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 Home > News & Policies > June 2004

For Immediate Release
Office of the Press Secretary
June 4, 2004

Economic Roundtable with NEC Director Steve Friedman and CEA Chairman Greg Mankiw
Room 476
Eisenhower Executive Office Building

1:05 P.M. EDT

MR. FRIEDMAN: Thank you for coming. You've all seen the numbers. This was a very positive report this morning, almost a quarter of a million jobs. That means something like -- something in excess of 1.4 million jobs since last August. That's nine consecutive months.

We are pleased about the fact that the job growth was broadly based across the board. It was very strongly in industries that pay well. We're also quite pleased that this was the fourth straight month of manufacturing job increases. That's up about 90,000 jobs. And so we believe that the President's tax package passed in May of '03 has been having real effect, along with the Federal Reserve's accommodative monetary policy, and just the fundamental flexibility and resilience of the American economy. We now feel that this is a robust and sustaining economy at this point. There's absolutely no complacency, though, here. There's still a lot to be done. And you've heard from us in the past, and you'll continue to hear from us about trying to work on the President's agenda and his six-point program.

So let me just turn it over to Greg and give you a little bit more background on the report this morning.

DR. MANKIW: This report confirms what we've been seeing in many other economic statistics, and that is that economy is enjoying a robust recovery from a difficult few years. As Steve said, the President's jobs and growth plan was signed into law in May. It started being effective in June and July when the withholding was adjusted.

And the labor market turned over this summer, as well. The unemployment rate reached its peak in June of 6.3 percent. It has now fallen down to 5.6 percent. August was the low point for employment, and it has been growing consistently since then. Particularly rapidly in the past three months -- over 1.4 million jobs since August; almost a million jobs over the past three months -- a little over 300,000 per month on average. So the economy is growing recovering robustly.

If you look at the other statistics that we look at, you can see other confirmatory evidence. This week we saw two reports from ISM -- Institute for Supply Management -- one survey of manufacturing, another survey of non-manufacturing. And both of them showed -- those are called diffusion indices -- and both of these indices showed that both sectors manufacturing and non-manufacturing are growing robustly, if you look at them.

The best measure of incomes -- if you're interested in incomes rather than jobs -- the best measure of incomes is disposable income, which includes all earnings, dividends, interest minus taxes that people pay -- real disposable income, as adjusted for inflation, is at an all-time high. So all the data is really telling a very consistent story now which is that the economy is heading quite robustly in the right direction.

MR. FRIEDMAN: We'll stop and just open it up for questions that you all have.

Q What's the disposable income number? You said it's an all-time high, what is the number? And how does it compare --

DR. MANKIW: If you look at the real disposable -- I don't have the exact number. You have to get it from the Bureau of Economic Analysis. But if you look at the level of real disposable income, it's growing and is at its historic peak.

MR. FRIEDMAN: I think real after-tax incomes are up by about 11 percent since December 2000, which actually is substantially better than after the last recession.

Q Is that real income per household or per person?

DR. MANKIW: I was looking at real disposable income. It's usually done per capita. That was always one way to do it.

Q You've seen a lot more people working. Obviously, there's a lot more tax-collecting going on. How do you see this impacting the deficit forecast that will be out in the mid session review?

DR. MANKIW: That's what we're in the process of working on right now. The mid session review will come out in July, so I don't want to prejudge what those numbers will be. But we're in the process right now of updating the administration forecast. The last administration forecast was put to bed in December. Then we forecast 4.0 percent growth from the fourth quarter of 2003 to the fourth quarter of 2004. Most of the private sector forecasts now are for GDP growth to be a little bit above that.

And we'll be coming out with our own administration forecast together with updated budget numbers in the middle of July.

Q Without giving me any specific numbers, can you give me some general idea about whether this is -- how this is positive? To what extent this might be affecting the deficit forecast?

DR. MANKIW: I don't want to prejudge what those numbers are going to be because those are based on the economic side numbers, plus a variety of other technical factors. So I think it's premature to, first, even know ourselves exactly what those numbers are going to be. But clearly, the economy is doing as well or better than we thought it was back in December.

MR. FRIEDMAN: And over time a favorable economy will generate more tax revenues.

Q But you can say in general that you expect it to be a brighter picture, yes?

MR. FRIEDMAN: Why don't you give your directional --

DR. MANKIW: Well, other things equal, strong economic growth is good for revenues, which is good for the budget deficit. The President said many times he wants to reduce the budget deficit in half. And there's two reasons -- there's two parts of that. One is to get the economy growing, to bring in revenues; and other is holding a line on spending -- with spending restraint being a very important part of the program to cut the deficit in half.

But I'm not sure it's appropriate at this point to say what the actual numbers will be until OMB announces them.

Q Well, what would be the factors that could make it worse?

MR. FRIEDMAN: Oh, I don't think there's any anticipation it will be worse. It ought to be better. But I think Greg's hesitation is as they go through the modeling, you can come up with some counter-intuitive things that pop up in these things. So he's just being cautious. But there will be no anticipation it will be worse. There is anticipation it will be better. I believe the Congressional Budget Office already had more favorable numbers.

Q Do you want to say anything about the energy prices, and the outlook?

MR. FRIEDMAN: Yes. There's never been an economy where you don't have tugs and pulls in different directions. And this one, as we've said, is a strong and robust economy. But there are always some things that are on the other side. And energy prices is clearly one of the things on the negative side. The President has pointed out that he is very conscious of the fact that this puts a crimp in the budgets of working families, and it's clearly a negative.

But you have to put this into the context of all of the other things that are going on in the economy. And so, while as a negative, we have no remote sense that it's going to derail this recovery. But we really do welcome OPEC's indications of an intention to pump more oil, and it's something that this administration is vigilant in trying to make sure that markets are working.

DR. MANKIW: The causation between oil prices in the economy goes in both direction. Other things equal, higher oil prices are a head wind in economic growth. Standard models suggest that a $10 increase in oil prices, if sustained, would reduce economic growth by about a third of a percent of GDP. On the other hand, a strong economy also affects the oil market. To a large extent, that's what is going on now. The U.S. economy is very strong; the world economy is very strong -- in part, because China is growing rapidly and much of the world is growing rapidly. It's like this is a very good year not only for U.S. economic growth, but for world economic growth. And because of that, that's bidding up the demand for oil. And that's partly what's driving the prices. So to some extent, oil prices are reflections of the good economic news. On the other hands, it's also a head wind. If other things equal --

Q So if you took it to the next step, we could expect that -- if that demand and growth continues worldwide, and the demand on oil continues, and that we should expect prices to remain --

DR. MANKIW: Well, no, what's important -- what's important is as the world economy grows, the demand for oil will grow. What's important is that the supply grows, as well. And that's why, as Steve said, it's welcome news that OPEC is expanding oil production. But it's also important that we think about expanding production in the United States.

The President has called for ANWR to be explored. And the President said at the Cabinet meeting -- I think it was last week -- that if ANWR had been signed into law when it came to the previous administration's desk 10 years ago, today, ANWR would be producing about a million barrels --

MR. FRIEDMAN: Up to --

DR. MANKIW: Up to a million barrels per day, which would have a significant impact on today's oil prices.

MR. FRIEDMAN: And as I say, we note the impact this has on families. But as Greg points out, this is very much driven by an increase in demand. And this is at -- sort of the early stages of a recovery. So you have a robust recovery helping to push this up. And it's -- as I say, it's a negative. But it is more than compensated for at this point by the positives, including the very strong job growth.

Q Steve and Greg, I want to ask you to respond to kind of a new level of argumentation about job numbers from the Kerry campaign. Starting last month, they've started only counting private-sector jobs created, not private-sector, public-sector jobs created -- essentially adopting the position that public-sector jobs don't count in a recovery because they are not attached to the "real economy." And in their release today responding to the numbers, they said, well, the Bush administration still lost 1.9 million private-sector jobs. I'd like you to evaluate that from just an economic point of view. And also if you have the numbers available, delineate between public and private sector.

DR. MANKIW: Yes, in fact, I can give you some of the numbers. I think I have some of those here. In this recent report, 248,000 was the job gain in the most recent month -- is the total, the total non-farm payroll employment, so that includes the government. The private-sector one was up 275,000. This particular month, there happened to be a small decline in government employment. So the private-sector number was bigger.

Last month based on newly revised data -- last month the total gain was 346,000; the private sector gain was 325,000. The previous month, March -- the total gain was 353,000; the private sector gain was 339,000. So I don't think they tell a very different story.

Q Do you see any inflation signals that are worrying to you?

DR. MANKIW: A couple things -- obviously, we need to be vigilant about inflation. But if you look at what's going on out there, there are some signs of inflation picking up. But I think as a -- you can go through all the signals together, it doesn't look that worrisome. The worrisome signs are some commodity prices. Some people view commodity prices as leading indicator of inflation. The other thing to keep in mind is that commodities are much less of an important input for most businesses than labor -- labor being the most important input.

If you look at unit-labor costs, unit-labor costs have not been growing in a way that signals an ongoing inflation problem -- in part, because productivity growth has been so strong. So for that reason, I'm not overly worried about inflation, although it's something certainly to keep an eye on.

The other thing to keep in mind is that in the long run, inflation is primarily a monetary phenomenon. We have an extremely good team over at the Fed -- Alan Greenspan, Ben Bernanke, Don Koln -- the appointees of this administration, we've got some extremely good economists. And they've established a lot of credibility as inflation fighters. And that's a reason why -- the administration, the Fed needs to keep an eye on inflation -- it is a reason to be optimistic in the long-term.

Q With the strength of the job growth that we've seen these past couple of months, why has the unemployment rate not fallen? And also do you think that it's possible that job growth will continue at such a pace that you'll eliminate the deficit in private-sector jobs by the end of the year?

DR. MANKIW: The unemployment rate has fallen. It's fallen from a peak of 6.3 percent back in June, to 5.6 percent. So the trend has been downward. If you look at the consensus of private-sector forecasters, they're expecting it to continue downward.

There's enough noise in the data, there are imperfections in measurement that you shouldn't give too much weight sort of month-to-month.

MR. FRIEDMAN: And more people have been coming to the labor force.

DR. MANKIW: And more people have been coming to the labor force. If you look at the gain in employment -- judged by the household survey, it's also been significant. I don't have that number, but I think it's in the same ballpark as the payroll survey. So the unemployment rate doesn't tell a fundamentally different picture.

And your other question -- oh, I'm not going to predict a particular month's data. But what is clear is that we're heading in the right direction. Most of the private-sector forecasts, as well as our, suggest we're going to continue heading in the right direction.

Q Do you still foresee the creation of 2.6 million jobs this year?

DR. MANKIW: We don't have an official administration forecast. We don't do that. We're not a forecasting firm, so we don't put out -- a forecasting firm will update their forecast twice a week. We don't do that. We only do it as part of the budget process. We don't have an official administration forecast since the last one we put to bed in December.

Q Why was that put in the presidential report then if it's not an official forecast?

DR. MANKIW: No, it was. No, that was. But if you look -- it was in the Economic Report to the President. If you look in the footnote of that, at the table, it says, based on data as of December 2nd. That was the official administration forecast put to bed in December, and then it was put in as part of the economic report, which happens to come out in February. But it's the same forecast coming out of the budget. And the forecast in May is part of the budget process in order to do budget numbers.

Q So do you see that number as being initiated this year?

DR. MANKIW: We don't have a new administration forecast since then.

Q But you can say with the current trend of the months left, that it's achievable, yes?

DR. MANKIW: I don't do the forecast. What's clear is we're heading in the right direction. We're making significant progress. I don't have a specific forecast to give you beyond that.

Q Are either of you concerned that an increase in rates, which is widely forecast at the next FOMC meeting, will put a damper or crimp on this robust recovery?

MR. FRIEDMAN: Well, I'll give you a reaction. First of all, as far as concern, we're paid to be concerned about a lot of things. But the -- we have been at exceptionally low -- historically low rates for quite some time. And the markets have, I think, very thoroughly discounted and anticipated Fed action. We don't predict Fed action. We leave that to the Chairman and his people. But the markets are every day going through their own analysis. And the markets have come to consensus and discounted it. And you can already see some of the impacts in it. And so what that leads me to believe is that this economy has absorbed the prediction of future rate increases and is operating in a very robust, forward-moving pattern. So we see nothing from that, that should derail this recovery.

Q Not only the stock market, but also it could have effects on -- refinancing, home-buying that sort of thing.

MR. FRIEDMAN: Yes, I'm not talking about the stock market. I'm talking about the fundamental economy. In other words, we see nothing that should make one feel that that's likely to be derailed.

DR. MANKIW: Can I add one thing to that? In our last administration forecast, we do forecast market interest rates. And if you look in the Economic Report to the President, our forecast table includes the administration forecast on market interest rates, because interest rates are important to the budget process. We forecast interest rates would rise as the economy recovered, so that was fully expected. In fact, that's a normal, cyclical development -- as an economy recovers, the demand for credit rises because businesses are borrowing to expand, and interest rates rise. So it's really a normal cyclical development.

MR. FRIEDMAN: And the way markets work, they price in their expectations. And so you've started to see in longer rates, already priced in. And you've started to see it in mortgage rates. But mortgage rates are still historically low.

Q Tell me, if you would, one or two things that Congress might do this year that could positively impact the economy; and one or two things that it may be considering that might negatively impact the economy?

MR. FRIEDMAN: Well, I'll stick with the former question. I think it's very, very important that we have litigation reform. It's an important priority for the President. You can't talk to a business group -- and I'm talking about them as the job-creators -- without realizing what an impediment it is to have an overly litigious society. And so if class-action reform is the one that's got the best chance of getting passed, that would be an extremely constructive thing to get done, as well as asbestos reform, medical malpractice reform.

On the other side of it, Greg can take his comments, I think that Congress working with the President to make sure that we maintain spending discipline would be a very, very constructive thing.

DR. MANKIW: I agree. And there's also a variety of free-trade agreements that have been signed, and they'll need to go through Congress at some point. And I think that would be --

MR. FRIEDMAN: At some point.

DR. MANKIW: -- that would be positive in the event that happened.

Q Let me just ask you on the other side of that, there seems to be some possibility that Congress may not extend some of the tax cuts -- the middle class, child tax credit -- would that really have much of an effect?

MR. FRIEDMAN: Permanence of the President's tax cuts is a very, very important thing, and I'm glad you focused on that. You have to let American families and American businesses have the ability to plan ahead. And, plus, the last thing you want to do in a recovery period like this is hit people with what would, in effect, be tax cuts, or the perception of tax cuts -- tax increases. I'm sorry -- tax increases or the perception of them in the future. So making the President's tax cuts permanent is one of his -- a key part of his six-point plan, and is very, very important.

Another constructive thing would be passing an energy bill, which he has been calling for, for the last three years so we don't lurch from crisis to crisis.

Q But specifically, if these tax cuts are not renewed for next year -- there are some that are going to expire next year, will that have an adverse impact on the economy?

MR. FRIEDMAN: I think any failure to make the cuts permanent is, in effect, an increase in taxes. And that has a negative effect, yes.

Q Gentlemen, despite this improving job picture, there's still weakness in some key battleground states -- Pennsylvania, Ohio -- do you forecast, or foresee any meaningful job growth there between now and the election?

MR. FRIEDMAN: Well, we don't -- we don't think of it in terms of battleground states or otherwise. We think of it in terms of economic terms. And the two states you talked about are very strongly manufacturing-oriented states. And so the turn in manufacturing jobs should benefit workers in both those states.

We're now in a situation where something like 47 of the 50 states have had reductions in their rate of unemployment over the last year. And this should get increasingly widespread, and should work in states that -- with a heavy manufacturing base.

Q And you mentioned the tugs on the economy, oil prices being one of them, is that how you all explain the fact that despite the improving job pictures, consumer confidence continues to drop, or it did drop in the second half of last month?

DR. MANKIW: I think the public's perception of the economy can lag the economists' perception of the economy. The economists follow the data very closely. The general public waits for people like me to report on that data. And that's why we're here, so you guys can report the very good news that we've been seeing in the data.

But I think over time, as people start feeling it in their lives, as they see jobs are easier to find, as they see that their neighbors are getting jobs again, as they're getting jobs again, consumer confidence will reflect that. But I think you're right one of the negatives has been oil prices.

MR. FRIEDMAN: There is clearly a lag in -- consumers are going about their lives. They're worrying about their jobs and their families, as Greg says, not studying the data. And there tends to be a lag in their perception of the turn. And I think probably areas in which the job picture turned earlier are ones where you can start to see the reflection of that, the understanding of that.

There's another factor: The tremendous amount of news coming out of Iraq has been a distraction to some extent for the consumers from really realizing just how much stronger this economy is.

Q What's a traditional lag time? Is there any set period of time? Or historically has there been?

DR. MANKIW: I've not seen studies of that.

MR. FRIEDMAN: You're dealing with something with a lot of variables. It's interesting -- there's one distinguished economist between the two of us, and it ain't me. But one of the things that was fascinating to me last year was to see how low business confidence was. And if you started to think in terms of what it would take to pick it up. At that time, it seemed to us that business confidence was actually going to lag the real turn-up also. Well, that's really happened. And if you look at the business roundtable survey that came out yesterday, you saw business confidence is extremely high.

Now, business confidence, these are the folks who create the jobs. And that should -- the same factors that are making them much more confident should start to make Mr./Mrs. American Householder start feeling better.

Q What have you seen in the IT sector? And there are things about the new economy that allow not only productivity to continue, but allow the U.S. economy to absorb higher oil prices in ways that say, it couldn't have in the '70s.

DR. MANKIW: What is absolutely true is that the amount of oil consumed per dollar production of GDP is much lower today -- I think half is the number -- the last one I've seen -- than it was in the 1970s. And that's, in part, because the nature of the economy is changed. We're more technology based. We're more service based. And that's one reason why some economists believe that oil price changes may have a smaller impact on the macro-economy today than was true a generation ago.

Q What do you see in the IT sector, in general?

MR. FRIEDMAN: My impression is that it is doing quite well. But going back to your question, which I'll broaden to efficiency in the economy, talking this morning to a manufacturers' group, and then just talking afterwards with one of the members, the phenomenon that we were discussing, during a slow-down period, which is what we've had, coupled with the much greater advanced use of software and information technology, business has just got a large inventory of efficiency-enhancing steps they can take, and that they have started to put into place. And so I believe they are -- I believe they are using their resources much more efficiently than they did some years ago, even in the industries have traditionally been energy intensive.

Q There's almost a million jobs that have been created in the last three months. Do you see that trend continuing over the remainder of the year? Do you see a natural slowdown in that pace?

DR. MANKIW: I think you'll see good job-creating going forward. You may well see fits and starts. One thing to keep in mind is that all economic data is noisy -- just measuring precisely. The revision between the preliminary data and the final data is huge, as we saw today. We saw quarter revisions of I think 74,000 to the previous two months data. And probably the month of May, there will be more revisions going forward. So given the nature of the economic data being inherently imprecise, don't be surprised if you have particularly good months, or particularly bad months. But the overall trend is clearly -- is clearly positive, and we expect it to continue.

Q There's a new analysis today -- it's coming from the AFL-CIO, so you know where they're coming from, but the suggestion is that the increased outsourcing of knowledge-based jobs means that the new jobs being created in the United States are going to be lower quality jobs, less high skilled, high wage jobs, and that recent BLS data backs up this assertion. Comment on that?

DR. MANKIW: Well, I haven't seen it. I haven't seen that study, so I can't comment on the specific study. On a general -- I see jobs being created across the economy -- manufacturing jobs, construction jobs, service-sector jobs, in services -- many different sub sectors of services. So what we see is a very broad-based jobs recovery. So I have not seen any evidence to back that.

MR. FRIEDMAN: I think the latest month's data indicate that almost three-quarters of the jobs, about 74 percent of the jobs, were created in industries where wages are at or above the median. And that includes heavy manufacturing and mining and utilities and information services. So I don't know -- I haven't read their study either, but I don't know what evidence they're drawing from.

Plus, information services from everything I read, business-types I speak to, is an American comparative advantage and highly likely to stay that way.

Q Did you all have any communication with the President today on all these numbers, and if so, what was his reaction?

DR. MANKIW: I'm not -- I'll often talk to him when he's in town -- because as you know, he's overseas --

Q Right.

DR. MANKIW: -- we faxed him the memo. But I haven't talked to him.

Q Is there a way to express to what extent the increased government spending, especially in the defense sector, has contributed to the better job numbers or increased economic growth?

DR. MANKIW: When you look at real GDP, you can look at the contribution of growth and the difference of components of GDP. And one sub component of GDP is government spending, and one component of government spending is defense spending.

And so, in certain quarters that has had a significant effect. But if you look at the overall patterns of the past year, a lot of the specific growth is coming from a recovery in investment; businesses are sort of coming back.

So while it might drive a particular quarter's numbers, it's not the overall driver of this recovery. The overall driver of this recovery is whether business is coming back.

If you look at this business cycle, by the way, this was a business cycle that was particularly hard on business investment, and that's, in part, why the manufacturing sector was hit so hard, because the manufacturing sector produces a lot of business investment, equipment investment. And now that's coming back. Because equipment investment is coming back, and that's partly why manufacturing is coming back.

Q One reason manufacturing was hit was the one Greg said. Another reason is that we had slow growth overseas and manufacturing is more export-oriented. And the President's tax stimulus package was designed to do a number of things in stages. One was to keep the consumer in the game because he'll go back to the end of 2002, the beginning of 2003, the consumer was -- interest rates -- was really very, very important and clearly, the economy needed to be kick-started. And so the first thing was consumers. The second stage was to get business confidence up so you'd start to see business capital spending up. And that has happened. And the third stage, which you've been seeing for the last three or four months, was job growth to make it a self-sustaining recovery. So there is a sense that -- without being remotely complacent, there is a sense that those three stages have taken effect as had been hoped for.

Q I'm not sure I understood your answer about defense jobs. To what extent does the defense industry represent the number of jobs created over the past couple of months?

DR. MANKIW: I haven't looked specifically in the last couple of months. But if you look -- I haven't looked specifically at defense job in the past two months, so I shouldn't -- what I'm saying is if you look at the recovery over the past year, a lot of the -- the recovery is not merely being driven primarily by increases in defense spending; it's being driven by the fact that business investment is coming back.

MR. FRIEDMAN: I think he was talking about defense spending, not defense jobs.

DR. MANKIW: Yes, yes. I have not looked in detail at defense jobs.

Q How much of it over that time would be defense spending?

DR. MANKIW: I don't have a specific number for you. But the driving thing behind the improving jobs market is the fact that economic growth is coming back, as measured by GDP. And the driving thing for GDP has been business investment coming back, the consumer continuing to be strong, the housing sector continuing to be strong. Certain quarters have shown a big impact on defense, but not the overall pattern that we had last year.

MR. FRIEDMAN: Pretty much done it? Okay, well, thanks so much for coming.

END 1:38 P.M. EDT