Creative Class

While the business press points to May’s slowdown in the pace of layoffs as an early sign of recovery, Harvard economist Jeffrey Frankel says not so fast. Frankel, who’s also a member of the Business Cycle Dating Committee of the National Bureau of Economic Research, prefers an alternative indicator of employment – total hours worked – which he says provides a better gauge of economic cycles (pointer from Economix).

Speaking entirely for myself, I like to look at the rate of change of total hours worked in the economy. Total hours worked is equal to the total number of workers employed multiplied by the average length of the workweek for the average worker. The length of the workweek tends to respond at turning points faster than does the number of jobs.

Frankel provides the graph below which tracks the trend in hours worked over the past decade.

Martin Feldstein is growing increasingly worried about the state of the U.S. economy. He’s usually a voice of calm in the middle of the storm – former head of the National Bureau of Economic Research, past chairman of the Council of Economic Advisors under Reagan, and Harvard economics professor.

So that is where the US is now: in the middle of a financial crisis, with the economy sliding into recession, monetary policy already at maximum easing, and fiscal transfers impotent. That is an unenviable situation, to say the least, for any incoming president.

He’s basically saying that we have thrown most of our fiscal and monetary policy ammunition at the crisis with little effect. Uh-oh.

In related crisis matters, Tyler Cowen suggests that the dollar should weather the storm. His reasoning is solid as usual. The dollar is likely to hold for the short-term. But for the longer-run, I’m not so sanguine. There has been a big global shift in the underlying real economy going on for some time now. This, plus financial trauma and large deficits, means sooner or later the currency has to give. That leaves me inclined to believe Ken Rogoff, Marty Feldstein, Larry Summers, and others who agree that a gradual slide in the dollar is inevitable. Even if large investors and smart people simply hedge (rather than go on a stampede) – say in gold, euros, Swiss francs, and yen – the dollar will eventually slip.

My advice in the matter: we live in an increasingly global world – diversify accordingly.