The Labor Market Recovery Continues

By Thomas Cooley and Peter Rupert

The preliminary establishment data released by the BLS for October shows strength  across the board in the labor market. Employment rose by 271,000 in October, and 268,000 of those were in the private sector.  Average weekly hours increased, the employment population ratio increased and the labor force participation rate stayed flat, although these two measures remain at historically low levels.





Earnings and Productivity

Another encouraging sign is that average hourly earnings and productivity both increased slightly, suggesting that competitive forces are beginning to assert themselves.



The Unemployed and The Underemployed

In addition to the improving jobs and compensation numbers there is evidence that  long duration unemployment is declining and the numbers of those that are employed part-time for economic reasons are declining.



The Labor Market and the Fed

The business press and economic pundits all view this strong jobs report as erasing one of the remaining justifications for the Fed’s reluctance to normalize monetary policy and begin raising rates. That may very well be true but it doesn’t mean that the labor market has emerged from the long shadow cast by the great recession. The recession inflicted lasting damage to the labor market, damage that is revealed in the continuing low participation rates and more importantly in the deterioration of the market’s ability to match workers with jobs as is suggested by the outward shift in the Beveridge Curve for the U.S.  These problems are long term and structural and not likely to be solved by monetary policy.


It May Sound Disappointing But It’s Not!

By Thomas Cooley and Peter Rupert

The Bureau of Economic Analysis released the advance estimate for GDP the day after the October meeting of the FOMC. Kind of bad timing…would the FOMC statement have been the same after knowing GDP in the 3rd quarter increased by just 1.5%? Most prognosticators expected a large drop in GDP growth compared to Q2, so the weakness was not entirely unexpected. In fact the fundamentals of the GDP report were not disappointing at all if you look at the composition and were not so far off Q2 results. But, markets will take some time to digest what it all means and what it means for liftoff. The way we read the numbers, there is very little reason for the “data driven” Fed to wait.


While the headline GDP growth number was lower than in Q2, the components of final demand were strong. Personal consumption expenditures grew at a 3.2% clip after climbing 3.6% in Q2. The contribution of gross private domestic investment to GDP growth fell by .9%, caused by a small decline in nonresidential structures and a big decline in inventories. Weaker exports were also a factor.




What next?

It is clear that the U.S. economy is continuing to grow. That consumption and basic investment are strong is a sign that the domestic fundamentals are pretty strong. Real disposable personal income increased by 3.5%. Declines in the energy sector have held back investment in non-residential structures and equipment and that doesn’t promise to improve in the near future.  Most of the uncertainty and worry are  external. The biggest worry is about the much discussed slow-down in China and the knock-on effects that has for other commodity exporting nations like Brazil and Australia, as well as continued slow growth in Europe and Japan.  The world economy is not booming and that raises the legitimate question of what our expectations should be and what considerations should guide Fed policy. At the moment they seem to be operating on the basis of a “first do no harm” principle. There is a growing chorus of people who believe that they are doing unseen harm by not normalizing monetary policy. There will be a couple more employment reports and the second estimate of Q3 GDP before the next FOMC meeting in mid-December, so time and data will tell!

Do these data surprise the Fed?

By Thomas Cooley and Peter Rupert

Today’s release of the employment situation shows a modest increase in employment of 142,000. Moreover, employment over the past two months was revised down by a total of 59,000 (22,000 for July and 37,000 for August). While the mining and logging sector (oil) continued to shed jobs, manufacturing employment was down for the second month in a row; falling 9,000 in September after falling by 18,000 in August. Although the housing sector has shown some growth, construction employment is still lagging. Average weekly hours also fell back to 34.5.






The household survey also had a weak flavor to it. The unemployment rate stayed at 5.1%, but the labor force fell by 350,000. The employment to population ratio also fell to 59.2.




Last week, the third “estimate” of real GDP for the 2nd quarter of 2015 shows  that output of final goods and services grew by 3.9% at an annual rate compared to 3.7% from the 2nd estimate. There was no change in the final estimate of 1st quarter GDP, remaining at 0.6%.  Personal consumption expenditures (PCE) was the largest contributor, providing 2.42 percentage points of the 3.9% gain.



Chairperson Yellen’s remarks on September 24 mentions again that they could (expect to?) raise rates by the end of the year:

Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter. But if the economy surprises us, our judgments about appropriate monetary policy will change.

The last sentence in the Yellen quote once again provides an out for the Fed not to do anything. It is the nature of the beast that quarterly or monthly outcomes can be much different from the trend without signaling a change in direction. That is, if in the next employment report there is a slight uptick in the unemployment rate, or an employment change of say only 100k workers, will that dissuade members of the committee? There is (almost) always something in a given report, GDP or employment, that can be read as surprising. Perhaps non-residential investment is particularly low, for example. Here are the numbers for the annualized percentage change in non-residential structures over the past six quarters, i.e., starting in 2014Q1: 19.1%, -0.2%, -1.9%, 4.3%, -7.4%, 6.2%. And this for equipment over the same time period: 3.5%, 6.5%, 16.4%, -4.9%, 2.3%, 0.3%.

The bigger question is whether the economy is in a sustained recovery or have we hit a rocky spot giving the Fed further pause? That said, a return to normal monetary policy that begins to eliminate some of the distortions caused by several years of zero interest rates would seem to be beneficial and it is surprising that the FOMC did not see it that way.

No Excuses…Or Are There?

by Peter Rupert

The moment of truth concerning liftoff is upon us as the FOMC makes their decision and delivers their verdict tomorrow. With the release of the latest Job Openings and Labor Turnover Survey (JOLTS) and the previous employment report, it appears the labor market is firing on many, if not all, cylinders. The JOLTS data reveal both the highest level (about 5.7 million vacancies) and rate (3.9%) of job openings since the series began in December of 2000.



The unemployment rate is also quite low and the Beveridge Curve (a plot of vacancies vs. unemployment) is now looking much healthier after its typical counter-clockwise journey. Many of the previous statements from the meetings suggested that there was still some slack in the labor market, but it was dissipating. With vacancies as high as ever it appears that businesses are in hiring mode big time…but, inflation is not in sight.




So, the question is: When is the right time? Financial markets are volatile for sure; however, to what extent has Fed policy fed into the volatility? The rest of the world has its problems, but many areas will continue to be problematic for some time to come, see our commentary here.

If the FOMC does not raise rates today, here is what they will likely say: “While labor markets appear to have reduced slack, there is little evidence of inflation. The rest of the world is still in turmoil.” And if they do raise rates, “Labor markets have continued to recover and are now near levels thought to be in the target range. While global markets are still somewhat fragile, the evidence in the US suggests that the current stance of policy is not in line with normal policy.”

August Employment…Keeps US Guessing

by Tom Cooley and Peter Rupert

The Bureau of Labor Statistics establishment survey for August revealed a somewhat expected, yet somewhat disappointing, 173,000 employment increase. Upward revisions totaling 44,000 over the past couple of months took some of the edge off of the disappointment. Private employment posted only a 140,000 gain, however, and government continued to climb, up 33,000. Goods producing declined by 24,000, with manufacturing down 17,000 and mining and logging down 10,000. Given the tendency for the August numbers to be revised upwards this report is in keeping with previous months and is not likely a sign of weakness in the economy.




Hours and Wages:

The average workweek ticked up to 34.6 after three consecutive months at 34.5. Average hourly earnings were also up slightly.




From the household survey, the number of unemployed fell by 237,000; however, the labor force was also down, 41,000, leading to a decline in the unemployment rate to 5.1% and no change in the labor force participation rate at 62.6. This is really the major conundrum for the U.S. economy. Labor force participation is at a forty year low. The employment to population ratio has picked up slightly but not anywhere near enough to reverse the precipitous drop during the Great Recession.  The low participation rates suggest there are many workers who have been effectively disenfranchised by the Great Recession which continues to cast its long shadow over the economy.  But these are now structural issues not cyclical ones.



The number of people unemployed less than 5 weeks fell by 393,000 while the number unemployed 27 weeks or more rose 7,000; again showing that the issues seem more structural than cyclical.



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