New Economic Data: No New News (Which is Good News and Bad News)

A new round of stats about the US economy have been released recently, and they tell a familiar ‘good news, bad news’ story. The good news is that both GPD (blue line) and corporate investment (red line) have rebounded well past their pre-recession highs (which are indexed to 100 in the graph).

I’d add lines for corporate profits as further good news, but they’d skew the graph too much: if total profits outside the finance industry equalled 100 before the Great Recession hit in December of 2007, they’re at 129.6 now. Including the financial industry, they’re at 139.3.

The bad news is captured by the green line, which measures how many people have jobs in America. This number is still not back to its pre-recession peak, which was almost six years ago.

FRED Graph

So companies are generating revenue in a growing economy, and spending plenty of it on gear while still making healthier profits than ever.What they’re not doing is hiring lots more people in order to grow revenues and profits.

A major reason for this, I believe — no, the major reason — is that technology and automation have advanced so much that companies in most (if not all) industries simply don’t need to be as labor-intensive as was was previously the case. To put it quite simply, the gear is substituting for the employees.

Erik Brynjolfsson and I discuss this phenomenon in our 2011 book Race Against the Machine. In our new book The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies (out in January; available for pre-order now) we fit it into the larger trends of technology-induced economic and societal change. The Second Machine Age makes the point that while most of the news about this phenomenon is great, it will bring with it some labor force challenges.

One of these challenges is the fact that many people seem to be dropping out of the workforce in recent years. This is easy to see if we take our graph back further in time and add one more line to it: the black line below is the civilian labor force participation rate, or the percent of working age Americans who have work or are looking for it (once you stop job hunting, go back to school, or otherwise leave the labor force you’re no longer included in the black line).

Labor force participation has been declining with depressing steadiness since the Recession, and is now at 63.2%. It’s not been this low since the summer of 1978, when women had not yet entered the American workforce in large numbers.

FRED Graph

I wish I could see what’s going to make that black line change direction and start heading up. Economic growth and stellar corporate profits don’t seem to be enough. Any ideas what will be?