Thursday, October 9, 2014

All indications point to prolonged slump

As November approaches, it may be important to understand where Guam's economy stands (from those indicators which are readily available). As a student of economics, I am most interested in knowing how big the output gap is. There are a number of lines of evidence that one can use to tell how far we are from full employment, which I will reproduce below:
  • Employment as a Percent of the 16-64 Population
  • Average Hourly Wages in the Private Sector
  • The Employment-Population Ratio
  • Changes in the Rate of Inflation
The sources of these pieces of information are the Current Employment Reports and the Unemployment Situation, both released by the Guam Department of Labor Bureau of Labor Statistics, and the Guam Consumer Price Index, which is released by the Bureau of Statistics and Plans.

Current Employment Reports

Data Sources: Current Employment Reports (GDOL), Census Demographic Database

The above graph shows the 5-quarter centered moving averages of employment as a percent of the 16-64 population. The centered average begins declining just as the current administration is about to take office. I should point out that the peak period was actually December 2010 (just before the Calvo-Tenorio Administration took office), which is masked in this graph (looking like it is September 2010), since I'm using a centered moving average, which would give a pretty good indication of the trend, but turning points tend to be distorted. Another example is that the low point is actually located on in the June 2012, but the centered moving average low point is at the December 2011. If there is a takeaway from this data, it is that, adjusted for demographics, there appears to be a large shortfall in employment since shortly after the Calvo-Tenorio Administration took office and there has been little progress in bringing back full employment.

Data Sources: Current Employment Reports (GDOL)

The graph above indicates that a similar "depression" has occurred in the average hourly wage of private sector workers. As one can see, prior to 2011, the progress of wages tracked a trend line, showing signs of movement back toward that line during practically every deviation.  In 2011, wages slumped and basically haven't come back to trend.

Unemployment Situation

Source: Unemployment Situations (GDOL)

The above graph represents the employment-population from the first quarter of 2011 to the third quarter of 2013, the latest report which this administration has released. For most of the data, I used a three-quarter centered moving average, but for the first quarter of 2011, there was not any data immediately before or after, so the number is not an average. In the first quarter of 2012 and the third quarter of 2013, I took an average of that quarter and the nearest quarter. If you compare this result with the graph of employment as a percent of the 16-64 population, you'll find that these are very similar, which is an encouraging sign. The employment-population ratio is simply taking the percent of the civilian non-institutional population which is employed, while the other is doing something very similar with the current employment report data. The numbers won't line up for various reasons, but they can give a complementary look at the position of the labor market.

Guam Consumer Price Index

Data Source: Guam Consumer Price Index

The Guam Consumer Price Index data is very interesting because by economic theory (specifically the new keynesian phillips curve), we would expect changes in the rate of inflation to be negatively correlated with the unemployment rate or, if one uses the measures shown earlier, we would expect changes to be positively correlated with the employment ratio or employment as a percent of the 16-64 population.  What we find is that the 2-year trailing average inflation rate begins declining in 2012, which, if I chose to center this upon the middle period where the rate of inflation peaked, would have been the beginning of 2011. Core inflation is the better measure of inflation because it usually better represents the longer-term trend of inflation, rather than bouncing around as much as headline inflation does. What this graph illustrates is that Guam's economy may be headed for outright deflation, which demonstrates the weakness of our economy and, potentially, hints that the economy could remain depressed.


To conclude, in brief, Guam's economy, by the lines of evidence I have examined, seems to have suffered from a prolonged slump since just after the Calvo-Tenorio Adminstration began and may remain depressed for a while longer. I would not say this is destined because (a) things can be done to address shortfalls in aggregate demand (which is at the center of the depressed economy) and (b) things may change without a specific intervention (or as some say, "The trend is your friend till the end," or, alternately, "stuff happens.").

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