By: Ashley Kindergan The Fianacialist

The latest economic data out of the United States is a little bit like an episode of “House,” Fox’s long-running series about the mysteries of medical diagnosis. In this case, the patient—that is to say, the economy—is presenting with a frustratingly low heartbeat, in the form of tepid GDP growth. Normally, when such symptoms are present, it’s an indication of equally weak growth in jobs. But in this particular case, payrolls have been bouncing steadily upwards for some time, expanding by an average of 200,000 jobs a month in 2013. How can such signs of rude health coexist with worrying hints of a chronic illness?

On “House,” the doctors always come up with an autoimmune disease, rare genetic condition or exotic parasite that reconciles the disparate clinical data, but to this point, economic diagnosticians have yet to figure out just what’s going on with the American economy. “This is not a typical pattern,” Credit Suisse Chief Economist Neal Soss wrote in a note this week entitled “Growth-Jobs Puzzle Unrevised.” The economy expanded by only 1.7 percent in the second quarter, compared to 1.1 percent in the first quarter and a truly dismal 0.1 percent in the fourth quarter of 2012. This while job growth has been buoyant. Based on the historical relationship between jobs and GDP, payroll job growth should be much lower than it is. But it isn’t. There are several potential hypotheses to explain the high job growth and weak GDP data, Soss wrote in his report, though none are truly satisfying.

Pay roll graph Courtesy of Credit Suisse report: “Growth-Jobs Puzzle Unrevised.”

First, Soss said, some have theorized that businesses are doubling up on part-time workers ahead of health care reforms set to take effect in 2015 that would require businesses to either provide full-time employees with health insurance or pay a penalty. (The requirement was originally set to go into effect in 2014, but last month, the Treasury Department delayed implementation by a year.) At first blush, the idea has merit. The overall number of part-time jobs has shown a disproportionate increase this year, and payroll gains at restaurants and other low-wage service jobs have been particularly robust. Here’s the mystery, though: the average workweek has not shown a significant drop—not since April, nor compared to April 2012. If the shift to part-time work was the dominant causal factor behind the job increases one would expect the average length of the workweek to decrease more than it has, Soss pointed out. But it hasn’t done so.

Perhaps companies simply cut costs so severely during the downturn that they can no longer get away with piling even more work on their remaining employees. In that case, even a little bit of economic growth after such a long crisis and drawn-out recovery could be enough to nudge firms into hiring mode. “Put another way,” wrote Soss, “firms are finding it harder to raise productivity at this more advanced stage of the cycle, so gains in output need to be ‘financed’ increasingly with more workers at the margin.” But there’s a problem with that idea, too, Soss said. “If it’s taking more payroll to create GDP, we would expect even weaker corporate profits than we are currently observing,” he wrote.

So it’s by no means clear why there is such a disconnect between jobs and GDP growth. That, Soss noted “muddies the picture for policymakers.” It’s hard, after all, to treat an unidentified ailment. As the search for clarity continues, growth may weaken further in the third quarter, when the automatic cuts in federal spending called for by the sequester could start to hit the real economy. (Technically, the cuts began in the second quarter, but the GDP figures showed only a $3 billion drop in federal spending.) Soss said that a lag between when budget cuts are made and when they show up in official economic data could mean that a larger drop is ahead for the third quarter.  As a consequence, they cut their Q3 GDP forecast to 2.0 percent from 2.6 percent. At least it’s not a mystery

For more on this story go to:

http://www.thefinancialist.com/the-mystery-of-americas-economic-health/