Do We Have Liftoff?

by: Zach Bethune, Thomas Cooley, Peter Rupert

The minutes for the June 17-18 meeting of the FOMC revealed a discussion about the end of bond purchases in October but only a vague notion of when liftoff might occur. Many believe that “slack” labor market conditions are still a concern:

In assessing labor market conditions, participants again offered a range of views on how far conditions in the labor market were from those associated with maximum employment. Many judged that slack remained elevated, and a number of them thought it was greater than measured by the official unemployment rate, citing, in particular, the still-high level of workers employed part time for economic reasons or the depressed labor force participation rate.

The first estimate from the BLS establishment survey reports total non-farm employment increased by 288,000 in the month of June and  the prior two months have been revised up by an additional 29,000. Here are our takeaways:

Monthly employment growth continues to be strong(ish).


The employment gains were broad-based.

All major BLS sectors (goods, services and government) added jobs in June. The next two charts illustrate these gains. The width of the bars represents the weight of each industry in total employment. For instance, employment in trade, transportation and utilities represents about one-fifth of all U.S. employment whereas industries like information or mining make up a much smaller fraction.


In June, every industry with the exception of ‘other services’ added jobs. As you would expect from a healthy labor market, the largest job gains predominantly came from the largest sectors with trade, transportation and utilities and professional and business services adding a combined 139,000 jobs.


Over the year, the story is similar. The largest four private sector industries have led the growth in employment. Of course government is a glaring exception.

Unemployment dropped for (almost) all the right reasons.

The unemployment rate dropped to a post-recession low of 6.1%, and it dropped for all the right reasons because the unemployed found jobs instead of leaving the labor force. Both the labor force participation rate and the employment to population ratio held steady. The only cautionary note is that a large number of the job gains were from involuntary part-time jobs. These are households that would like to have a full-time position, but could only find part-time work.

The recent trend in the job finding rate, those going from unemployment to employment, since the beginning of the year continued. The largest gains were recorded from the short-term unemployed workers.


The index of average weekly hours for private sector employees has continued to climb steadily.

Unemployment and unemployment claims continue to fall.

The unemployment rate and the “U6″ unemployment rate (Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force) have fallen substantially, yet remain elevated relative to pre-2007.



Initial claims are now near their pre-2007 level.


Job vacancies have shot up lately.

According to the Job Openings and Labor Turnover Survery (JOLTS) job openings have shown a large spike up. The hiring rate, however, is still somewhat subdued.



But long-term unemployment remains a problem.

The fact that mean unemployment duration has risen much more than the median indicates there are many more unemployed for 27 weeks or longer.


Wage growth has been tepid.

Nominal wage growth has slowed and real wages grew mainly due to a fall in inflation…but due to the recent tick up in inflation, real wage growth is close to zero.

Again, from the FOMC minutes:

Aggregate wage measures continued to rise at only a modest rate, and reports on wages from business contacts and surveys in a number of Districts were mixed. Several of those reports pointed to an absence of wage pressures, while some others indicated that tight labor markets or shortages of skilled workers were leading to upward pressure on wages in some areas or occupations and that an increasing proportion of small businesses were planning to raise wages. Participants discussed the prospects for wage increases to pick up as slack in the labor market diminishes.


A Dismal^2 Q1 Final GDP Report

by Zach Bethune, Thomas Cooley and Peter Rupert

Final Revision to Q1 GDP: UGH!

Yesterday the BEA announced another large downward revision to first quarter GDP growth from -1.0% to -2.9%. The final estimate was primarily attributed to downward revisions in consumption (3.1% to 1.0%) and exports (-6.0% to -8.9%). In addition, there was a major hit to the late-2013 inventory overbuild and construction.



All of this, obviously, leaves the FOMC and the administration in a tough position. While many analysts recount weather-related setbacks and changes in depreciation allowances (such as I.R.C. 179), there is certainly real concern that the weakness is, well, weakness.  Before the downward revisions, the weak Q1 GDP figures were already on the Fed’s mind. From Janet Yellen’s congressional testimony on May 8 (emphasis added):

“Although real GDP growth is currently estimated to have paused in the first quarter of this year, I see that pause as mostly reflecting transitory factors, including the effects of the unusually cold and snowy winter weather. With the harsh winter behind us, many recent indicators suggest that a rebound in spending and production is already under way, putting the overall economy on track for solid growth in the current quarter. One cautionary note, though, is that readings on housing activity–a sector that has been recovering since 2011–have remained disappointing so far this year and will bear watching.”

Real private domestic investment, after having just reached its levels from December, 2007, has been stagnant of late.  Both nonresidential and residential investment are culprits, though both had upward revisions from -1.6% to -1.2% and -5.0% to -4.2%.  The numbers are nothing to cheer over, but there is also nothing in today’s report should change the Fed’s reading on the housing market from May.





More recently from Janet Yellen’s June 18th press conference (again emphasis added):

Although real GDP declined in the first quarter, this decline appears to have resulted mainly from transitory factors. Private domestic final demand—that is, spending by domestic households and businesses—continued to expand in the first quarter, and the limited set of indicators of spending and production in the second quarter have picked up. The Committee thus believes that economic activity is rebounding in the current quarter and will continue to expand at a moderate pace thereafter.

With yesterday’s large downward revisions to consumption, private domestic final demand is now estimated to have fallen in the first quarter, though more recent data are still in line with higher spending in the second quarter.

It’s not at all clear how much the revision will alter the Fed’s economic outlook or their stance on policy accommodation. The focus is still largely on improvements in the labor market, but a -2.9% Q1 growth rate is far from the FOMC’s latest central tendency projections for 2014 of 2.1%-2.3% growth. So what exactly does the growth rate of real GDP have to average over the next three quarters to be in line with the FOMC’s projection? The answer is 3.77-4.03%. While those rates are not impossible, it remains highly unlikely given the average growth during the recovery, as the figure below makes apparent.


More of the Same for Employment Growth? We Dig a Lot Deeper

by: Zach Bethune, Thomas Cooley, Peter Rupert

The establishment survey reports total non-farm employment increased by 217,000 in the month of May and revisions to the prior two months cut  employment by 6,000.   This seems like just another ho-hum increase in jobs in what has been a drawn out recovery.  But there is more to this story when one digs below the surface.  This is a long slow recovery from a sharp contraction and employment has just surpassed its pre-recession level. In the course of this recovery labor force participation has declined to a level not seen since the 1970’s, erasing many of the gains of the increase in female labor force participation.  One consequence of the long recovery is that the duration of unemployment has increased with nearly 35% of the unemployed, or 3.4 million workers, unemployed for 27 weeks or more. Weak labor market conditions and long duration unemployment discourage labor market participation. In this post, thanks to economists at the Bureau of Labor Statistics who shared their data with us, we can drill down  a little deeper and examine how the experience of workers who have been unemployed for long spells compares to the experience of those with shorter spells.



How do employment prospects differ by duration?

The graph below shows the rate at which unemployed workers transition to employment, broken into groups according to how long a worker has spent in unemployment.  Think of this as a job finding rate by duration of unemployment. For example the black line in the figure gives the job finding probability for those workers that have been in unemployment for less than 5 weeks. First, it is always true that workers that spend longer in unemployment have a lower probability of getting a job. Second, the job finding probability is pro-cyclical, it is harder to find a job in recessions and easier in booms.


Focusing on the current recovery, notice that these rates never fully recovered to the levels that prevailed before the 2001 recession – the first jobless recovery.  Not only did the labor market not regain its robustness after that contraction, the transition rate dropped dramatically in the great recession and has not recovered much for most durations of unemployment.

A positive sign is that the transitions to employment for short duration unemployed workers, particularly those that have been unemployed for less than 5 weeks, has ticked up in the most recent data – possibly significantly.  This is where the recovery of the labor market and increasing wage pressures will show up first since these workers are more likely to exit unemployment.  There are very slight increases for those unemployed for longer spells but almost no movement of those unemployed for greater than 27 weeks. When these transition probabilities show a marked upward movement the labor market recovery will be in full swing even though longer duration unemployed may be slow to benefit.


The transitions from unemployment to out of the labor force also tell a more nuanced story.  Clearly the long duration unemployed face declining prospects and are more likely to exit the labor force and these transitions have been rising dramatically. But decisions to exit the labor force are also affected by the duration of unemployment benefits and that shows up in slower transitions as benefits have increased. UU-rate-duration-2014-06-06

We can also look at the transitions from unemployment to unemployment, meaning the rate at which workers stayed unemployed in any given month. This is a reflection of the persistence of the unemployment.  Notice the rate at which workers stayed in unemployment is higher for all durations than in previous recessions meaning that unemployment is much more of an absorbing state.median-duration-2014-06-06

Finally, we can breakdown the median number of weeks that workers spend in unemployment, or the unemployment duration, into the duration for those workers who eventually found jobs and those that exited the labor force. Both have increased dramatically compared to previous recessions and the duration of those transitioning to employment is only slowly coming down.

The figures above highlight the devastating impact of this recession on those unemployed for long spells.


What do we learn by digging deeper?

Looking at the detailed transitions by group lets us see where exactly the labor market is improving by explaining the components that comprise the well known path of unemployment and labor force participation (below).  The long duration unemployed cast a long shadow over the labor market as a whole. Most of the policy action and most of the recovery is going to show up in the improved transition probability of the short duration unemployed.  We see that is finally beginning to show a few green shoots.

For an even more finely detailed look at employment by industry and occupation check out the superb interactive graphics developed by the New York Times.







A Dismal Q1 GDP Revision…

by Zach Bethune, Thomas Cooley and Peter Rupert

GDP Report

The BEA announced in the advance estimate last month that real GDP increased at a s.a.a.r. of 0.1% for 2014 Q1…and the second estimate released this morning revised that down to -1.0%.   Is this just a pregnant pause or are we in danger of sinking into another contraction?  A close look at the details suggest that more likely than not it is just a pause.  Much of the decline was due to a large downward revision to estimates of inventory accumulation in the first quarter.  Inventory accumulation has been a source of strength for the past couple of quarters and the decline of inventories in the first quarter is the counterpart to that.   The revisions to most of the other components of GDP were relatively minor.

Consumption was essentially unchanged compared to the first estimate.  Investment in equipment showed a smaller decline than in the first report and investment in  intellectual property increased significantly in this revision.  Investment in non-residential structures was revised downward significantly .

The interesting question is what does all of this mean for the progress of the recovery?  It is a dismal set of revisions compared to what was already a dismal estimate of first quarter progress.  Is the economy going to be in a prolonged pause or pull itself out?  The only positive indication from this revision is that with inventogdpreal-chg-q-break-2014-05-29ries reduced firms will not have a big hangover of inventories that could hold back production in the second quarter. Many forecasters at the FED and elsewhere are looking for growth rates to climb back toward 3% in the coming quarters following two quarters of dismal growth. The second quarter GDP estimates (not due until July 30th) are going to be the first indicator we have of whether this is just wishful thinking or not.





On a more positive note, initial claims fell 27,000 to 300,000.


April jobs report: More mixed signals.

by: Zach Bethune, Thomas Cooley, Peter Rupert

The establishment survey reports total non-farm employment increased 288,000 and the previous two months were also revised up a total of 36,000 over what was previously reported. Job growth over the year has averaged 190,000 per month. Moreover, the job gains were fairly widespread with service producing jobs leading the way with 220,000 jobs added. Goods producing and government employment showed little change.


The unemployment rate fell from 6.7% to 6.3%.


Some cold water on the report

But is the report really as good as it looks at first blush? Maybe not…average weekly hours of work were unchanged at 34.5 and average hourly and weekly earnings remained flat at $24.31 and $838.70, respectively.


According to the household survey the labor force fell by 806,000 and the labor force participation rate declined from 63.2 to 62.8. Is this decline in the labor force participation rate (and the consequent decline in the unemployment rate) due to discouraged searchers leaving the labor market? Or, is it a longer run trend down in participation rates? According to the household survey employment fell by 73,000.

Some of the decline in labor force participation is attributed to the fact that the long duration unemployed have dropped out of the labor force.  The average duration of unemployment is little changed at 35 weeks and more than 35% of the unemployed are unemployed for 27 weeks or more. Many of the long duration unemployed eventually stop looking for work and thus drop out of the labor force.  This has been an important contributor to the declines in labor force participation.



As often happens, it is possible to use this report to signal strong growth in the labor market or to underscore the real weaknesses in the economy. The takeaway is that the labor market still appears fragile.


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