Q: People who pay attention to economic news can be overwhelmed by data and stories coming from all directions, especially with the 24/7 media. It's difficult to sift out the politics and sensationalism. Please tell us your view of where the national economy is today.
A: Sure. It's not easy to assess how the overall economy is doing at a given time, and trends can be affected by events unfolding in the U.S. and around the world. Having said that, I look to the rate of employment growth as the best lens to see what is going on now and over time. Personal income data are important, too, but come to us only with a considerable lag.
The rate of employment growth reflects employers' collective judgment that the benefit of taking on new people outweighs the cost of doing so. When an employer hires someone, it is effectively betting that that new employee will be profitable despite all of the uncertainty out there. The uncertainty I'm talking about includes every risk that employers can foresee. So the rate of employment growth helps us to look past the media noise you're talking about and pay attention to the bottom line.
I'm encouraged by what I see going on in the labor market right now. In February employers added a net 236,000 jobs nationally, which was a much better number than what had been expected. That includes significant gains in manufacturing jobs. And the employment news has been even better in Oklahoma.
Q: You have provided us with a very interesting graphic [see below] entitled “U.S. and Oklahoma Employment Growth.” What does this graphic tell us about the economic picture nationally and in Oklahoma?
A: This graphic contains four lines, one for each of the U.S., the State of Oklahoma, Oklahoma City and Tulsa metro areas spanning the past 40 year period. The lines represent the year over year rate of change, measured quarterly, of employment growth, for each of those places. The thickest line is for the national economy. The most recent date the graphic includes is this past December.
The numbers in the bottom right-hand quarter show the employment gains in the year beginning Jan. 1, 2012, and ending Dec. 31, 2012. Employment growth in the U.S. was 1.6 percent for the year. For Oklahoma as a whole, the rate of growth was 2.4 percent. Oklahoma City saw a 4 percent gain, while Tulsa's growth was much less, slightly ahead of the state's at 2.5 percent. The other numbers are the actual numbers of jobs created over the year. The state gained 38,000 jobs in 2012.
The graphic is interesting because it tells an historical tale, as well as a comparative one. You can see the effects of the various recessions over the past 40 years, as well as the expansionary periods. In the late '70s and early '80s, energy boom years, we were doing much better than the nation. Also note the Penn Square Bank era of 1982-83; the graphic plainly shows Oklahoma's underperformance compared with the rest of the country. You can see that the lines representing the U.S. and Oklahoma have moved together far more closely since 1990 or so. This suggests that Oklahoma's economy is becoming more diversified, more like the national economy. A more diversified economy should be a more resilient economy, less prone to booms and busts than Oklahoma was in the past. While we are sometimes higher and at times lower than the nation, our growth patterns now certainly “rhyme” with the nation's.
Notice also that Oklahoma City's employment growth is far outpacing the rest of the country and the state. Contrast its employment growth with Tulsa's much slower rate. You can see that Tulsa's line has often exaggerated the movement of the other trend lines. Tulsa is more cyclically volatile. This likely reflects the fact that Tulsa's economy is less diversified than Oklahoma's City's and has a comparatively larger manufacturing base. OKC benefits from being the seat of state government and Tinker.
Combined with the recent employment numbers, the trends in employment growth are beginning to look quite positive, and there has been marked improvement since the financial crisis of 2008. I say this as a skeptic of policymakers in Washington and the Fed.
Q: So what do you see looking ahead for Oklahoma and the U. S.?
A: In my view, we're still kind of on the cusp of recession nationally, and economic indicators have been mixed. The jury is still out on what all the indicators mean taken together, but recent signals like the February jobs number suggest the economy is strengthening.
In terms of employment, it's been a long slog back from the financial crisis, and we're not there yet. With rates of employment growth in the recovery, the U.S. will not get back to its 2008 peak employment, in absolute numbers of jobs, until sometime in 2015. And that doesn't even take into account a labor force that will be 7 to 8 percent larger by then. Should employment growth remain steady or increase in the U.S., things should continue to look relatively good for Oklahoma. We will do well to match the gains of 2012 this year, but we certainly have a good shot at it with the continuing natural gas and tight oil boom.
But an economist always needs to be looking at what the next problem might be. In my view, that potential concern is inflation brought on by the Fed's quantitative easing programs.
Q: Quantitative easing is a term that everyone has heard of but few understand. Please briefly and simply explain quantitative easing, and why it might lead to inflation.
A: Bear with me because it is a little complex. Quantitative easing involves the Fed buying bonds from banks and other financial institutions using money that the Fed creates out of “thin air.” I'm not talking about the debt of the banks themselves, but bonds that they own, like an individual would own bonds. When the Fed buys bonds, it pays for them by simply adding to the deposits the banks have at the Fed. The Fed gets the bonds and the banks get newly created deposits at the Fed. The Fed's assets, including bonds, have expanded from $900 billion in 2007 to over $3 trillion today.
Why am I concerned about inflation? It is because these bank reserves are “high powered money” capable of being lent-out multiple times thereby leading to multiple expansion of the money supply. We have a fractional reserve system — banks are only required to keep a small amount of reserves relative to what they can lend out. The more reserves a bank has, the more it can lend. And each time a bank lends money, the money is spent and becomes a deposit at another bank, in turn increasing that bank's reserves, most of which is available to be lent out. That process is repeated again and again in what is known as the “money multiplier effect.”
The concern is that eventually this money being deposited into banks' accounts at the Fed will result in more money in circulation as those deposits are increasingly lent out by the banks, compounded by the multiplier effect. More money may mean, potentially, too much money chasing too few goods, i.e., inflation.
Q: What can we can as individuals do?
A: It's critical that people take time to understand what the Fed is doing, because its actions may be more consequential than most of us and our elected representatives realize. I applaud the Fed for preventing a deflationary crash in 2008, but it may have overdone it with quantitative easing at this point. It may be difficult for the Fed to sell the debt it now owns — unwind its positions — without interest rates going higher. This is because when the Fed sells bonds, the price of bonds fall and interest rates rise. Investors demand to be paid more to own a larger stock of bonds. Higher interest rates could hurt the economy.
The Fed has never embarked on a program of this magnitude, and it will be tricky going from here. We can help ourselves by trying to understand the Fed, and by being vigilant about inflation, and by encouraging our elected officials to understand and uncover what the Fed is doing. We should give their words and deeds proper scrutiny because inflation is a tax, and a serious threat to stability and prosperity.