The 2015 national economy: It's all about jobs

James Glassman, managing director and head economist for commercial banking at JPMorgan Chase & Co., and John Lonski, managing director and chief financial markets economist at Moody's Analytics, agreed that the economy of the nation, like Arizona, is recovering but not yet recovered. Getting to recovery — that is, returning the economy to full employment — will likely take several more years.

Experts at the 51st Annual ASU/JPMorgan Chase Economic Forecast Luncheon were in agreement about economic recovery, at the state and national level. James Glassman, managing director and head economist for commercial banking at JPMorgan Chase & Co., and John Lonski, chief capital markets economist at Moody's Analytics, agreed that the economy of the nation, like Arizona, is recovering but not yet recovered. Getting to recovery — that is, returning the economy to full employment — will likely take several more years.

Lonski explained, "If, as expected, U.S. real GDP rises by 2.8 percent in 2015, then the U.S. economy will have failed to grow by at least 3 percent for a tenth straight year. Moreover, U.S. real GDP's average annual growth rate will have dipped from 3.4 percent average over the 1996–2005 decade to 1.5 percent average over the 2006-2015 decade."

But, the economy is still growing. Lonski said, "In 2015, the U.S. economy is more likely to purr than roar."

Yet while economic growth since the recession ended has been lackluster, the stock market has boomed. In that, many people see a contradiction, but Glassman does not. He explained: "The economy is always moving, like the tides of the oceans. The economy stumbles, and then gets back on its feet. Financial markets know that history well. So rather than base decisions on the state of the economy today, they look to the future."

That's why financial markets appear so much more optimistic about the state of the economy than those who just look at the current state of affairs, Glassman said. "The financial markets are at all-time highs because they're looking ahead and anticipating that the economy will continue to heal in the future, even if it's not right now."

The state of the recovery depends on the measure of unemployment

Are the financial markets right to be optimistic? That depends in part on where the economy is on its recovery path. If the economy is near the end of its recovery and about to settle into a long-run trend, then financial market optimism may be misplaced. If, however, the economy is only in the middle of its recovery and if there is a lot of growth potential left, then financial market optimism seems perfectly rational.

So how far along is the economic recovery? Glassman explained that watching an economic recovery is much like following a baseball game. "In contrast to a football game, baseball is not about the clock. It's about getting to the ninth inning." The ninth inning, in Glassman's analogy, is the balance of full employment and inflation at about 2 percent: economic recovery.

The official unemployment rate of 5.8 percent is near the "full employment rate" of 4–5 percent. But that official unemployment rate masks a large segment of workers who are counted as employed but are working part-time, or have dropped out of the labor market altogether, Glassman explained. "If all who were displaced by the recession were accounted for, the unemployment rate would still be coming down but likely would still be about 8.5 percent. This would imply that the recovery is only in the fifth inning."

Glassman added, "The unemployment rate is not the best signal about where we are in the recovery process. Federal Reserve Chair Janet Yellen and her colleagues have been saying this for quite some time."

A sure sign that the economy is nearing true full employment (and full recovery) is upward pressure on wages and prices, explained Glassman. "Inflation is still low. The economy has room to run. So it's a bullish story. We should expect continued economic recovery for the next several years."

Lonski explained that the underutilization of resources, which he calls a global phenomenon, curbs wage and income growth. "In today's globalized economy, U.S. wage growth will be influenced by much more than the U.S. unemployment rate. The currently ample amounts of underemployed labor outside the U.S. should help to contain U.S. wage growth amid a further tightening of the U.S. labor market."

Experience matters: Older workers are faring better than younger ones

There is a curious trend in the demographics of the workforce today, explained Lonski. "Contrary to conventional wisdom, it is actually older workers who are doing better than younger workers." As of October 2014, employment had grown by a cumulative 5.2 percent since June 2009. "However, the increase was unevenly divided between a meager 1.5 percent rise for the employment of Americans aged 16 to 54 years and a 20.9 percent advance in the employment of those aged 55 years and older."

"Employers are hanging on to older workers, rather than hiring younger ones, because older workers have more experience, and can be more productive," Lonski explained. Yet while jobs in that age category are growing, they're growing — in all likelihood — at lower levels of income. "Often older workers find themselves forced to accept a lower salary if they wish to continue working. And if only because retirement looms, older workers tend to have a higher propensity to save and a lower proclivity to spend compared to their younger counterparts."

In all likelihood, the skewing of employment growth toward older Americans has curbed the overall growth of income and spending.

Glassman sees the same trend in the workforce. "Most employers would much rather hang on to people with experience and skills than lay them off in favor of less-experienced but cheaper workers. And most employees are probably happy to work fewer hours rather than lose the job altogether." The result: younger job seekers have been disproportionately impacted by unemployment.

"I've never seen a recession hit an age group so disproportionately," Glassman said. "There are 2.5 to 3 million young people who left the job market altogether because they couldn't find a job. This is the first time we've seen this; in the past, older workers would get pushed out because they're more expensive. The fact that employers aren't doing that now tells me they're reluctant to drop people with experience."

"All roads lead back to the job skills gap," Glassman added. "Technological innovation over the last 20 years has been quite disruptive — as innovation always is — but it has also been concentrated and has overwhelmingly displaced routine work. In this environment, people without skills and experience don't bring the same value to an employer." In particular, said Glassman, when companies are not yet sure of the economic outlook, they're even less inclined to hire people without experience, such as recent college graduates.

On to the next inning

With a significant number of U.S. workers still underemployed and inflation below the Fed's target rate, both Lonski and Glassman expect the economic recovery to continue, and to continue to improve. "The participation of young people in the labor market is returning," said Glassman. "The rate of part-time work is coming down. We are doing better."

But, Glassman said, the U.S. economy will spend the balance of this decade recovering. He's bullish about that, because it means a lot of growth potential.

Slides from the presentations:

James Glassman - Economic Forecast Lunch 2014

John Lonski - Economic Forecast Lunch - 2014