Council of Economic Advisers
CEA Chairman Edward Lazear Discusses the Administration's Latest Economic Forecast
November 21, 2006
MS. PERINO: Hi, can everyone hear me? I hope so. This is Dana Perino, and I am the deputy press secretary at the White House. I have Chairman Edward Lazear, Chairman of the White House Council of Economic Advisers. And he's going to provide an updated economic forecast, and then we'll take some questions before he has his next meeting. So I'll turn it over to Dr. Lazear now.
CHAIRMAN LAZEAR: Thanks a lot. I appreciate you all joining us on this call. Today we're releasing the administration's economic forecast that will be used for the President's fiscal year 2008 budget.
These forecasts are developed semi-annually by the Council of Economic Advisers, the Treasury Department, and the Office of Management and Budget. And we do these together.
The updated forecast is similar to private sector forecasts, and it's also similar to the administration's past forecast. I should point out that this is a routine process. As I mentioned earlier, it's done twice a year, and it is done by a professional staff. These are career employees who tend to be long-term individuals, who have been in the government for a while, and they are not specific to any one or the other administration.
Let me give you some of the details that are associated with this particular forecast. We are projecting real GDP to grow at 3.1 percent in 2006, and that's on a Q4, quarter four to quarter four basis. And we're projecting 2.9 percent for 2007. These growth rates are similar to the U.S. historic average. And they are also similar to the ones that the market is giving us in terms of the blue chip forecast.
It is also true that these rates would make the United States the fastest growing major industrialized country in the world. Our predictions are somewhat lower than the forecast in June, and that's primarily a reflection of the housing market, which as most of you know, has been a bit slower than expected. But the good part of that is that the slowness has not affected other parts of the economy. Consumer spending is still strong. Retail spending is strong. And we expect that what we've seen in this last quarter in terms of the decline in GDP growth relative to the previous quarters is really a temporary phenomenon, and it is not a trend. In fact, we're expecting things to pick up in the fourth quarter and as we go forward into 2007.
The labor market has been very strong. Last month the unemployment rate dropped to its lowest rate in over five years. It currently stands at 4.4 percent. This lower than expected unemployment rate is good news. It means that the market is tight. And that's being reflected not only in increased jobs but also in wage growth.
What we've seen over the past year is that real wages for non-supervisory and production workers have increased by 2.8 percent. And that -- when we're talking about production workers, hourly wages of production workers, this excludes the 20 percent of supervisory workers who tend to earn more. So when we're talking about 2.8 percent, we're talking about mainstream American workers.
This, by the way, is consistent with our forecast going forward in terms of job growth, which is going to be about 129,000 jobs per month. And the other thing I'll say is that the wage growth, which is particularly encouraging because it's something that we've been predicting for a long time given past increases in productivity, that wage growth has finally started to happen, and we're -- as I said, we're very happy about it. It means a significant increase in earning power for the typical American family.
Those numbers translate into about $1,600, a little more than $1,600 for the typical family of four. And just to put that in perspective, I recently saw a report that the average family spends about $800 on their Christmas presents, so this means that they can get their Christmas presents and then some extra as well as a result of the wage growth that we've seen in the past year.
Finally, there are other signs that the economy is strong. Obviously energy prices have fallen and fallen precipitously over the past couple of months. Consumer sentiment is positive. The stock market has been very strong. And the other thing that I look at is the unemployment insurance claims, the new claims that we see coming out each week. The reason we look at those is because they give us a sense of what's happening in the economy right now. And those have been in the low 300s really throughout this year.
So again, all the signs are for continued strong growth, and I look forward to your questions.
MS. PERINO: Can we go to questions, please?
Q I'm guessing that's me from the FT. Mr. Lazear, I just wanted to ask you about the wage trends. You've obviously -- you draw attention to the 2.8 percent real terms gain, so it's a significant one. But it's partly the result of the -- as you say -- the precipitous decline in energy prices in the last few months.
What sort of real wage gains would you expect to see over the course of next year?
CHAIRMAN LAZEAR: Hi, good to talk with you. That's a good question. The problem that we had in the past was not that nominal wages weren't growing; it was actually that real wages weren't growing because prices were rising so rapidly. So nominal wage growth has actually been up at about 4 percent since the beginning of the year. But as you know, the big problem in the first half of the year was that the energy price rise was so significant that it was really killing off any real increase in wages during the first half of the year.
With the decline in energy prices, we've seen a reversion. And that means that now real wages are up. So what that means, of course, going forward is that as long as the nominal wage growth continues to hold at about 4 percent, and inflation rates stay low, we are going to see real wage growth going forward. And I would forecast that we are going to see that for a couple of reasons.
First of all, I think the inflation numbers have been good. They've been strong numbers in terms of not only the headline numbers that affect -- that are affected by energy prices, but also the core numbers look good, as well, both at the consumer and producer level. And there's no indication at all that there's any failure to have increased demands in the labor market. That seems to be quite strong, and so I would anticipate that that will keep nominal wage growth high.
Q So will you be looking for a similar level of hourly real wage growth, 2.8 percent?
CHAIRMAN LAZEAR: I don't know that I'd want to give you an exact number, but I would anticipate that we will have positive and strongly positive wage growth, real wage growth into next year, through next year.
Q Thank you.
CHAIRMAN LAZEAR: Thank you.
Q Yes, I'm from CCH. You were speaking a moment ago about real wage growth looking even better next year. And for this year for the typical family of four, you gave an example of an increase. But what I'm wondering about is for the minimum wage earner. I'm sure you saw a Wall Street Journal article today saying the income gap is actually growing, and that the CPI has grown like 25 percent since the minimum wage was last set at $5.15 an hour, nine years ago. So I'm just wondering what your comment is for the prospects for increasing the minimum wage? As you know, there have been some calls for that in Congress.
CHAIRMAN LAZEAR: Okay, thanks very much. As you may have heard the President say on this issue, he is not opposed to any increase in the minimum wage that will not cost jobs and not affect economic growth. So, yes, of course, we have heard calls by Congress for increases in the minimum wage, and my sense is that this is not necessarily inconsistent with the President's view on this, and that there is some room for us to work on something together going forward.
Q You wouldn't support a clean bill that doesn't have anything in it that would give breaks to small business?
CHAIRMAN LAZEAR: Well, that's for the President to decide. Obviously, we need to make sure that small business is protected because they are an important engine of economic growth. We also want to make sure that large business also has the appropriate incentive. It's not specific to small business. We're worried about keeping the economy growing at its rapid pace, and making sure that standard of living rises for all workers, including minimum wage workers. And all of those are important components. So I wouldn't want to say what the President is willing nor unwilling to do at this point. But, as I said, he has not been negative on this issue, and I think this is an area where we can work together.
Q Could I also ask you something related to PAYGO and revenue offsets? Because Congress -- at least the Democrats -- are looking at re-instituting or re-proposing PAYGO, but of course it would be a little differently defined, than you, in that it would propose revenue offsets by both spending cuts and tax increases. Would the administration be willing to support that type of Pay Go?
CHAIRMAN LAZEAR: Well, we haven't seen a specific proposal at this point, and obviously the President will have to consider anything that Congress passes on to him or decides to discuss with him. But again, we'd have to see the specifics before we could comment on what we'd be willing to think about.
Q I know. But your definition has only been for spending cuts to make up for the offsets, and so regardless of looking at their proposal, what is your view of a PAYGO that's defined as offsetting through spending cuts as well as tax increase?
CHAIRMAN LAZEAR: Well, again, as far as I know, there are no specific proposals on the table, so I don't want to speculate on what a proposal might be and then comment on it. I think we'd rather wait and see what the proposal is and then comment on it at the appropriate time.
Q Thank you.
CHAIRMAN LAZEAR: Thank you.
Q Thank you. I was wondering if you could talk more about your outlook for the housing market. Do you expect there to be -- it to bottom in 2007? And is the worst behind us in your opinion? And what are the risks, in your mind, of a recession?
CHAIRMAN LAZEAR: The housing market, as you know, it has been hit, I think, harder than most of us had expected. Most forecasters were expecting a slower decline. What that probably signals is that the future will not be as negative as it otherwise would have been because we've probably had much of the decline that we're expecting to have.
That said, there are -- you know, there are a number of indications that things are still not as strong as they were last year in the housing market. You know, do I see that as a problem for the economy? Obviously, we don't like to see any one industry get hit and hit hard. That affects people's jobs. The good side of that, of course, has been that non-residential construction has taken up much of the slack in that industry. So we haven't seen construction jobs fall off dramatically as a result of the housing decline.
And I would say that as we go forward what we'd be concerned about is employment in that industry and looking to see how it transmits to the rest of the economy. I don't believe that it is going to transmit to the rest of the economy. There's been no indication that it has. Other sectors remain strong. And that would be the primary danger that I would see from the housing market, whether it's bottomed out now or whether it will take another quarter or so to bottom out I think is still up for grabs, and I wouldn't want to speculate on it.
But I would be willing to tell you that I don't think that this signifies any kind of weakness throughout the economy, in fact the reverse. The job numbers I think are probably the best indicator that the economy is very strong and in really good shape.
Q And the risk of recession, do you have a --
CHAIRMAN LAZEAR: Well, again the economy is growing. I don't even think we should be talking about going in the other direction at this point. The economy is growing. The economy is strong. The labor market is strong. You know, you see -- when you see jobs added at this rate, when you see unemployment at 4.4 percent, it's pretty hard to be thinking about things going in the other direction. I mean obviously at some time in the future things can change, but right now, as long as we keep our policies consistent with economic growth, which means keep taxes low, make sure that we don't put impediments, strong impediments to trade and business in there, I think we're on track for a strong economy.
Q Thank you, sir.
CHAIRMAN LAZEAR: Thank you.
Q Yes, Mr. Lazear, the inflation forecast to 2.6 percent in '07 from 2.3 this year, will that give the Fed any heartburn? And also what does that increase reflect?
CHAIRMAN LAZEAR: I would say that the inflation -- the change in the inflation, as I see it, is not especially significant. We don't usually expect that we can get those numbers down within .2 of a percent point.
I would say this number -- I interpret this number as essentially being consistent and almost equivalent to where we were last time, so I wouldn't want to read much into it. I certainly wouldn't want to give my colleagues at the Fed heartburn, especially my predecessors and some of my friends over there. So I don't think that we have to be particularly worried about it at this point.
That said, obviously, it's the Fed's job to keep track of inflation and make sure that everything is going well. Again, I think the thing I would point to are the numbers that we saw most recently with the producer price index, and consumer price index numbers both being very good. I think the Fed remarked on that, as well. So again, going forward, I think things look pretty good. I'm actually encouraged. The energy prize situation seems to have stabilized, and we look to be in good shape on price front.
Q Thank you.
CHAIRMAN LAZEAR: Thank you.
Q Actually, both of my questions about the housing market and inflation were answered, so I'll actually give you another question. On the jobs front, you pretty much see the unemployment rate -- you see a slight improvement in the unemployment rate, even with the economy -- even with economic growth slowing a bit. Why is that? Where do you see growth coming from, if you can elaborate on the improvement that you're expecting on jobs at the same time that economic growth from your previous forecasts have been a little bit lower?
CHAIRMAN LAZEAR: Well, the unemployment rate being at 4.4 percent right now was not in our forecast, and we weren't expecting a number quite that low. Obviously, we're pleased to have a number that low, but it means that going forward, it will affect the forecast of unemployment next year, as well.
Now, we're expecting -- we do expect that there may be some movement back toward the historic average, but we're certainly not troubled by that because we're still talking about very low unemployment rates. Even if things were to go back to where they were, you'd still be talking about 4.6 percent, which we still think of as full employment or even better than full employment by some economists' definitions.
The other thing I would point out is the job growth at 130,000 or so is a very good number, very positive number, especially when you're at a position where you're basically at full employment. So again, I think that this is a very tight labor market. It's being reflected not only in terms of jobs. It's being reflected in layoff rates, which are at an all-time low since we've been collecting the data. It's being reflected in wage growth. So all of this seems to signify a very strong and tight labor market.
Q Oh, hi, thanks for taking my call. The Democrats obviously have a lot of things that they want to do, and I know you talked a little bit about PAYGO. Some folks think that some of their proposals are going to require a tax increase, and when you're looking at sort of the long-term structural deficits, there's obviously a lot of costs down the road. Bob Rubin recently said that if you raise taxes now it would have zero impact on the economy. And I wonder, given how strong you say the economy is, whether you think it could handle any kind of a tax increase?
CHAIRMAN LAZEAR: The President has come out very strongly opposed to any tax increase because he thinks it will harm the economy. That's consistent with my view as well. I think a tax increase at this point is both unnecessary and undesirable. I don't think it would be good for our long-term fiscal situation. In fact, the long-term fiscal situation is driven not so much by the tax side -- right now we're at a tax level that's higher than our historic average in terms of a percentage of GDP that we're taxing, so we're not under-taxing ourselves right now.
The big problem as we go forward is the growth in entitlement spending, and I think everybody understands that that's the issue; everybody recognizes that that's the big problem and one that needs to be addressed.
The President has, I think, been courageous in putting those issues out there, taking a stand that others have been unwilling to take, and that's something that we've just got to deal with, and that's going to be the way to take care of these problems.
So I don't think the tax side is the right way to go. I think it's very risky. We don't want to endanger the kind of economic growth that we've had over the past couple of years, particularly in the labor market again, which to my mind is the most important aspect of the economy. When we look at what really affects the typical American, we're worried about jobs and we're worried about wages, and those are both on the right track right now, and I certainly wouldn't risk it by having a tax increase.
Q All right. Thank you.
CHAIRMAN LAZEAR: Thank you.
MS. PERINO: We have time for one more question.
Q Hi, yes. Thanks for taking my question. I noticed at the beginning of your remarks you said the downturn that the economy took -- the hit the economy took from housing you expected to be temporary and rebound in the current quarter. Later, when you were asked more specifically about housing, you said you weren't sure whether the bottom was now or could be -- we could be reaching it later. So I'm wondering -- I know you don't do quarterly forecasts, but are you saying basically you do the think the fourth quarter is going to be stronger than what we saw in the third?
CHAIRMAN LAZEAR: I'm sorry. I may have misspoken, but I don't think I did. I don't think that I said that housing specifically was going to be higher in the fourth quarter than it is right now. We don't issue a specific forecast on that. What I said was that I thought the level of GDP that we had in the third quarter was abnormally low because of housing. But that doesn't mean that housing would have to rebound in order for us to have a better fourth quarter. The fourth quarter could be good because other factors offset it or because housing comes back. Either of those would be sufficient to make the fourth quarter better than the third quarter.
What I was trying to point out was that the fourth quarter is expected to be better because we think that the third quarter was a temporary aberration, that it wasn't a reflection of a trend, but rather was something that was a short-term deviation from what we think of as a very positive growth path. So hopefully that clarifies it.
CHAIRMAN LAZEAR: Thank you very much.
MS. PERINO: Thanks everyone. We'll release a transcript as soon as it's available.