Daughter of Lucy
In August of 2003, I wrote about my preferred economic indicator, which I called a labor capacity utilization index, or LUCY. I want to update it.
Back then, I used an index of aggregate hours worked, which I assume meant only for production and nonsupervisory workers, since that is the only historical series I can find when trying to update it (there is an index of hours worked by all workers, but it only goes back five years). Even though the BLS has a very generous definition of such workers, in a Garett Jones economy I would rather look at everyone. So for my update, I changed to using total nonfarm payroll employment. Incidentally, this includes government workers.
So here is, if you will, daughter of LUCY. You take total nonfarm payroll employment and divided it by the population over 16. (This is basically just an employment to population ratio.) Divided each monthly number by the peak value, reached in December of 1999, then multiply by 100. The resulting index behaves as follows:
It has a peak of 100 in December of 1999, obviously. However, the NBER recession does not begin until March of 2001.
It has a trough of 93.66 in December of 2003. The NBER had declared the recession as ending in December of 2001. My original LUCY article was written to dispute this view, just as I currently dispute the NBER end date for the most recent recession.
The next peak is 95.26, in April of 2006.
The next trough is 87.51, in December of 2009.
Its recent high is 87.97 in May of this year, and it is currently at 87.56.
1. If daughter of LUCY were the only indicator we were using, we would say that the most recent recession began in May of 2006 and perhaps ended in December of 2009. The NBER says that the recession did not begin until December of 2007 and it ended in June of 2009.
2. The NBER uses many indicators, and it places a great weight on GDP. GDP is the dominant measure of economic activity in the spending paradigm. I think that market utilization of labor ought to be the dominant measure in the PSST paradigm.
3. If we use the daughter of LUCY as our measure of economic activity, and we use the peak-to-peak difference as a measure of the secular trend, then from December of 1999 to April of 2006, the secular change was -4.64 percent, which is a significant decline.
I think that labor capacity utilization is the right way to measure economic activity. It says that economic activity has been in a declining mode for most of the past ten years. Relative to that decline in economic activity, GDP has done remarkably well. That says that productivity growth has been fairly rapid.
To me, this looks like economic restructuring. Many workers have lost jobs because their contributions are not valued by employers. Entrepreneurs need to figure out business models that can profitably employ the available workers.