Weak Employment on the Heels of weak GDP

by Thomas Cooley, Ben Griffy and Peter Rupert

Reading through today’s release of the employment situation from the BLS one is struck by how many times the phrase “little changed” shows up. Employment gains from the establishment survey were weak, up 151,000. Revisions over the past two months were almost off-setting, up 28,000 for November and down 30,000 for December, so, little change there.

empchgm-2016-02-05

Employment in mining and logging continues to decline, down 7,000 and down 29,000 over that past three months.
Manufacturing was up 29,000 and services up 118,000. However, temporary services declined 25,200. Health care and social assistance as well as leisure and hospitality rose by 44,000.

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Average weekly hours were up to 34.6 but have bounced between 34.5 and 34.6 since March of 2014. Average hourly earnings rose from $25.27 to $25.39, up 2.5% over the year.

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The household survey also showed very little change in most headline numbers. The unemployment rate remained at 4.9% and the unemployment rate including marginally attached workers remained at 9.9%. Here are the numbers for the unemployment rate since September, with a lot of digits:

2015-09-01 0.05052050
2015-10-01 0.05028136
2015-11-01 0.05035331
2015-12-01 0.05007825
2016-01-01 0.04920580

uu6rate-2016-02-05

Given the amount of vacancies out there, however, the unemployment rate remains somewhat high, as can be seen in the Beveridge Curve.

beveridge-2016-02-05

There has been no significant change in the employment to population ratio or the labor force participation rate, those unemployed 27 weeks and longer, or those working part time for economic reasons.

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Output per hour fell 3.0% at an annual rate in the fourth quarter of 2015 and has not shown any upward trend over the recovery. Indeed, it is only about 7% higher today compared to the peak before the great recession, by far the slowest rate of growth across all recessions and recoveries since the 1960’s, except for the 1973 recovery.

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prod-cyc-2016-02-05

The BLS also undertook the annual revision to earlier data based on a more complete set of data. The annual revisions lowered December payrolls by 105k. The total nonfarm employment level for March 2015 was revised downward by
206,000 but this left a boost for job growth as the over-the-year change in total nonfarm employment for 2015 was revised from 2,650,000 to 2,735,000.

Overall, then, the slow GDP growth reported earlier this month along with the fairly weak labor report shows an economy that continues to grow at a fairly anemic pace. Moreover, it seems less likely the Fed will signal any moves in the near future.

Tighten Your Seatbelt

By Thomas Cooley, Ben Griffy and Peter Rupert

Today’s release of the “advance” estimate for GDP for 2015 QIV shows 2015 ending with a dud as growth slowed throughout the year. Real GDP increased only 0.7% at a seasonally adjusted annual rate. Both real GDP and real personal consumption expenditures (PCE) have taken a decidedly downward turn. The weak numbers were widely anticipated, presaged by falling industrial production, declining exports and weak consumer demand. The question on everyone’s mind is whether this portends a more prolonged contraction in the economy.

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Looking at previous business cycles, it is clear that this recovery, while weak, is beginning to look mature.  Job growth has continued strong and the unemployment rate is low  but this recovery has been in progress for several years now.  What are the forces weighing on economic growth that would tip the economy into a contraction?

gdp-cyc-2016-01-29

nrfi-cyc-2016-01-29

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Exports have shown gradual flattening out and then more recently a decline precipitated by weak demand elsewhere in the world and a strong dollar. Expectations are that this will continue and continue to pull down U.S. growth.  Consumption was also weaker in the fourth quarter after looking stronger earlier. PCE slowed to 2.2% after growing 3.6% and 3.0% in QII and QIII, respectively. Moreover, as the graph below shows, once PCE goes south it takes a while to reverse course. Investment in non-residential structures (-5.3%) and equipment (-2.5%) fell sharply, leading to an overall investment decline of -2.5%. Residential structures, however, grew at 8.1%.
useuro-2016-01-29
exp-cyc-2016-01-29

 

 

Headwinds

The U.S. economy has always been an important driver for growth elsewhere in the world. As the first picture below shows the fate of the U.S. economy is closely aligned with the fate of nearest and most important trading partners, Mexico and the U.S. but in the age of globalization other trading partners – China, Europe Japan are very important as well. As you can see from the following charts, Europe and Japan are stagnant and the emerging markets, while not completely foundering, are likely not to lift others, particularly as China’s growth slows.  These are serious concerns for the future strength of the U.S. recovery.

 

gdp-US-CAN-MEX-2016-01-29

gdp-US-EU17-Japan-UK2016-01-29

 

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A Strong Labor Market in the Face of Global Headwinds

by Thomas Cooley, Ben Griffy and Peter Rupert

The December employment situation delivered this morning from the BLS showed continued strength across the board. Payroll employment increased 292,000 and the news gets better as payrolls were revised up for both October (+9,000) and November (+41,000). The mining and logging sector continued to decline, falling another 8,000 after falling 11,000 in November and 1,000 in October as a result of the continued decline in oil prices. The motor vehicle and parts sector also fell for the third straight month, shedding 6,500 jobs over that time span.

Most of the job gains were in the service sector with health care and temporary services showing significant gains. In the goods producing sector most of the gains were in construction.

Average weekly hours were essentially unchanged as were average hourly earnings.  The latter is important because it means that strong job growth has not yet generated more upward pressure on wages.  But a more careful look at wages is provided by the Federal Reserve Bank of Atlanta’s wage tracker. It shows across a broad set of categories a three month moving average of median wage growth of roughly 3.1% . This is a sign of a healthy labor market. The labor force participation rate and the employment population ratio also inched up very slightly. These strong results provide some validation for the Federal Reserve’s first interest rate hike in nearly a decade, which occurred in December.

Global weakness as well as falling oil prices still loom on the horizon. On two separate occasions this week, the Chinese stock market fell by more than 7 percent, prompting a halt to trading on Wednesday. Uncertainty about the interest rate environment, as well as concern about the Chinese stock market caused the Dow, Nasdaq, and S&P 500 to close down, despite the strong jobs report. This, among other data concerns prompted GDP Now, a predictive algorithm maintained by the Federal Reserve Bank of Atlanta, to revise its estimate of quarterly GDP in the fourth quarter of 2015 from 1.0 percent to 0.8 percent.

Many observers noted weakness in the U.S. economy in the fourth quarter – signs that showed up mainly in the purchasing managers indices and industrial production. So far that pressure has not appeared in the U.S.  labor market.  The number of people employed part time for economic reasons has continued to decline as has the duration of unemployment.

How long this recovery can continue in the face of much global turmoil remains to be seen, but for the time being the major puzzles of the labor market seem to be structural not cyclical.  We will discuss these structural issues in a subsequent post.

empchgm-2016-01-08

oil-2016-01-08
Average hours of work remained at 34.5 and average hourly pay fell slightly to $25.24 from $25.25.

avghours-2016-01-08

epr-2016-01-08

 

compensation-cyc-2016-01-08

 

prod-cyc-2016-01-08 uduration-2016-01-08

udur27-2016-01-08


parttime-2016-01-08

 

beveridge-2016-01-08

November Employment Report: Good Enough

by Thomas Cooley and Peter Rupert

Establishment Survey

The Bureau of Labor Statistics establishment survey for November shows an employment increase of 211,000 jobs, with an upward revision of 27,000 jobs for October and down 5,000 jobs for September.

empchgm-2015-12-04

Average weekly hours fell slightly, from 34.6 to 34.5 and average hourly earning were essentially flat. Since 2009 the BLS also produces data for all private workers, evidently higher than for just production and non-supervisory workers; however, the same basic pattern emerges. The recent climb in real hourly earning stems almost entirely from the decline in inflation as nominal earnings growth has hovered around 2% for the last five years or so.

avghours-2015-12-04

ahetpps-2015-12-04

ahetpreal-2015-12-04

ahepscpiyoy-2015-12-04.png

Household Survey

parttime-2015-12-04The household survey reveals very little significant change  over the past few months. The unemployment rate ticked up ever so slightly…from 5.036 to 5.046, but who’s splitting hairs. The participation rate also ticked up slightly and the employment to population ratio was essentially unchanged. The number of people working part time for economic reasons  popped up by 319,000 but it has been declining steadily for months.  The composition of the unemployed changed slightly with more more new-entrants to the labor force and more re-entrants.  The overall picture is of a recovered labor market with some continuing longer term structural issues.

unrate-2015-12-04

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epr-2015-12-04

parttime-2015-12-04

 

udur27-2015-12-04

Upward Revision to Q3 GDP…Yet Weakness in The Details

By Tom Cooley and Peter Rupert

Today’s release of the second estimate for Q3 by the Bureau of Economic Analysis (BEA) reveals an upward revision from 1.5% in the advance estimate to 2.1% for real GDP.

gdprealchgm-2015-11-24

As pointed out in the release, “The upward revision to the percent change in real GDP primarily reflected an upward revision to
private inventory investment that was partly offset by downward revisions to PCE and to exports.” Personal consumption expenditure was revised down from 3.2% to 3.0%.  The weakness in consumption and the higher than anticipated inventory investment are signs of weaknesses that are confirmed elsewhere.

pcerealchgm-2015-11-24

In our last post we mentioned that what looked like some bad news was not so bad. This time, what looks like good news with the upward revision reveals some troubling signs for the future path of interest rate hikes. It seems that the Fed will do what the Fed will do this December, as there is not much in the way of strong evidence to not raise rates at the next meeting and there is a strong desire to move off the zero lower bound. But weaknesses in the recovery are likely to affect the future path of the federal funds rate. Moreover, this is now quite a “mature” if tepid recovery, as can be seen in the first chart below –  other recoveries had expired this many quarters out.

gdp-cyc-2015-11-24

pce-cyc-2015-11-24

inv-cyc-2015-11-24

rfi-cyc-2015-11-24

nrfi-cyc-2015-11-24

Consumption, investment and its components are all consistent with a continued, but weak, recovery; and this recovery is set in the context of a world economic order that is fragile and changing. Europe has continued to be slow to improve, Japan and China show signs of weakness and many emergent market economies are beset by the falls in commodity prices.

Weakness in Manufacturing

A strong dollar and aggressive monetary expansions elsewhere in the world have contributed to weakness in U.S. manufacturing.  Industrial production has been weak over the past year or so and capacity utilization continues to be below the estimated “boom-bust” level of 82.5.

indpro2015

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Barring a bad jobs report, the weakness in manufacturing is not likely to constrain the Fed from raising rates at its next meeting.  But along with other factors it is likely to constrain the path of interest rates for some time to come.

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