% in December. Despite more workers, we worked less in December than we did the month before, which is a headwind to growth. Losing 0.2% total hours of work is the equivalent to losing 228,000 jobs.

More importantly, the kind of jobs being added are of lower quality than we want. In 2023, nearly half of all jobs added were in the government and health care (which is heavily funded by government). Compare this to 2015 - 2019 (before COVID) when these two sectors accounted for a fifth of new jobs added.

Where else is the quality of growth low? Construction. Many people are talking about onshoring as manufacturing comes back to the US. Manufacturing facility construction is up 59.1% from a year ago and up 123.5% from two years ago. But this isn’t all private money. The government is funding many new projects, with the CHIPS Act and Inflation Reduction Act, artificially boosting spending in areas like manufacturing construction. But this deficit spending can’t last forever.

Real (inflation-adjusted) government purchases, which feed directly into the GDP numbers, are up 4.8% in the past year versus an average of 1.0% in the past twenty years. Meanwhile, recent government programs have been structured to multiply private-sector investment in politically-favored sectors, like “clean energy.” That, in turn, helped prop up economic performance last year – pushing out a recession that had looked likely to arrive at some point in 2023. But it’s low-quality growth that comes at a price. In order to spend on government favored projects, we must tax profitable entities in other areas. This redistribution does not add to growth, it just shifts it from one sector to another.