Final Estimate of 4th Quarter GDP

by: Zach Bethune, Thomas Cooley, Peter Rupert

The third and final estimate of GDP released today by the Bureau of Economic Analysis provides no substantial new information on the growth of the economy…and therefore little to guide us to the future of interest rate changes by the FOMC. The final number for real GDP growth for Q4 is 2.2%, seasonally adjusted at an annual rate.


Since the negative growth rates in 2008 and 2009, real GDP growth has been weak, but fairly steady year to year, 2010: 2.5%, 2011: 1.6%, 2012: 2.3%, 2013: 2.2%, and 2014: 2.4%; but, as noted here and elsewhere, quite slow relative to previous expansions.


Consumption growth received a small boost, as did net exports, but inventories took a hit.


Real investment took about 25 quarters to get back to it 2007 peak, typically taking only about 10 quarters. Residential fixed investment has yet to get back to its peak in 2007, it is still about 14% below that level.






There is still real debate within the FOMC, however. From KC President George’s remarks: “While the FOMC has made no decisions about the timing of this action, I continue to support liftoff towards the middle of this year due to improvement in the labor market, expectations of firmer inflation, and the balance of risks over the medium and longer run. Liftoff in the middle of this year, in my view, would be fully consistent with the FOMC’s Statement on Goals and Monetary Policy Strategy, which reminds the public that monetary policy actions tend to influence economic activity and prices with a lag.” But, Chicago President Evans from a speech in London: “What is my personal view of the appropriate path for Fed policy? I think economic conditions are likely to evolve in a way such that it will be appropriate to hold off on raising short-term rates until 2016.”

In their own words, the future of lift-off will be “data-driven.” When isn’t it?

February Employment Stays Strong

by: Zach Bethune, Thomas Cooley, Peter Rupert

According to the Bureau of Labor Statistics establishment survey, employment increased 295,000 from January to February and has increased by about 3.3 million since February 2014. January employment was revised down slightly by 18,000 and December had no revision.  This continues the trend of strong employment growth consistent with an an ongoing robust recovery.  The unemployment rate fell further to 5.5% average weekly hours were flat and average hourly earnings rose only slightly. 


Job gains were robust, only mining and logging, non-durable goods, and temporary help services saw small declines. Is the decline in temporary help services, for the second month in a row,  a signal of underlying strength in that firms are relying more on full-time workers rather than temps?  Maybe, but, as the chart below shows, as a fraction of total employment, firms use temp help much less during downturns.  Moreover, the use of temp services has doubled relative to total employment since the early 1990’s.


Average weekly hours have remained fixed at 34.6 for the past 5 months after being stuck at 34.5 for the previous 7 months. Average hourly earnings rose only slightly from $24.75 to $24.78.


While the establishment survey provided solid numbers, the household survey provided some mixed messages. True, the unemployment rate fell from 5.7% to 5.5%.


But the labor force fell by 178,000 leading to a decline in labor force participation from 62.9 to 62.8 and no change in the employment to population ratio at 59.3.



The number of persons working part time for economic reasons fell by 175,000, with 165,000 fewer reporting slack work reasons. The number of persons reporting part time for non-economic reasons increased by 15,000.


All of this seems to provide further support for the view that the Fed should begin normalizing monetary policy sooner rather than later. Although recent communications have emphasized the view that they could be “patient,” we expect that language to disappear. The graphs below show the continued strength in the labor market, albeit slower than coming out of previous recessions.



4th Quarter GDP….Downward Revision….Keeps Us Guessing

by Zach Bethune, Thomas Cooley and Peter Rupert

GDP Report
The BEA’s second estimate of 4th quarter GDP trimmed the growth rate to 2.2% from 2.6%. The downward revision will certainly give those more “patient” policy makers additional ammo to sit back and let the dust settle further before making any moves.


Since the recovery began, real GDP has continued a long, slow climb out of the depths. As is evident in the graph below, the growth has been weaker than the typical recovery. Said differently, almost 30 quarters since the previous peak real GDP is less then 10% higher now; however, in the past real GDP was 20-30% higher after 30 quarters from the previous peak.


Meanwhile, a version of the Taylor Rule with unemployment targeted at 6% and inflation at 2% calls out for an increase…and has been for more than 4 years.


However, average hourly earnings growth has been anemic, stuck around 2% since 2010, meaning any changes in real earnings came from changes in inflation. The latest drop in inflation has meant an increase in real hourly earnings of about 2%. As can be seen in the graph below real hourly earnings growth since 2010 spent lots of time in negative territory, rarely hit even 1% and has averaged about zero.


Moreover, five year out inflation expectations are also low.


With no inflation pressures now or later, many on the FOMC likely feel little reason to begin liftoff. Indeed, from Chair Yellen’s remarks to Congress,

In sum, since the July 2014 Monetary Policy Report, there has been important progress toward the FOMC’s objective of maximum employment. However, despite this improvement, too many Americans remain unemployed or underemployed, wage growth is still sluggish, and inflation remains well below our longer-run objective.

While many were thinking that liftoff might begin in the middle of this year, but these words from her testimony imply later rather than sooner,

The FOMC’s assessment that it can be patient in beginning to normalize policy means that the Committee considers it unlikely that economic conditions will warrant an increase in the target range for the federal funds rate for at least the next couple of FOMC meetings. If economic conditions continue to improve, as the Committee anticipates, the Committee will at some point begin considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis.

But recent data have confirmed that falling oil and commodity prices may be masking movements in prices. Core inflation – excluding food and energy – jumped at the last reading and markets reacted.  The FOMC seems to be leery of acting too soon on liftoff but the bigger worry is that the costs of acting too late might be higher.

Finally, from the end of the testimony,

As always, the Federal Reserve remains committed to employing its tools to best promote the attainment of its objectives of maximum employment and price stability.

Good to know, thanks.

Strong January Employment Report

by: Zach Bethune, Thomas Cooley, Peter Rupert

The Bureau of Labor Statistics release of the January jobs report shows continued strength in the labor market, with total nonfarm employment rising 257,000. Moreover, the current increase, along with revisions over the past two months show employment growth averaging 336,000 over the past three months. The revision to November, up to 423,000, was the largest monthly increase since May of 2010.


In addition to the usual monthly revisions, the BLS also undertook annual re-benchmarking:

With the release of January 2015 data on February 6, 2015, the Bureau of Labor Statistics (BLS) introduced its annual revision of national estimates of employment, hours, and earnings from the Current Employment Statistics (CES) monthly survey of nonfarm establishments. Each year, the CES survey realigns its sample-based estimates to incorporate universe counts of employment—a process known as benchmarking. Comprehensive counts of employment, or benchmarks, are derived primarily from unemployment insurance (UI) tax reports that nearly all employers are required to file with State Workforce Agencies.

For those data geeks wanting to know more about benchmark revisions, here is the full article from the BLS. Summarizing that article, “The March 2014 benchmark level for total nonfarm employment is 137,214,000; this figure is 67,000 above the sample-based estimate for March 2014, an adjustment of less than 0.05 percent.” The BLS then uses the re-benchmarked data to revise the rest of the year, “From April 2014 to December 2014, the net birth/death model cumulatively added 968,000, compared with 841,000 in the previously published April to December employment estimates.”

Employment gains were robust, the only major sector to shed jobs was the Government sector, losing 10,000, meaning that Private sector jobs increased by 267,000.

Average weekly hours, however, have shown no change over the past 3 months, stuck at 34.6.

Average hourly earnings ticked up slightly to $24.75, and growth has averaged about 2% per year since 2010, but with CPI inflation running below 2% of late means real hourly earnings are growing, albeit modestly.


While the strong report certainly keeps the Fed on a steady *normalization* pace, there are still areas in the labor market that, if not troublesome, remain nagging issues. While the employment to population took a nose dive during the great recession…and is still quite low relative to its all-time (at least since WWII) peak…


…however, if one zooms in, there has been a steady increase over the past year and a half or so…


Another somewhat nagging issue is the fate of the long term unemployed. Indeed, the number of those unemployed 27 weeks or longer actually rose in January, from 2.785 million to 2.80 million persons. The percent of the unemployed who are unemployed 27 weeks or longer has been bouncing between 31% and 32% for the last six months or so….
udur27a-2015-02-06The number of persons employed part time for economic reasons (or involuntary part-time workers) also didn’t improve in January. There remains 6.8 million individuals who would like to be working full time but couldn’t because the were unable to find full time work or had their hours cut back.


The rate at which these workers are transitioning into full time continues to show no improvement…rate-pter-fter-2015-02-06

…and their wages are declining relative to full time workers.
wage-ratio-2015-02-06It is no surprise that, despite a low 5.7% unemployment rate since October, there is still concern about the health of the labor market.

4th Quarter GDP and Compensation

by Zach Bethune, Thomas Cooley and Peter Rupert

GDP Report
The BEA’s advance estimate of GDP  for the 4th quarter shows a 2.6% increase in real GDP, sharply lower than the 4- 5.0% rises for the 2nd and 3rd quarter. This was below prior estimates and was largely taken by the markets as negative overall. Personal consumption expenditures led the positive side of things, growing at 4.3%, making it the largest contributor to growth. Exports and private nonresidential fixed investment also contributed to the growth. Working against that growth was an increase in imports, growing 8.9%, contributing -1.39 percentage points to the growth. Government spending also saw a large decline.

Although the growth was below the prior quarters, the economy increased at a rate of 2.5% over the prior year.  This continues to be respectable recovery although not as fast as many prior rebounds.  The open question is whether the moderation of the rebound reflects the drag created by the stagnant European and Japanese Economies and the slowing of the BRICS.  The strengthening of the dollar will begin to take a toll on exports over the coming quarters so it remains to be seen if the recovery can pick up any momentum.

gdprealchgm-2015-01-30 gdp-cyc-2015-01-30 pce-cyc-2015-01-30 inv-cyc-2015-01-30


Labor Markets

Also out today is the Employment Cost Index from the BLS. The ECI for all civilian workers increased 0.6% in the 4th quarter. Wages and salaries (70% of compensation) rose 0.5% while benefits (30% of compensation) increased 0.6%. Plaguing some policy makers is the weak response of compensation of employees; however, some are less concerned. From the FOMC minutes of the December meeting:

Although a few participants suggested that the recent uptick in the employment cost index or average hourly earnings could be a tentative sign of an upturn in wage growth, most participants saw no clear evidence of a broad-based acceleration in wages. A couple of participants, however, pointing to the weak statistical relationship between wage inflation and labor market conditions, suggested that the pace of wage inflation was providing relatively little information about the degree of labor underutilization.

Further, they see the recent decline in energy prices as helpful in supporting consumption growth. From Wednesday’s FOMC statement (emphasis added):

Information received since the Federal Open Market Committee met in December suggests that economic activity has been expanding at a solid pace.  Labor market conditions have improved further, with strong job gains and a lower unemployment rate.  On balance, a range of labor market indicators suggests that underutilization of labor resources continues to diminish.  Household spending is rising moderately; recent declines in energy prices have boosted household purchasing power.



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