Stagnant Growth Continues

By Thomas Cooley, Ben Griffy and Peter Rupert

The U.S. economy grew at a paltry 1.2% rate in the second quarter continuing a pattern of anemic growth for the past three quarters. The expectations had been fairly high, somewhere around 2.6% growth. The Fed had “left the door open” for a September rate hike. The FOMC announcement on Wednesday suggested a brighter picture than the June announcement. Here the WSJ compares the two statements. Unfortunately the economy didn’t listen! Not only did the  Q2 GDP report  show a 1.2% growth rate for real GDP, the revision for Q1 was revised down from 1.1% to 0.8%. The annual revision to the National Income and Product Accounts (NIPA) was also announced with this release. While there were some upward and downward revisions over the last few years, the upshot was the average annual growth from 2012 through 2015 was 2.2% compared to the previous estimate of 2.1%. The past three quarters have been quite weak, 0.9%, 0.8%, and 1.2% making a September rate hike unlikely.



Today’s report also showed continued strength in consumer spending (PCE 4.2%),
and an increase in exports (1.4%) but weakness in private inventory investment, nonresidential fixed investment (-2.2%), residential fixed investment (-6.1%), and state and local government spending (-1.3%). Imports also decreased (-0.4%).



Also this morning the Bureau of Labor Statistics reported the latest Employment Cost Index. Overall, the 3-month seasonally adjusted index for total compensation for all cilvilian workers climbed 0.6% (2.3% yoy) following a 0.6% climb for the three months ending in March. The wage and salary component was up 0.6% (2.5% yoy) for the three months and the benefits component up 0.4% (2.0% yoy). Compared to the last couple of years the ECI has shown a bit of a hike, again pointing to the strengthening of the labor market.



The dismal performance of GDP combined with a strongish labor market keeps one guessing as to the next move by the Fed. The most-watched signals (GDP, employment, unemployment and  wages) seem not to be in sync, keeping the Fed at bay.  But weakness in both Europe and Asia combined with stagnant U.S. GDP growth may be the dominant factors urging caution. Nevertheless the Taylor rule continues to call for a significant rise.


June Employment Surge

By Thomas Cooley, Ben Griffy and Peter Rupert

After several months of weakening employment growth the establishment survey from the BLS showed that June payroll employment increased 287,000. The employment number for April was revised up 21,000 for a final reading of 144,000. The weak May employment number was revised down 27,000, however, to a mere 11,000.


Private sector employment was up 265,000 and government up 22,ooo. Almost all of the increase was in private service producing, however, up 256,000. Manufactuing employment rose only slightly, up 14,000 and construction employment was unchanged. Mining and logging employment continued to contract, losing another 5,000.

Mike Feroli observes that, “The swing between the May and June headline payroll numbers only looks extreme by modern standards. Over the past five years the standard deviation of monthly jobs adds was the lowest in the history of a series going back to the 1930s.” Here is a picture of the monthly changes going back as far as the data permit:


Of course that is a lot of data to see, here it goes back to only 1986:


And one more from 2010 on:


The data do show there appears to be decline in volatility and somewhat of a slowing down in employment growth over the past year and half or so and has likely given the FOMC reasons to not act.

The workweek held steady at 34.4 for the fifth straight month and average hourly earnings showed only a slight increase, from $25.59 to $25.61.


The household survey saw an increase in employment of only 67,000 however. With an increase in the civilian labor force of 414,000, the participation rate climbed 0.1 to 62.7 , the employment to population ratio fell from 59.7 to 59.6 and the unemployment rate moved up from 4.692% to 4.899%.




Productivity for the first quarter fell 0.6% at an annual rate, with output increasing 0.9% and hours up 1.5%. This is the second consecutive quarter of a productivity decline, with 2015 QIV falling 1.7%. Compared to other cycles, while productivity has appeared fairly weak, it had been growing at a pace similar to other cycles for the first several years coming out of the recession but then tapered off to a much more moderate growth rate.



The strength of this employment report keeps hopes alive for a rate increase by the FOMC before year end, although later rather than sooner.

Tepid Growth for Q1 GDP

By Thomas Cooley, Ben Griffy and Peter Rupert

Today’s announcement of a 1.1% increase for the final estimate for Q1 real GDP from the BEA produced a small upward revision from the second estimate (was 0.8%), but more than doubled the advance estimate (was 0.5%). While the upward revision was certainly welcome, the overall picture is still one of weak growth overall. gdprealchgm-2016-06-28

Consumption spending drove most of the increase in growth,  personal consumption expenditures grew +1.5% and the services component at +2.1%. Gross private domestic investment declined -1.8% and has declined for three consecutive quarters. Nonresidential structures and equipment fell substantially, -7.9% and -8.7%. Residential structures, on the other hand, grew at its highest rate in over two years, +15.6%.

The weak-ish growth and the Brexit have contributed to the overall global uncertainty concerning future growth–and future policy. The dollar-pound exchange rate fell to its lowest level in about 30 years, as of this writing on July 1, it is 1.33 dollars per pound. Not to mention England lost to Iceland 2-1 (which we term “Brexit II”)!


The real effects of Brexit will take some time to sort out. How the EU reacts remains to be seen. In the short run, however, uncertainty can have real effects. Investment is likely to decline in both the UK and EU given the uncertainty surrounding future policy, such as tariffs and labor mobility. But note that tariffs and immigration controls are policy choices. If free and open trade and open borders benefit the citizens of the two areas then the choices by government should reflect that. However, as Chancellor Angela Merkel remarked, “Whoever decides to leave that family cannot expect all obligations to be omitted while keeping its privileges.”

Within the US, Brexit has been influential in causing the Fed to taper its stated goals of two interest increases during the year. Given the uncertainty surrounding Brexit and the EU, as well as the upcoming presidential election, this seems prudent. As the economy has been displaying tepid progress over the past few months in the United States, we can only hope that Brexit is not the final push for a teetering US and global economy.

The May Jobs Report Stifles Optimism

By Thomas Cooley, Ben Griffy and Peter Rupert

In recent weeks there has been increasing optimism about the strengthening U.S. economy based on increases in consumption and improvements in the housing sector.  This was accompanied by increasing chatter about a possible June or mid-summer rate increase by the Fed. The latest jobs report throws cold water on that optimism. The Bureau of Labor Statistics announced that payroll employment increased only 38,000 in May, the smallest increase since June of 2011. Of the 38,000 increase 25,000 was in the private sector. In addition, there were downward revisions to the previous two months totalling 59,000; down 22,000 in March and 37,000 in April.





The service sector was the driver of the increase, up 61,000, and almost all of that in health care, up 55,400. Mining employment continued its decline, down 11,000 after falling 26,000 over the previous two months.

Average weekly hours has been stuck at 34.4 for the past three months and average hourly earnings showed almost no change over the month, $25.54 in April and $25.59 in May.


The household survey from the BLS shows a 458,000 decline in the labor force (employed plus unemployed), and the number of persons unemployed fell by 484,000, leading to an  unemployment rate decline from 4.98% to 4.69%. The employment to population ratio held steady at 59.7.



These tepid results may be a delayed reflection of the slow growth in the first quarter and it may be the Q2 will continue to look stronger.  It does suggest that the Fed may scale back its intentions to continue to raise interest rates above the zero lower bound. In addition, slowing wage growth implies that inflation may flag as well, further depressing the nominal interest rate. There will undoubtedly be calls for more direct fiscal stimulus in the form of infrastructure investment to counter the low rate of investment and job growth. But that is unlikely to be forthcoming in an election year and given the increasing debt/gdp of the U.S..

As the rest of the world has stagnated, the United States has been the largest source of growth over the past few years. With poor employment reports over the past few months, it is unclear whether the US economy is strong enough to continue to be the global driver of growth.


Labor market adds to weak outlook

Labor market adds to weak outlook

By Thomas Cooley, Ben Griffy and Peter Rupert

The Bureau of Labor Statistics provided some additional bad news with employment increasing only 160,000 for the month of April. The private sector gained 171,000 however, with government shedding 11,000. Moreover, previous estimates were also revised down,  March 208,000 from 215,000 and February from 245,000 to 233,000. Mining employment continued its decline, down 8,000. empchgm-2016-05-06

Average weekly hours were up from 34.4 to 34.5 and average hourly wages ticked up.

The household survey also provided evidence of weakness: the unemployment rate remained essentially unchanged at 4.99%, the labor force fell 362,000 and the participation rate fell by 0.2%.


The household survey and establishment survey moved in decidedly different directions, with employment from the household survey falling 316,000.



Get every new post delivered to your Inbox.

Join 358 other followers