Press Briefing on the Economy and Budget by Senior Administration Officials (Text Only)

Press Briefing on the Economy and Budget by Senior Administration Officials
Room 350
Eisenhower Executive Office Building

PARTICIPANTS:
Deputy Press Secretary Tony Fratto
Chairman of the Council of Economic Advisors Ed Lazear
Director of the Office of Management and Budget Rob Portman

MR. FRATTO: Good morning, everyone. Thanks for coming. Unfortunately, Al Hubbard had to cancel -- that's who we were waiting for, we would have been on time -- Chairman Lazear and Director Portman are always on time. But thanks for coming this morning. We're going to have Chairman Lazear lead off, and then go to Rob. And we'll talk about the jobs report and the state of the economy. Thank you.

CHAIRMAN LAZEAR: Okay, great. Well, thanks for being here. Let me tell you how I see these numbers that just came out today. I think the job numbers, although slightly lower than the previous month, are still within range and we still think of these as good, solid numbers. They indicate a strong and growing economy. That, particularly coupled with the kinds of numbers that we're seeing on unemployment claims, which have been in the low 300,000 range for quite a long time now, suggests that the labor market is still strong.

The other statistic that I would point out is the wage growth, which I tend to look at a lot. I focus on that and think of that as being particularly important. And I tend to focus on the nominal wage growth, not the real wage growth. The reason is that the nominal wage growth tells you more about demand conditions in the labor market. Real wage growth, of course, is important in terms of the way it affects the individual worker after the fact, but it doesn't tell you much about the way people are predicting what's going to happen. So the fact that we're seeing nominal wage growth of about 4 percent per year still suggests a very strong labor market.

It turns out, of course, that real wage growth was good -- was 1.3 percent, which is well above the average for the '90s, and it means about $800 a year in terms of additional buying power for the average family of four. So that's a good part of the story also.

In terms of details, to my mind probably the most important story that this tells is not so much in terms of levels, it's not that job growth is high or low, but rather that job growth continues even in the period during which we're seeing some changes in the U.S. economy, most of which are positive. And the changes that I would point to would be the ones that were reflected in the GDP numbers last week.

When you look at GDP growth last week, it was a very balanced picture. You got about a point from consumption, you got a point from investment, you got a point from net exports, and you got a point from government -- then lost a half point from housing. And that was basically the picture. That's a somewhat different story from the one that we tend to see in most quarters, or certainly have seen in most recent quarters, where consumption tends to be the driver. And I think of that as a good development. I think of this kind of rebalancing of the economy as a positive step.

As you know, we've had negative saving rates for a significant period of time now. That's not sustainable into the long run, having personal saving being negative. So we now have a positive personal saving rate. We were able to accomplish that while still having a very strong, growing economy. Again, as reflected in the job numbers and in the unemployment numbers. So all of those, I think, are positive developments. And why don't I stop there and turn it over to Rob.

DIRECTOR PORTMAN: Thank you, Chairman Lazear. I would like to take this a little different direction. There's a chart that I think you all have -- is this one circulating? These new job numbers, as Eddie said, are generally positive, in the sense that show continual strong growth, not just in the economy, but in terms of job growth. If you look at the unemployment claims that came out recently, again, consistent with steady job growth.

What I want to point out is the relationship between the job growth and tax receipts, which then of course affects our federal budget deficit. The chart I'm passing out shows an amazing correlation between the 2003 implementation of the tax relief and the growth in jobs, and then the red line you'll see shows the receipt growth.

I think this is an interesting chart for a couple reasons. One, again, that correlation between tax relief, jobs. Also, you see another chart, so I think we circulated it before, with regard to investment, with regard to shipments, just kind of a relatively abrupt increase after 2003, the implementation in May-August 2003 time period, and then continuing on.

With this number, if you look at the end of that red line, you come to about a 7.5 percent increase. That's a percent increase in receipts. It's a month-to-month number. We think this year we'll end up with about 6.9 percent, about 7 percent increase. Last year, as you recall, was 11.8 percent, the year before 14.5 percent.

DIRECTOR PORTMAN: Last year was 11.8 percent, year before was 14.5 percent, which were record levels -- in nominal terms; absolute terms, record levels again this year, but percentage wise, the last two years were record increases taken together.

Our balanced budget over five years that you see on this larger chart here assumes a 5 percent increase in tax revenues over the '08 to 2012 period.

So my point is that the tax relief has worked to create jobs. It has worked to create the economic conditions that has increased the receipts, which is really the primary reason we're seeing this decrease in the deficit, which, by the way, is beyond our projections. You recall our projections last year were to have the deficit tick up slightly, and instead the deficit has gone down by over $40 billion this year, over $200 billion over the last three years. And a continual path toward a balanced budget is, I think, now within reach, and more realistic than it even looked a couple years ago, certainly more than a couple years ago, even more than February when we made our last projection.

And it is, again, all related, in the sense that the tax relief I think has helped grow the economy. The economy, in turn, has -- the economic growth has stimulated more business activity, generating more revenues. This is probably my last opportunity to talk to you all about the budgets, so I'm stretching a little bit here beyond these jobs numbers to talk about the budget.

I really do believe it's a very simple formula. And it's just as you look at in your own families, or in your businesses, which is, you have to keep your expenses under control, and you have to keep your revenues steady. And that formula is working, and it is working precisely because we're seeing a little better restraint on the spending side. The last three years the so-called domestic spending, or non-security discretionary spending has been, on average, 1.3 percent. That's very close to what the President has proposed again for this year. Congress is interested in spending more -- the $22 billion more this year, $205 billion over the next five years is in this area of domestic spending.

And so as I leave, my strong admonition to my former colleagues in Congress and my message would be, let's keep the restraint in place, reasonable restraint. The President has a 6.9 percent -- another 6.9 percent, coincidentally -- 7 percent increase almost again in the budget for next year. That's the discretionary spending increase, most of it, admittedly, on the security side. But even on the non-security side, a slight increase, 0.6 percent increase.

Keeping that restraint in place, as we've done the last three years, including under the Democrat Congress this year, is the way in which we can assure that the economy stays strong, that we continue to make progress toward a balanced budget, in conjunction with pro-growth policies that keep the economy strong, adding to the second of the two simple elements of the formula, which is keeping your revenues steady.

And again, this chart shows these revenue increases are very much related to the tax relief, so one of those pro-growth elements needs to be tax relief. And again, I don't think this is an overly-optimistic projection, because it assumes, again, from '08 to 2012, a 5 percent annual increase in revenues, which is less than this year, substantially less than the last two years. But I think it does require continued focus on pro-growth policies.

The spending is not just the $22 billion a year, by the way. If you look at the farm bill proposal from the Democrat majority -- and I say that because most Republicans voted against it as it went through the House recently -- the farm bill increases spending over the baseline. In our budget, this balanced budget, we have a $5 billion increase in the farm bill from baseline in our own budget. But the House and Senate seems intent on adding another $10 billion or $15 billion on the baseline in the farm bill.

S-CHIP -- I know there was a big vote in the Senate last night. The House vote was very close, as you know; 204 people voted against it. In fact, more Republicans voted -- I'm sorry, more Democrats voted against it than Republicans who voted for it, on S-CHIP. But it is anywhere from -- you look at the Senate bill, it's about $30 billion more than our $5 billion -- again, we have $5 billion built under this baseline for S-CHIP -- another $30 billion in the Senate, roughly another $50 billion in the House.

So it's not just these annual appropriations bills, it is other spending -- the WRDA bill, the Water Resources Development Act the President said he will veto now, that's adding another $10 billion to $15 billion over what the President is proposing. And all of these that I just mentioned -- the WRDA bill, the farm bill, the S-CHIP -- they're all accompanied with tax increases under the pay-go rules, or at least they should be, under the congressional rules. So with new spending comes new burdens on the economy, new taxes. And my fear is that this jeopardizes this nice balance we've achieved over the last couple years, in particular, of restraint on the expense side, keeping reasonable restraint on spending, even while meeting our priorities, and then on the revenue side having steady growth in revenues based on a strong and growing economy.

So thank you for your indulgence, letting me stretch the job numbers into a larger picture here -- but I really do think they're related.

Q Chairman Lazear, when you look at today's unemployment report, what does that say to you about business' appetite to hire, as well as the climate that's out there for job seekers?

CHAIRMAN LAZEAR: In terms of appetite to hire, I think that is still very strong. If you look at the numbers, again, probably the best indicator of that would be initial claims on unemployment. And those numbers are very low. The reason I look to those, of course, is that those are the -- really the only data that we have that are contemporaneous. So we're really looking at data that are telling you what's happening in the past few weeks. And those have been strong.

The other thing is the anecdotal evidence. If you interview employers -- we do this periodically at the Council of Economic Advisers, we call people in business, and just ask, what's going on out there -- and invariably the biggest complaint that they have is finding people, getting talent. When people are talking about those kinds of problems, those are the kinds of problems that we like to see in an economy. Those are the same problems that we saw during the talent wars in the late '90s when we saw very strong expansion of jobs and some expansion of wages, as well.

So again, I would say that the kinds of messages that we are hearing have been very positive in terms of job growth. The labor market has really been the shining beacon throughout the entire period. Even during the first quarter, which was our weakest quarter in a while, the labor market remained strong; the kinds of messages that we were getting were that people were hiring. And again, that was indicative of what was going to happen in the second quarter, and we saw it happen. That's the reason that I'm primarily optimistic about the third and fourth quarter.

CHAIRMAN LAZEAR: Oh, the entire period. I'm sorry. The shining beacon, yes, throughout the entire period. I was thinking of the period, say, of the past four quarters, even during the quarter that was the quarter that we would say was the weakest in terms of measured GDP growth, you still had a good, strong employment number.

Q Analysts seem to (inaudible) in this job market, looking at the numbers from (inaudible) -- signs of a cooling job market.

CHAIRMAN LAZEAR: Again, I don't see that. I think of these things as not being statistically significant, not being substantive differences. So if you look at the difference between this month and last month, that's almost within sampling error of what we would think of as numbers coming out. We also know that the revisions have been pretty significant over the past few months.

So again, I don't place too much weight on one number being 10,000 or even 30,000 jobs fewer than the previous number. That's particularly true this month, because the biggest decline actually was in government jobs. And, again, when you think about this, that's not an indicator of what's happening in the private sector. In fact, one could argue that if you took out the government jobs, we actually grew at about 130,000 -- 125,000, 130,000, to offset the fact that there was this government decline. So the private sector is still growing at a strong rate, and that's really what we want to see. I wouldn't be too enthusiastic about seeing our economy supported by government job growth.

CHAIRMAN LAZEAR: Our forecasted growth in the second half is somewhere in the 3 percent range, and that's what we're still expecting. I think our forecasts are consistent not only with other forecasts in government, like Congressional Budget Office, but also the market forecast. Now we don't forecast quarter by quarter. What we do is we forecast for the year. But of course we already know what the past two quarters have been, and if we're sticking with our forecast numbers, that tells you something about what we're thinking about for the second half. But we have no reason to revise downward, or, to be honest, upward, our forecast. We think we're pretty much on target. Somewhere in the 3 percent range sounds realistic and sensible.

Q May I ask a question a little bit off the jobs? It's about the (inaudible). Chairman Lazear, yesterday (inaudible) report about oil, high oil prices driving the U.S. economy into a danger zone. How would you characterize the risk of high oil prices to your outlook for this (inaudible)?

CHAIRMAN LAZEAR: Obviously we don't like to see high oil prices. I would put it more on the consumption side and on the personal side, than I would on the business side. The individuals who are hurt by high oil prices, and in particular heating and gasoline prices tend to be at the lower end of the income spectrum. And we worry about those individuals because they have to spend a disproportionate share of their income on energy.

So to my mind, the biggest hit is really on those individuals. Fortunately, in the past few weeks we've actually seen those prices come down a bit. Gasoline prices are down, actually quite significantly. The peak was at $3.26 in May. I think we're down to about $2.93 now. That's a pretty substantial drop. So that's actually good news.

As we've looked at the data -- and we have looked at this quite frequently; we do monitor it and keep a close eye on how energy prices are affecting the economy -- I would say that the -- probably the surprise to nay-sayers has been that the American economy has been quite robust even in a period during which energy prices have risen, and risen pretty substantially.

I'm not talking about the past quarter or the past two quarters, but really over the past few years we've seen some pretty significant increases in energy prices, and despite that we've had a very strong economy over the past few years.

It is, I think, just a testament to the robustness of the U.S. economy. We're able to handle these things, we're able to absorb them in large part because of significant productivity gains in the past.

Q So I take it you don't think that these oil prices are putting the U.S. economy in the danger zone?

CHAIRMAN LAZEAR: I wouldn't say that we -- I wouldn't use the word -- I wouldn't say that the U.S. economy likes to see high oil prices. That's obviously not the point. The point is that we have been able to adjust to these high oil prices and do so in a way that has not been detrimental to the economy in any significant way. It doesn't mean that it doesn't take off some growth, it surely does have an effect. But it has been minimal, again, because the American economy is so robust and has been able to offset it with other positive factors -- productivity being the primary one.

Q How do you explain the pessimism out there about the economy? More than two-thirds of Americans say we're either in a recession or going to be in one next year.

CHAIRMAN LAZEAR: You know, we keep hearing this -- and actually I'm going to let you pick up on this, Rob, because Rob has followed this probably more closely than I have. I would say two things. First of all, economists tend to look at behavior rather than at statements. It's ingrained in us, and I think it's the right approach. Many of these things are a function of how you actually word the question.

But if you look at the actual behavior of the economy, what we see is that people are investing, people are having faith in the markets. We've seen the markets -- again, despite the volatility that we saw over the past week or so, the markets have been quite strong. We've seen significant growth over the past year. People are putting their money into equity and financing the future expansion. And people have been consuming. If you look at consumption over the past year, it has been strong. Investment, for the most part, has been solid. And so the behavior is consistent with people believing in the economy.

When people are concerned about the future, what they tend to do is they tend to save at very high rates. And if you look at time periods during which people have been really concerned about the economy, saving goes up. It's true also if you look across countries. When a country is entering a period of economic decline, people start saving a lot of money. And that's not been happening in the United States.

So, again, the behavior suggests that people actually do have confidence in it. Rob has been following a good bit of the rhetoric on this. Why don't I just turn to you and let you add to that?

DIRECTOR PORTMAN: Thanks, Eddie. I'm confused by it, honestly, and I think most of you who write about it are probably somewhat confused, because you see relatively good economic news coming out continually over the last few years, and yet, you're right, the polling data has been fairly pessimistic.

When you ask the question, is your own personal financial situation good or better, people are more positive. And so there's a disconnect between what people see for themselves, which is a better economic situation. Some of you follow -- I think it was ABC/Washington Post polling that's been done with the consistency to be able to establish a benchmark and look where it's gone up and down, and those numbers have been pretty high. I don't know what the latest is, but I think it's generally been 60 percent to 65 percent, you know, 35 percent, 40 percent. So 60 percent to 65 percent of people say, yes, their personal financial situation is good or excellent.

And then the same question is asked continually on the state of the economy, and it's almost the reverse. In other words, it's almost the, you know, 40 percent, 60 percent or 35 percent, 65 percent is how do you feel about the economy in general, not so good.

So I don't know, it's a mystery to most of the smart people I talk to. The three reasons that I've heard seem to make some sense. And, again, Eddie is absolutely right on the behavior front, look at the consumer confidence numbers, for instance -- and they go up and down, but generally speaking, consumer confidence numbers have been strong.

But the three reasons I think is, one, gas prices. A lot of people look at gas prices as the barometer for the economy. And for many people, particularly, as Eddie said, lower income Americans, it's a disproportionate part of their budget and so it does affect them if they have to drive for work or have a long commute. Plus you see the marquee every day when you drive by it.

Second is the way in which the economy is reported. When there is good news, as there has been this past quarter, as there has been on these employment numbers, it's kind of a yawn. And I'm not blaming you all for not reporting on it -- you probably aren't reporting on it very much -- although you're here today, and thank you -- because probably your editors tell you that your viewers or your readers aren't that interested in sort of continual --

DIRECTOR PORTMAN: Yes, exactly. Thank you. Your readers are. It's those who aren't here, which is maybe more of the popular media. So that's what some of the pollsters and analysts -- not being Republican or Democrat -- just objectively trying to look at this say that if it's bad news it tends to get reported more, because it seems to be more of a story. And if it's better news, it's sort of status quo, it's not that interesting.

The final thing I'll say -- again, this is something I haven't talked about publicly until today, nor have I really decided how all this plays and (inaudible) accurate -- but what people tell me who follow this more closely, who look at the media and polling data is that people tend to believe the bad news. So it takes, as one person has told me in this business, three stories that are good for every one story that's bad, in order to end up with something that's about neutral.

So I don't know if that's an answer to your question that you wanted -- it probably isn't, because it's way too complicated. But I really thought about it a lot and talked to a lot of smart people, and I think it's partly gas prices, energy prices, generally; and then partly the fact that the good news doesn't tend to get reported and it tends to -- you tend to have to have a few good news stories for every bad news story to sort of end up with a perception that is even neutral.

I think for a while health care also was considered to be a driver of this. I don't know if that's so much true now, but just health care premium cost increases per year, people are concerned about, even if the economy is doing well.

DIRECTOR PORTMAN: It's a long answer, sorry, Eddie. Wanted to get it off my chest, you know? (Laughter.)

CHAIRMAN LAZEAR: You guys can follow up with me if you have anything further. Thank you.

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