In addition to the rise in August, the estimates of private sector job growth for June and July were revised up by a total of 66,000. Since last December, private sector employment has risen by 763,000. Despite the rise in private sector employment, overall payroll employment fell by 54,000, as 114,000 temporary Census jobs were eliminated.

Private sector payrolls expanded in a number of sectors, including education and health services, construction, and temporary help services. Manufacturing employment fell 27,000 in August; much of this drop likely reflects the fact that manufacturing employment in July was elevated because General Motors chose to forgo its usual two-week shutdown. The manufacturing ISM Report on Business released on Wednesday indicated stronger employment growth in manufacturing in August than in July. State and local government payrolls declined by 10,000 in August, consistent with continuing budget difficulties in many states and localities.

In the household survey, the number of people employed rose by 290,000. But, because the labor force rose by 550,000, the unemployment rate ticked up to 9.6% (from 9.5% in July). The employment -to-population ratio also rose one-tenth of a percentage point (to 58.5%), indicating that in the household survey employment growth more than kept up with population growth. In addition, the number of workers who have been unemployed 27 weeks or longer declined sharply, from 6.57 million to 6.25 million.

Against the backdrop of some unsettling economic data in the past few weeks, today’s numbers are reassuring that growth and recovery are continuing. At the same time, the fact that the growth of private sector payrolls is below the level needed to keep up with normal growth of the labor force is obviously unacceptable. There are a number of step we could take to help increase private sector job growth and put the economy on a path of steadily declining unemployment. We will be working with Congress on these measures in the coming weeks.

There will likely be bumps in the road ahead. The monthly employment and unemployment numbers are volatile and subject to substantial revision. Therefore, it is important not to read too much into any one monthly report, positive or negative. It is essential that we continue our efforts to move in the right direction and encourage robust job gains.

Christina Romer is the Chair of the Council of Economic Advisers

Overall payroll employment decreased 131,000.  However, much of this decline was anticipated because of the winding down of temporary Census employment.  The sharp decline in state and local government employment also contributed to the overall decline.  Private sector employment increased 71,000, above the revised levels of private sector job growth in May (51,000) and June (31,000).  Private sector employment has grown by 630,000 since its low point in December 2009.  Average weekly hours in the private sector rose another one-tenth of an hour; hours are now five-tenths of an hour higher than they were in October 2009.

A bright spot in the private sector jobs numbers for July was the growth of manufacturing employment.  Manufacturing employment grew 36,000, the seventh consecutive monthly rise.  Manufacturing employment is now up 183,000 since its low point.  Both financial services and construction shed jobs.  Temporary help employment also fell, the first such fall since November 2009.

The unemployment rate held steady at 9.5 percent.  Both the labor force and employment as measured by the household survey declined, though the decline in the labor force was decidedly smaller in July than in June.  The unemployment rate declined particularly strongly for workers with only a high-school education (down 0.7 percentage points to 10.1 percent).
 
We have made substantial progress from the days when employment was declining by 750,000 a month.  But, today’s employment report emphasizes just how important the additional jobs measures before Congress are.  In addition to the state fiscal relief nearing passage, the President strongly supports the small business jobs bill and targeted incentives for clean energy investments.

There will likely be more bumps in the road ahead as the economy recovers.  The monthly employment and unemployment numbers are volatile and subject to substantial revision.  Therefore, it is important not to read too much into any one monthly report, positive or negative.  It is essential that we continue our efforts to move in the right direction and replace job losses with robust job gains.

Christina Romer is the Chair of the Council of Economic Advisers

Recent Growth

The overall growth of GDP in the second quarter of 2.4% was divided across the various components of output and demand in a way that suggests balanced recovery.  Consumer expenditures rose at an annual rate of 1.6%, down slightly from the first quarter, but more rapid than in the fourth quarter of last year.  Fixed investment (that is, investment in nonresidential structures, equipment and software, and housing) grew at an annual rate of 19.1%, the fastest pace since 1983.  Business investment in equipment and software increased by over 20% for the second consecutive quarter, indicating a welcome return to investment by private firms.  Inventory investment contributed just over 1 percentage point to GDP growth, substantially less than in the previous two quarters.  Thus, the steady growth occurred with relatively little inventory bounce.
 
In addition to the solid growth in the second quarter, real GDP growth in the first quarter was revised up substantially to 3.7%.  Growth has averaged over 3% for the first half of the year.

Moderate, sustained GDP growth is a vast improvement over the terrible declines in GDP of late 2008 and early 2009, and reassuring given the turbulence in financial markets following debt problems in Europe.  However, growth is below the rapid rate of increase needed to bring the unemployment rate down quickly.  For this reason, it is essential that Congress take the additional targeted actions that the President has recommended to further stimulate growth and job creation, such as increased lending and additional tax cuts for small businesses, aid to state and local governments to prevent the layoffs of hundreds of thousands of teachers, firefighters, and police, and tax credits to promote energy efficiency and clean energy manufacturing.

Data Revisions

The comprehensive GDP data revisions, which are released each July, show that the recession was deeper than previously reported, particularly in the second half of 2008.  GDP growth in 2008:Q3 was revised down from -2.7% to -4.0%, and growth in 2008:Q4 was revised down from -5.4% to -6.8%.  Growth in 2009:Q1, on the other hand, was revised up from -6.4% to -4.9%.  It now appears that the financial crisis may have affected production substantially more quickly than was previously reported or realized at the time.  But, the revised data also emphasize the dramatic positive shift in GDP growth over the past year and a half—from a decline of 6.8% in the last quarter of 2008 to 2.4% in the most recent quarter. 

Overall, the decline in GDP from its high in 2007:Q4 to its low in 2009:Q2 was 4.1%, making this recession the deepest since the official quarterly data began in 1947.  Since 2009:Q2, GDP has risen 3.2%.  That real GDP has not yet returned to its previous peak, much less its long-run trend path, emphasizes how much work remains before the U.S. economy is fully and truly recovered.

The data revisions, together with recent estimates, also provide some important new information about longer-run trends.  Revisions to both personal income and consumer spending have led to estimates of the personal saving rate in 2008 and 2009 that are substantially higher than previously reported.  The average saving rate in 2009, for example, is now 5.9%, 1.7 percentage points higher than previously reported.  In 2010:Q2, the saving rate is 6.2%.  This higher saving rate is consistent with estimates reported in the Economic Report of the President of likely consumer behavior in the wake of the financial crisis.  The higher level also suggests that there is room for further consumer spending growth as consumers become more confident, without returning to the very low saving rates of the past decade.
 
The revised data also indicate that productivity growth in 2008 and 2009 has averaged roughly 3%, slightly above the average from 1995 to 2007.  Productivity growth fell sharply in 2008 (now estimated at an annual rate of -0.3%) and rose even more sharply in 2009 (at an annual rate of 6.3%).  That the average over the recession and the first stages of recovery is equal to the historical average could suggest that the financial crisis has not damaged productivity growth (as some have argued).

 

 

Christina Romer is the Chair of the Council of Economic Advisers

First, extending the high-income tax cuts would provide very little job creation in 2011. There is widespread agreement that the short-run economic benefits of high-income tax cuts are small.  The Congressional Budget Office lists a tax cut for high-income earners as a particularly ineffective job creation measure.  Private sector forecasters have reached the same judgment.¹ The vast majority of economic research shows that higher-income earners spend less of a tax cut and so tax cuts to those earners create fewer jobs throughout the economy.²

That doesn’t mean that all tax cuts are ineffective in creating growth.  In fact, tax cuts designed in the right way can be highly effective.  That is why the President supported numerous tax cuts in the Recovery Act and why continuing the middle-class tax cuts from 2001 and 2003 is so important.  The view that tax cuts focused on the middle class can be important to the recovery is consistent with a wide range of research, including a paper that I wrote with David Romer before coming to government and that was recently published.  This paper showed that tax changes in the postwar United States had larger short-run impacts on output growth than previously believed.  Since most postwar tax changes have been broad-based, our evidence indicates that broad-based tax cuts have large effects.  But it’s important to note that our study did not distinguish among tax cuts for different groups and did not focus on high-income earners.  Thus, it provides no basis for doubting the compelling evidence that tax cuts for high-income earners are less effective than broad-based tax cuts focused on the middle class.

If lawmakers are truly concerned about job creation, as they should be given the painfully high rate of unemployment, many approaches would be more cost effective than extending the Bush tax cuts for high-income earners.  For example, a private sector study recently concluded that a third year of the Making Work Pay tax credit would be far more stimulative.¹  Likewise, estimates by the Council of Economic Advisers suggest that spending $10 billion to prevent the layoffs of teachers, firefighters, and police would lead to nearly twice as many jobs as the estimated $30 billion of high-income tax cuts—that’s twice as many jobs for one-third the cost.  The small business jobs bill currently before the Senate, which contains both targeted tax cuts for small businesses and measures to improve their access to credit, would also be a far more powerful and cost-effective way to stimulate economic growth and job creation.
 
It is ironic that many who are now arguing that the high-income tax cuts must be extended on stimulus grounds opposed the Making Work Pay tax credit in the Recovery Act.  That tax cut, which totaled $110 billion (spread over tax years 2009 and 2010), went to 95% of working families and by all accounts has made an important difference to the trajectory of the economy.  In its third quarterly report to Congress on the American Recovery and Reinvestment Act, the Council of Economic Advisers estimated that the tax cuts and other income support provisions in the Recovery Act saved or created more than a million jobs just through the first quarter of 2010.  The evidence from my work with David Romer implies that the Making Work Pay tax credit may have been even more effective than conventional estimates indicate. 

Finally, near-term stimulus measures must be taken in the context of developing a credible plan to address our Nation’s long-run fiscal challenges.  A benefit of all three of the alternatives mentioned above is that they are clearly temporary measures aimed at jumpstarting job creation.  In contrast, extending the high-income tax cuts would increase pressure to make them permanent.  While the Office of Management and Budget estimates the high-income tax cuts would cost about $30 billion in 2011, the yearly cost is expected to grow as the economy recovers.  Extending them permanently would add about $700 billion to the ten-year deficit.  That is a cost that we simply cannot afford, particularly for something that does so little to aid our recovery.

Christina Romer is the Chair of the Council of Economic Advisers

¹ See Goldman Sachs Global ECS US Research, “US Daily:  Extending the Expiring Tax Cuts:  What, How, When and Why (Phillips),” July 26, 2010.

² Economic studies in the 1940s and 1950s provided the first statistical evidence for the widely-believed proposition that lower-income households tend to spend more out of an additional dollar of income than do richer households, and subsequent research has repeatedly confirmed the proposition.  For an excellent summary of this literature, see Thomas Mayer, Permanent Income, Wealth, and Consumption (University of California Press, 1972).  These differences across groups emerge in a host of ways in more recent studies.  For example, Parker, Souleles, Johnson, and McClelland studied households’ spending responses to the 2008 Economic Stimulus Payments and found substantially larger spending responses among low-income than among high-income households. See Jonathan A. Parker, Nicholas S. Souleles, David S. Johnson, and Robert McClelland, “Consumer Spending and the Economic Stimulus Payments of 2008,” Manuscript, Kellogg School of Business, Northwestern University, February 2010. 

Payroll Employment

Total payroll employment fell 125,000 in June.  This decline had been widely anticipated because some of the temporary employment related to the Census began to wind down last month.  Temporary Census employment dropped 225,000 in June.  Non-Census employment rose 100,000, reflecting a rise in private employment of 83,000 and a rise in other types of Federal employment.  Private employment rose at an average monthly rate of 119,000 in the second quarter of 2010, up from 79,000 in the first quarter, and up dramatically from the average decline of 752,000 in the first quarter of 2009.  Private employment has increased 593,000 since its low point in December 2009.

Employment gains were spread broadly across industries.  The biggest gains were in professional and business services (including an increase of 20,500 in temporary help services), leisure and hospitality, and education and health.  Manufacturing also added employment for the sixth month in a row.  Besides the decline in Federal employment related to the Census, the industries losing jobs were construction, finance, information, and state and local government.  Average weekly hours for all employees on private nonfarm payrolls also declined one-tenth of an hour in June.  Hours, however, are still up four-tenths from their low in October 2009.

Unemployment

The unemployment rate fell two-tenths of a percentage point for the second month in a row.  At 9.5%, the unemployment rate is now six-tenths of a percentage point below its high last year.  However, the drop in the unemployment rate was driven in large part by a substantial decline in the labor force, which we expect to be reversed as employment prospects continue to improve.  The household survey also found that the number of workers working part-time for economic reasons declined substantially for the second month in a row.  The number of such workers has fallen 525,000 over the past two months.

While this report suggests a continuation of gradual labor market repair, it is important to emphasize the magnitude of the damage that remains from the recession.  Payroll employment is still down 7.5 million from its pre-recession peak and the unemployment rate is more than 5 percentage points above its pre-recession low.  It is essential that we focus on accelerating job growth.  That is why the President continues to work with the Congress to pass targeted jobs measures such as an extension of emergency unemployment insurance, a program for small business lending that will enable small firms to get the credit they need to expand and create jobs, and more aid for troubled state and local governments to prevent layoffs of teachers, firefighters, and police.  These are fiscally responsible measures that would have a substantial impact on the rate of job growth.

As always, it is important not to read too much into any one monthly report, positive or negative. The monthly employment and unemployment numbers are volatile and subject to substantial revision. Emphasis should be placed on persistent trends rather than month-to-month fluctuations.

Christina Romer is the Chair of the Council of Economic Advisers

Payroll employment rose 431,000 in May. As expected, most of this increase was due to temporary hiring associated with the decennial Census. Total private employment increased by 41,000, somewhat lower than the rate of increase in previous months. Building on the steady gains in previous months, private employment is now nearly 1/2 million higher than in December 2009. Both manufacturing and service-providing industries showed job gains; employment in construction and state and local government, however, fell noticeably. Average weekly hours, which are another important indicator of labor market healing, rose by one-tenth of an hour in May and are up four-tenths of an hour since last December.

The unemployment rate, which had risen in April, fell two-tenths of a percentage point to 9.7 percent. Both the labor force and the household measure of employment fell in May, following tremendous gains in the previous months. Consistent with the rise in average weekly hours, the number of full-time workers rose for the fourth month in a row and the number of people working part-time for economic reasons declined sharply.

The fact that the unemployment rate fell and private employment rose are obviously encouraging signs that recovery continues. At the same time, the continued high level of unemployment and the slowdown in private sector job growth emphasize the need for continuing vigilance. The Administration strongly supports targeted actions to spur private sector job creation and prevent continued reductions in state and local government employment. Tax incentives for clean energy manufacturing and energy efficiency, extensions of unemployment insurance and other key income support programs, a fund to encourage small business lending, and fiscal relief for state and local governments are essential measures to ensure a more rapid, widespread recovery.

As always, it is important not to read too much into any one monthly report, positive or negative. The monthly employment and unemployment numbers are volatile and subject to substantial revision. Emphasis should be placed on persistent trends rather than month-to-month fluctuations.

Christina Romer is the Chair of the Council of Economic Advisers

Payroll employment increased by 290,000 in April--the largest one month employment gain since March 2006. Of this total, 231,000 was in the private sector. Hiring related to the decennial Census contributed 66,000 to the total. The payroll employment numbers for February and March were also revised up substantially (by 53,000 and 68,000, respectively). The current numbers now show that employment has grown in each of the past four months.
 
The job gains were spread widely across sectors. Construction, manufacturing, professional and business services, education and health, and hospitality and leisure all added jobs. Indeed, the rise in manufacturing employment of 44,000 was the largest since August 1998. One area of weakness was state and local government, which reduced employment by 6,000. Temporary help employment grew more slowly than in previous months (+26,000), suggesting that firms may be moving to more permanent hiring. The average workweek for all employees on nonfarm payrolls increased by 1/10 of an hour and is up 3/10 of an hour since December.

In the household survey, the unemployment rate rose to 9.9 percent. This is obviously a very high rate, and reducing it must remain the fundamental focus of policy. Importantly, the rise in the unemployment rate in April was driven largely by a surge in the labor force. The labor force increased by 805,000, while employment as measured by the household survey increased by 550,000. Since December, the labor force has increased by 1.9 million.^♦  Such a rise in the labor force often occurs in recoveries as workers who had dropped out of the labor force are drawn back in by improved employment opportunities.
 
While today’s report clearly suggests that we are moving in the right direction, it also shows how much work remains to be done. The unemployment rate is painfully high, and payroll employment is still nearly 8 million below its level at the start of the recession. It will take many months of robust job growth to restore the labor market to genuine health. Further targeted actions to spur private sector job creation are critically needed to ensure a more rapid, widespread recovery.

The monthly employment and unemployment numbers are volatile and subject to substantial revision. Therefore, it is important not to read too much into any one monthly report, positive or negative. It is essential that we continue our efforts to move in the right direction and generate sustained, strong job gains.

Each additional quarter of GDP growth is a welcome sign that the economy is healing from a severe recession that cost over eight million jobs and wiped out trillions of dollars in household and family wealth. Given the severity and depth of the recession, it will take a number of quarters of robust growth and strong employment gains to return the economy to full health and full employment.

The most encouraging news in the report was the strong growth of key types of private spending by consumers.  Personal consumption expenditures grew at an annual rate of 3.6 percent, suggesting renewed confidence among households.  This growth is also consistent with the rise in tax refunds in the first quarter due to the Recovery Act (see the CEA’s Third Quarterly Report on the Economic Impact of the American Recovery and Reinvestment Act of 2009 for more information on the surge in Recovery Act tax relief in the first quarter).  Business investment spending on equipment and software rose strongly as well, increasing at a 13.4 percent rate.  Businesses also increased their inventory investment substantially, suggesting they are more optimistic about future sales.

While there is much to be encouraged by in the report, there were two areas of notable weakness.  First, both residential and non-residential structures investment declined, reflecting continuing slack in the housing and commercial real estate markets.  Second, state and local government purchases fell at a 3.8 percent rate, more than offsetting a small rise in Federal purchases.  This fall in state and local government spending was the largest since 1981, and is consistent with the continuing severe budget shortfalls in many states.

The Administration continues to work with Congress to take responsible actions that will help the private sector create jobs and speed the recovery.

Christina Romer is the Chair of the Council of Economic Advisers

The main macroeconomic findings include:

• The magnitude of the fiscal stimulus increased substantially in the first quarter of 2010 (from $83 billion in 2009:Q4 to $112 billion in 2010:Q1) largely because of a surge in tax refunds and lower final tax liabilities due to the Making Work Pay tax credit.
• Government investment outlays in areas such as infrastructure and clean energy, which increased $16 billion in 2010:Q1, are expected to rise further throughout 2010.
• The CEA estimates that as of the first quarter of 2010, the ARRA has raised employment relative to what it otherwise would have been by between 2.2 and 2.8 million. These estimates are broadly similar to those of other analysts. Our estimates incorporate the most recent information about actual Recovery Act spending and tax reductions, as well as current trends in employment and production.

A special section of the report focuses specifically on the impact of the tax relief and income support provisions of the Recovery Act:

• To date, there has been more than $200 billion of tax relief and income support provided to households by the ARRA. These funds have had a disproportionately large impact on the incomes of middle- and lower-income families. 
• CEA estimates that without these provisions, household real disposable income would have fallen substantially in 2009. Figure 6 from the report (reproduced below) shows actual after-tax family income alongside income without the tax relief and income support provisions of the Recovery Act. Without the tax cuts and income support provisions of the ARRA, consumer spending would not have rebounded as it did and, indeed, would likely have continued to fall.
• As of 2010:Q1, the tax relief and income support provisions of the Recovery Act have saved or created between 1.1 and 1.4 million jobs, or roughly one-half of the total number of jobs saved or created by the Act.

Identifying the impact of policy actions is inherently difficult, and the estimates must be understood to be subject to large margins of error. For this reason the CEA has approached its task from a wide range of perspectives, all of which point to a key role for the ARRA in helping the economy recover from the worst recession since the Great Depression. The CEA will continue to monitor the effects of this important policy initiative over the coming months and years.

The data in this chart is available to download as a csv file.

Christina Romer is the Chair of the Council of Economic Advisers

Payroll employment increased 162,000.  Even after adjusting for the 48,000 temporary Census workers hired and a rebound effect from the February snowstorms, this number suggests an increase in underlying payroll employment.  Moreover, revised estimates now show a small job gain in January and a smaller job loss in February than previously reported.  As a result, for the first quarter of 2010 as a whole, job growth averaged 54,000 per month.  This is a dramatic change from the first quarter of 2009, when average job loss was 753,000 per month.

Download this data as a CSV file. April 2, 2010.

The unemployment rate remained constant at 9.7 percent.  This stability reflects roughly proportional rises in the labor force and employment, as measured by the household survey.  This pattern of rising labor force and household employment has been repeated in each of the last three months.  Indeed, according to the household survey, the labor force has increased by 1.1 million since December 2009 and employment has increased by 1.4 million.*

At the same time that we welcome today’s encouraging labor market news, it is obvious that the American labor market remains severely distressed.  More than eight million Americans have lost their jobs since the start of the recession in December 2007.  It will take sustained, robust employment growth to bring the unemployment rate down.  Further targeted actions to spur private sector job creation are critically needed to ensure a more rapid, widespread recovery.

While this is the most positive jobs report we have had in three years, there will likely be bumps in the road ahead.  The monthly employment and unemployment numbers are volatile and subject to substantial revision.  Therefore, it is important not to read too much into any one monthly report, positive or negative.  It is essential that we continue our efforts to move in the right direction and generate steady, strong job gains.

Christina Romer is Chair of the Council of Economic Advisers

* The reported numbers are adjusted to remove the impact of revised population controls that the Bureau of Labor Statistics introduced in January 2010.  Without this adjustment the labor force increased by 851,000 and employment increased by 1.11 million.

March 5, 2010.

Christina Romer is Chair of the Council of Economic Advisers

Rescuing an Economy in Freefall

The Employment Act of 1946, which created both the Council of Economic Advisers (CEA) and the Joint Economic Committee, made explicit that it was the role of the Federal Government “to promote maximum employment, production, and purchasing power.”  Chapter 2 of the Economic Report discusses the unprecedented actions that have been taken to end the Great Recession of 2008 and 2009.  It is no surprise that this chapter is the longest in the book; the actions that have been taken are many.  They include not only the American Recovery and Reinvestment Act of 2009, but a number of smaller fiscal actions such as the “cash for clunkers” program to stimulate the automobile industry and important extensions of key tax cuts and unemployment benefits.  They include a range of financial sector interventions, such as the stress test of the nineteen largest financial institutions, new lending programs, and support for the government sponsored enterprises.  Rescue actions also include programs to stabilize the housing market and help responsible homeowners avoid foreclosure, as well as conventional and extraordinary monetary policy measures conducted by the Federal Reserve.

Chapter 2 also discusses the evidence that these actions have had a tremendous impact.  Our financial markets are secure again and credit spreads, a common measure of financial market unease, are down almost to historical norms.  Despite overwhelming downward momentum, the trajectory of the economy has changed radically.  By the third quarter of 2009, real GDP was growing again, and last Friday we learned that the unemployment rate fell three-tenths of a percentage point in January.  Experts across the ideological spectrum credit the unprecedented policy actions with preventing an economic cataclysm and putting us on the road to recovery.

Here I want to discuss particularly the impact of the Recovery Act.  This Act is the great unsung hero of the past year.  It has provided a tax cut to 95 percent of America’s working families and thousands of small businesses.  It has meant the difference between hanging on and destitution for millions of unemployed workers who had exhausted their conventional unemployment insurance benefits.  It has kept hundreds of thousands of teachers, police, and firefighters employed by helping to fill the yawning hole in state and local budgets.  And, it has made crucial long-run investments in our country’s infrastructure and jump-started the transition to the clean energy economy.  All told, the Recovery Act has saved or created some 1½ to 2 million jobs so far, and is on track to have raised employment relative to what it otherwise would have been by 3.5 million by the end of this year.  When the political rancor of the moment passes and dispassionate analysis is done by experts, I have no doubt that the American Recovery and Reinvestment Act of 2009 will be viewed as one of the great triumphs of timely, effective, countercyclical macroeconomic policy—just exactly the type of policy the Employment Act of 1946 was designed to facilitate.

While conditions are far better than they would have been without the actions that were taken, it is clear that substantial challenges remain.  The unemployment rate is 9.7 percent and the revised data show that employment has fallen 8.4 million from its peak in December 2007.  For this reason, the President has called for important targeted actions to spur job creation.  One of these is the Small Business Jobs and Wages Tax Cut.  The Council’s analysis suggests that such a tax cut for hiring could be a particularly cost-effective way to generate substantial increases in employment at this point in the recovery.  The Administration also supports continuation of essential relief measures to aid the unemployed and to keep teachers, police, and first responders employed by strapped state and local governments.

In another chapter on rescue measures, the Economic Report discusses the worldwide response to the crisis.  It shows that a coordinated move to monetary and fiscal expansion allowed countries around the globe to climb out of the crisis simultaneously.  In this way, worldwide growth helped to support the growth in each individual country.

Rebalancing the Economy on the Path to Full Employment

In his State of the Union address, the President highlighted the problem of the Federal budget deficit.  As described in Chapter 5 of the Economic Report, the Federal budget situation had deteriorated substantially before the recession.  Largely because of two tax cuts, two wars, and a major new Medicare drug benefit that were not paid for, the budget surpluses of the 1990s had been replaced by substantial actual and projected future deficits long before the recession began at the end of 2007.  The recession obviously made the deficit larger, as did the actions to address the recession, such as the Recovery Act.  But by the end of the decade, the rescue actions raise the deficit by just one-quarter of one percent of GDP.  The much more significant factors in accounting for the long-run deficit are the unpaid-for policies of the past decade and Medicare, Medicaid, and Social Security costs.  Whatever their cause, the medium- and long-run deficits that are projected are unsustainable, and will gradually crowd out investment and impede growth if they are not addressed.

Chapter 5 explains the logic of the Administration’s proposed fiscal target.  By balancing the primary deficit (that is, the deficit net of interest costs) in the medium run, we will stabilize the debt-to-GDP ratio.  To achieve this, the Administration has proposed a sensible plan that includes a three-year freeze of nonsecurity discretionary spending and a bipartisan commission to build consensus on other needed actions.  At the same time, our budget contains $100 billion for further targeted jobs measures and additional funds for continuing relief efforts.  Such a blending of near-term emergency spending and a medium- and long-term plan for fiscal sustainability is the sensible policy for this point in the recovery.

Other chapters of the Economic Report build on the theme of restoring balance to the American economy.  CEA analysis suggests that American families are likely to be saving more in the future than they did in the past decade.  To fill the gap left in demand, business investment and net exports will need to rise.  The Administration has proposed a number of policies to encourage this healthy transition.  Likewise, our financial regulatory system needs to be revamped to match 21st century financial innovation.  We need to put in place sensible rules of the road to ensure that we do not return to the bubble and bust economy that has wreaked such havoc on the American economy in the past decade.

Rebuilding a Stronger Economy

In no area are the long-run challenges facing the American economy greater than in health care.  We are all too aware of the statistics on the millions of Americans without health insurance.  But, as we discuss in Chapter 7 of the Economic Report, the troubles are broader than that.  American families with insurance face further stagnation and eventual decline in take-home wages as rising health insurance costs consume a larger and larger fraction of total compensation.  Federal, State, and local governments face unsustainable pressure on their budgets as government health expenditures rise along with overall health care costs.  That is why the President has made health insurance reform a top priority.

Working with Congress, we have already achieved a great deal. The extension of the Children’s Health Insurance Program will bring coverage to as many as 4 million more children.  The Recovery Act provided support for unemployed workers to help them maintain health insurance benefits and made pioneering investments in health information technology, health centers, and research into which treatments are likely to work best.  Both houses of Congress have passed reform legislation that would do so much more to slow the growth rate of health care costs, and make insurance coverage more secure for those who have it and affordable for the millions of Americans who do not.  Successful completion of reform legislation is essential to our long-run economic prosperity, taming our government budget deficit, and making American families more secure in their health insurance coverage.

Three other chapters of the Economic Report discuss additional areas where the President believes we need to rebuild our economy stronger than before.  Education is a key ingredient to improved productivity and wages.  Clean energy holds the promise of generating good jobs at the same time that we reduce harmful greenhouse gas emissions.  And innovation is the ultimate engine of economic growth.  In each of these areas, the President and Congress have already made key substantive investments.  But, as these chapters describe, there is much more that can and should be done to ensure a brighter future for our children and our country.

As I have described, this year’s Economic Report of the President is a blend of history, analysis, and prescription.  It describes what we have been through during the past very difficult year.  It describes the many actions we have taken to address both the near-term crisis and our longer-run problems.  And, it contains an important agenda of policy actions that will help to ensure that the American economy not only recovers completely, but comes back even stronger than before.

Before I close, I want to acknowledge the outstanding staff of the Council of Economic Advisers who contributed to this report.  The CEA is unique among government agencies in that most of the staff turns over every year.  Our senior economists are typically professors on leave from universities, and our junior staff are typically students on leave from Ph.D. studies in economics or undergraduate economics majors.  This past year, the Council has been blessed with staff of a caliber not seen since the glory days of the CEA in the 1960s, when future Nobel laureates Robert Solow and Kenneth Arrow were senior economists and James Tobin was a member.  Leading experts in every field of economics joined the CEA staff this year to try to bring the best professional expertise to the tremendous economic challenges facing the country.  The junior staff is equally gifted and has worked eighty hours a week with a cheerfulness and enthusiasm that is truly inspiring.  I am indebted to all them, and to the dedicated permanent staff, and this volume reflects their collective wisdom and months of very hard work.

Christina Romer is Chair of the Council of Economic Advisers 

The unemployment rate declined from 10.0 percent to 9.7 percent.  This decline occurred despite a modest rise in the labor force.  The broadest measure of the unemployment rate, which includes all persons marginally attached to the labor force and workers working part time for economic reasons, fell almost a full percentage point.  Obviously, the unemployment rate remains unacceptably high, and is even worse for certain demographic groups such as teenagers and black or African American workers.
 
Overall payroll employment declined 20,000 in December.  This total reflects substantial variation across industries.  Employment in manufacturing rose for the first time since January 2007, led by an increase in employment in motor vehicles and parts.  Employment also rose in retail trade and in temporary help employment.  Employment fell, however, in construction and state and local government.

Even as today’s numbers contain signs of the beginning of recovery, they are also a reminder of how far we still have to go to return the economy to robust health and full employment.  Indeed, with the benchmark revision announced today, we now know that the total job loss over the recession was more than 1 million larger than previously estimated.  That is why at the same time that he released a plan for reining in the budget deficit over the medium and long run, the President has called on Congress to enact responsible, targeted actions to jump-start job creation.  His proposals for a small business jobs and wages tax cut and a new program to encourage small business lending are important steps to help the businesses that are essential to robust job creation.  Today’s numbers showing continued decline in construction and state and local government employment emphasize the importance of two other of the President’s priorities—continued infrastructure investment and additional aid for strapped state and local governments.

There will likely be bumps in the road ahead.  The monthly employment and unemployment numbers are volatile and subject to substantial revision.  Therefore, it is important not to read too much into any one monthly report, positive or negative.  It is essential that we continue our efforts to move in the right direction and replace job losses with robust job gains.

Christina Romer is Chair of the Council of Economic Advisers

While positive GDP growth is a necessary first step for job growth, our focus must remain on getting Americans back to work.  That GDP rose strongly in the fourth quarter of last year while employment fell and the workweek increased only slightly emphasizes the need for policy actions designed to help spur private sector job creation.  The President is announcing today the specifics of his plan for a small business jobs and wages tax cut.  This policy is designed to encourage businesses to respond to rising demand and output by taking the plunge and hiring new workers again.

Part of the rapid growth in real GDP was due to a substantial rise in inventory investment.  This inventory bounce, though likely to be transitory, is a normal part of healthy recoveries.  As firms’ confidence in the future increases, their desire to run down inventories wanes.  This change in behavior is often a powerful force for growth early in a recovery.  Other components of GDP also rose strongly:   business investment in equipment and software rose at an annual rate of 13 percent and residential investment rose at a 6 percent rate.  And consumer spending rose at a rate of 2 percent.  This broad-based rise in GDP was surely fueled in part by the tax cuts and investment spending in the Recovery Act and other rescue actions, but some appears to be the result of private sector demand returning.

As always, it is important not to read too much into a single report, positive or negative.   There will surely be bumps in the road ahead, and we will need to continue to take responsible actions to ensure that the recovery is as smooth and robust as possible.  Nonetheless, today’s report is a welcome piece of encouraging news.

Christina Romer is Chair of the Council of Economic Advisers

The past year has been one of enormous challenges for the American economy. President Obama took office at a time of economic crisis. The economy was losing jobs at a rate of close to 700,000 jobs a month, credit markets were functioning poorly, and real GDP was falling at a breakneck pace. The economy was at the edge of a cliff, and the possibility of a second Great Depression was frighteningly real.

Thus, the first task of the new administration had to be to be to turn around an economy in freefall. The American Recovery and Reinvestment Act, which the President signed less than a month after taking office, was the boldest countercyclical fiscal action in American history. Together with Administration's Financial Stability Plan, its actions to aid distressed homeowners, and actions by the Federal Reserve and other regulators, the Recovery Act is generating one of the sharpest economic turnarounds since World War II. Real GDP, after falling at an increasingly rapid rate for three quarters, barely fell in the second quarter of 2009 and rose in the third quarter; and, it is widely expected that when the fourth quarter data are released later this month, they will show even larger growth. Job loss, which averaged 691,000 jobs a month is the first quarter of 2009, averaged 69,000 in the fourth quarter—one-tenth as much.  A new CEA report released Wednesday found that the Recovery Act has been instrumental to this change in trajectory, and that approximately 2 million people are employed who otherwise would not be, because of the Act.

With the economy still losing jobs and unemployment at 10 percent, the economy is obviously far from healthy, and we have a long way still to go. That is why the Administration is committed to taking every responsible measure to spur job creation—measures ranging from the "Cash for Clunkers" program last summer, to the extensions of unemployment insurance and additional business tax cuts in the bill the President signed in November, to ideas explored at the Jobs Forum in December.

But, the Administration always knew that stabilizing the economy would not be enough. The problems that led to the crisis were years in the making, and even before the crisis, we faced significant long-run challenges. That is why even as the Administration has worked to rescue the economy form the recession, it was also working to build a new foundation for stronger, more balanced growth. One key part of these efforts is financial regulatory reform that will protect the economy from actions that could threaten financial and economic stability, and protect ordinary Americans in their dealings with sophisticated and powerful financial institutions. Another key step is health care reform—reform that will not only make insurance more secure for those with insurance and expand coverage to those without it, but also slow the growth rate of costs while maintaining quality, and so benefit households, businesses, and governments at every level. The Administration is also working to improve our education system, to promote the transition to a clean energy economy, and to foster faster productivity growth through greater innovation. We will continue these efforts in the new year.

It has been a critical year for economic policymaking and we have made significant progress. Despite this progress, there is much left to do. The President knows that the recession will not be truly over until the labor market has recovered. That is why he and his economic team are committed to bringing about strong employment growth and building an economy that is stronger and more secure for years to come.

Christina Romer is Chair of the Council of Eocnomic Advisers

Revised data now show that employment increased 4,000 in November.  This is obviously welcome news and the first employment increase in 23 months.  Compared with the unexpectedly good report for November, December’s job loss is a slight setback.  Two industries where employment declined significantly were construction (-53,000) and wholesale and retail trade (-28,400).  One continuing sign of labor market healing was that temporary help services, which is often a leading indicator of labor demand, added 46,500 jobs in December.  Both the work week and aggregate hours remained stable, maintaining the significant improvement that occurred in November.

The unemployment rate remained at 10.0 percent in December.  This level reflected a proportional decline in the number of people unemployed and the number of people in the labor force.  The unemployment rate remains unacceptably high, which underscores the need for responsible actions to jumpstart private-sector job creation.

As the President has said for a year, the road to recovery will not be a straight line.  The monthly employment and unemployment numbers are volatile and subject to substantial revision.  Therefore, it is important not to read too much into any one monthly report, positive or negative.  It is essential that we continue our efforts to move in the right direction and replace job losses with robust job gains.

Christina Romer is Chair of the Council of Economic Advisers

Key benefits to the labor market include the following:

• By slowing the growth rate of health care costs in the public and private sector, health insurance reform will improve take-home wage growth, improve standards of living, and encourage private sector job growth.
• More efficient labor markets will spur entrepreneurship, productivity, and growth at small firms, a key source of job creation.
• Expanding coverage to the millions of Americans who currently lack health insurance will improve health status and reduce disability, increasing labor supply.
• And finally, reform makes direct investments in the health care infrastructure that will create new jobs in research, information technology, medicine, and public health.

Lowering the cost of healthcare will lower the unemployment rate in the short-to-medium run. Bringing down the cost of healthcare will be good for jobs. Academic studies found that slowing health costs helped boost job growth in the 1990s and that the rapid rise of health costs in the 2000s hurt jobs, especially in manufacturing. Putting in place serious reforms to improve quality and slow cost growth will, in the short-to-medium run, lower the burden on businesses and enable them to hire more workers.

• The CEA estimated that if the annual growth rate of health spending slows by 1.5 percentage points per year, then the unemployment rate could fall by 0.24 percentage point and jobs could rise by 500,000.
• Analysis by business groups such as Business Roundtable and other independent analysts shows that reform would slow the growth rate of costs, freeing up funds for job creation. The delivery system reforms and revenue provisions (such as the excise tax on high cost plans in the Senate bill) in current legislation provide incentives and create new measures to contain health care spending, allowing employers to hire more workers rather than spending money on rising health insurance premiums.
• A newly released CBO report finds that premiums will fall by as much as 3 percent in the large group market and 2 percent in the small group market after reform, showing that employers will reap the cost savings necessary to hire more workers and invest in new property, plant, and equipment.

Health reform will spur entrepreneurship, productivity, and growth at small firms, helping fuel a key engine of job creation. Health reform will lower costs for small businesses through tax credits and pooled purchasing on a competitive exchange – reducing their competitive disadvantage vis-à-vis larger firms, thus helping to fuel a key engine of job creation in the economy.

• Firms with fewer than 20 employees accounted for approximately 18 percent of private sector jobs in the year with the most recent data, and nearly 25 percent of net employment growth from 1992 to 2005.
• In the current health care market, small firms must compete for workers alongside large firms that may able to afford better benefits due to their size. Under reform, the health insurance exchange will expand options for coverage, making small businesses a more attractive place for people to work, and encouraging people to start up businesses of their own.

Health market reforms will improve the functioning of labor markets by reducing job lock. By ending limitations on coverage based on pre-existing conditions and expanding portable coverage options, health reform will help reduce "job lock," freeing up workers to be more flexible – increasing the flexibility and productivity of the economy, and increasing labor supply.

Reform legislation invests directly in making the health care system more efficient, creating jobs in research, information technology, medicine, and public health:

• Reform and the health provisions of the stimulus bill invest billions in modernizing the health care infrastructure, creating high-tech jobs for skilled workers to modernize medical records and work to interconnect health information technology throughout the health care system.
• The reform bills in Congress create new jobs for doctors, nurses, and other health care providers by investing billions of dollars directly in the health care workforce, especially in the areas that have the greatest need for more health care providers.
• Reform legislation will create science and technology jobs by encouraging the development of new drugs and new treatments. The bills in Congress create new pathways for the approval of pharmaceuticals and medications such as biosimilar drugs, which will create jobs for the scientists, laboratory workers, and doctors who develop these drugs and conduct the tests needed to ensure their safety and secure their approval.
• Health Insurance Reform will create jobs for skilled researchers who analyze wellness and public health. Reform legislation devotes millions of dollars in funds toward research in wellness, epidemiology, and public health, investments that will create job opportunities for skilled workers in fields that improve the nation’s health.

Christina Romer is Chair of the Council of Economic Advisers

Payroll employment declined 11,000 in November.  This is a dramatic improvement from the decline of 597,000 in November 2008 and 741,000 in January 2009.  It is by far the closest we have been to stable employment since the recession began almost two years ago.  Furthermore, the employment loss in both September and October was revised down substantially, with the result that employment as of October is nearly 160,000 higher than was reported last month.  As was true in October, the largest employment gains in November were in temporary help services, which is often a leading indicator of labor demand.  21,000 jobs were also added in state and local public education.  Both the work week and aggregate hours increased, another early sign of labor market healing.
 
The unemployment rate, which had risen to 10.2% in October, declined to 10.0% in November.  This decline primarily reflects an increase in the number employed, as measured by the household survey.  Despite the welcome decline, the unemployment rate remains unacceptably high.  This underscores the need for the responsible actions to jumpstart private-sector job creation that the President highlighted at yesterday’s Forum on Jobs and Economic Growth at the White House.

There are many bumps in the road ahead.  The monthly employment and unemployment numbers are volatile and subject to substantial revision.  Therefore, it is important not to read too much into any one monthly report, positive or negative.  But, it is clear we are moving in the right direction.

Christina Romer is Chair of the Council of Economic Advisers

The Business Roundtable (BRT) report adds to a growing body of evidence that workers with employer-sponsored health insurance coverage will see lower cost growth and lower premiums from health insurance reform as supported by the President and as contained in the bills being considered in Congress. Health insurance reform not only contains cost growth for the government and so reduces the long-run budget deficit, it will also lower premiums and expenses in the private sector and throughout the health care system – for businesses, workers, and their families.

As documented in the BRT report, rising health care costs are placing an ever-increasing burden on employers and on the millions of Americans with employer-sponsored health insurance. In the absence of reform, the BRT projects that rapidly rising health care spending will restrain job growth and reduce the growth of employee wages. Without reform, the report projects that average per-employee health care costs at large employers will triple over the next decade. The report estimates that health insurance reform as currently proposed in Congress, when fully implemented, would reduce the overall health care cost trend for employer-sponsored health insurance by 15 to 20 percent over the next ten years. This would reduce per-employee health insurance costs by $3,095 in 2019, relative to what they otherwise would have been.

This is consistent with the findings of the Council of Economic Advisers report, "The Economic Case for Health Care Reform," which finds that reform could increase income for a typical family of four by $2,600 in 2020, and increase the nation’s real GDP by nearly 2 percent in 2020, and 8 percent in 2030.

The BRT report estimates that the delivery system reforms that are included in current draft legislation have the potential to spread beyond Medicare and Medicaid to private insurance plans. In this way, they can substantially reduce the growth rate of overall health care spending, which eats into the take-home wages of workers with employer-sponsored coverage every year. The BRT report finds that delivery system reforms have the potential to make health care more efficient without compromising on quality.

For example, the BRT report points out that the House and Senate reform proposals contain provisions to encourage Accountable Care Organizations (ACOs), which are groups of doctors working together through joint decision making to coordinate care for patients. The report  "find[s] that private-sector savings from initiatives such as these can be very positive."

The report also describes how the House and Senate reform proposals encourage payment bundling for Medicare, where doctors and hospitals are paid for an episode of care, rather than individual treatments. Bundling payment gives providers incentives to provide quality care for an overall condition or hospital stay, improving efficiency and reducing costs over the long run.

Finally, the report highlights many other reforms that improve efficiency and quality while reducing costs – such as paying providers based on their performance through Value-Based Purchasing, preventing hospital readmissions, and an independent commission to consider reforms to make Medicare spending sustainable and fiscally responsible over the long run. 

Christina Romer is Chair of the Council of Economic Advisers 

Payroll employment declined 190,000 in October, continuing the steady trend of moderating job loss that began last spring. Furthermore, the employment loss in both August and September was revised down substantially. Importantly, employment in temporary help services, typically one of the first industries to see job gains, increased by 33,700. The motor vehicle industry also posted employment gains. These are hopeful signs that the unprecedented policy actions are working to stabilize the economy and put us on a path toward recovery.

The unemployment rate, however, rose four-tenths of a percentage point, to 10.2 percent. That this occurred despite the rise in real GDP last quarter reflects both the typical lag between GDP growth and unemployment decline, and the recent exceptional increases in productivity. Having the unemployment rate reach double-digits is a stark reminder of how much work remains to be done before American families see the job gains and reduced unemployment that they need and deserve.

Christina Romer is Chair of the President's Council of Economic Advisers

As a teacher, I should have realized that many people have trouble with the distinction between growth rates and levels. As noted in a new article by the Christian Science Monitor, I made the uncontroversial statement in testimony yesterday that fiscal stimulus has its greatest effect on economic growth over the period where it is ramping up most quickly. This statement seems to have caused some confusion and misunderstanding.

When we go from no stimulus to substantial tax cuts, increases in government spending, and aid to state governments, this has a large effect on the growth rate of real GDP – just as when you press hard on your car’s accelerator and go from 0 to 60, you have a great change in your speed. This sense of acceleration is exactly what we have been experiencing since the start of the year. Fiscal stimulus has been steadily increasing, raising GDP growth by between 2 and 3 percentage points in the second quarter and between 3 and 4 percentage points in the third quarter. Because GDP was falling rapidly before the stimulus, the contribution of the Recovery Act to growth has changed what would have been a continued rapid decline in GDP to only a modest decline in the second quarter, and changed what probably would have been a further decline into what is now widely expected to be a moderate increase in the third quarter. We expect that stimulus will continue to have a positive effect on growth in the fourth quarter of 2009 and well into 2010, though, by design, not by as much as it did in the second and third quarters of 2009. As a result, we expect the largest effect of the stimulus on the levels of GDP and employment to occur well after the largest effects on growth rates.

At some point, the stimulus plateaus at a high level. That is important too. Such continued stimulus may not add much to growth, but it is keeping the levels of GDP and employment much higher than they otherwise would have been – just as keeping pressure on the accelerator keeps the car going at 60 mph.

If you take your foot off the gas, the car goes from 60 back down to a slow crawl – a serious case of deceleration. Taking stimulus off in an economy where private demand has not adequately recovered could lead to negative GDP growth and a fall in the level of both GDP and employment. This is something I think we can all agree would be detrimental to the U.S. economy and American families.

Christina Romer is Chair of the Council of Economic Advisers