August Employment not august

By Thomas Cooley, Ben Griffy and Peter Rupert

Employment from the establishment survey reported by the BLS increased 151,000, nearly all of which was in the private service sectors, increasing 150,000. The goods producing sector decreased 24,000, roughly offset by government employment, up 25,000.
Manufacturing employment has shown considerable weakness since 2015, while the service sector has continued to show strength. Education and health services along with leisure and hospitality posted the largest gains of the subsectors. Revisions were pretty much a wash: down 21,000 for June and up 20,000 for July.




Average weekly hours fell to 34.3 after six straight months at 34.4. Labor force participation and the employment population ration were essentially unchanged.


The household survey wasn’t encouraging either. Employment, according to the household survey, increased only 97,000 and the unemployment rate ticked up slightly from 4.88% to 4.92%. The number of unemployed persons increased as did those not in the labor force. The number of people working part-time for economic reasons increased for the second straight month, but the number of people marginally attached to the labor force trickled down.

The problem the markets now face is that this report only increases uncertainty. The FOMC has been suggesting of late they seem to be favoring a rate increase sooner rather than later. Over the past three months employment increases have average 232,000 jobs a month but the most recent numbers are softer. If this had been a stronger report a rate increase would have certainly been likely this year. It may still be but it is likely that the Fed will wait for more indications. The CPI for July was unchanged and for the previous year up only 0.8.  If the economy keeps going sideways the Fed has a quandary: clearly they would like to get on more normal path, but the sluggish economy and global uncertainty have forced tepid policy responses until the storm quiets.

Q2 GDP Revised Down…Just a Bit

By Thomas Cooley, Ben Griffy and Peter Rupert

Today’s revised estimate of Q2 GDP from the BEA saw only a small downward revision that did little to change the economic outlook. The advance estimated growth of 1.2% was revised down to 1.1%. Personal consumption expenditures continues to be the main driver it appears, contributing 2.94%, while there was also a smaller decrease in private fixed investment. Although, investment overall has continued to look weak.




The general weakness, PCE aside, will almost certainly keep the Fed sitting on their hand this September.

Yellen’s Jackson Hole Remarks:

Federal Reserve Chairwoman Janet Yellen spoke at the annual meeting in Jackson Hole this morning (link to transcript). Entitled “The Federal Reserve’s Monetary Policy Toolkit: Past, Present, and Future,” she focused on whether the current monetary tools are adequate for future downturns. Most specifically, she points to the ability of the Federal Reserve to affect the quantity of reserves held by banks. After the government pumped extra liquidity into the market following the Great Recession, the previous policy tool (changing the volume of reserves offered by the Fed in the overnight market) would have been dwarfed by the reserves available from banks. To prevent this from happening, the Congress implemented a policy in October 2008 to allow interest to be paid on reserved held by banks. The results have been nothing short of astonishing:reserves-2016-08-27.png

Yellen made the case for a gradually rising Federal Funds rate conditional on economic conditions continuing to strengthen.  This strengthened the prospect that we will see further rises this calendar year.  All told, the prospect seems to be for gradual improvement of the economy as reflected in the steady improvement in employment and wages, but no major moves in the Fed’s policy stance or targets.

July Employment: Strength in Numbers

By Thomas Cooley, Ben Griffy and Peter Rupert

The Bureau of Labor Statistics announced that non-farm payroll employment for July increased 255,000, beating the “expected” job gains of 180,000. In addition, both May and June were revised up, 13,000 and 5,000, respectively. The bulk of the gains came from service sector jobs, up 201,000 with the majority of those in business and professional services.Employment in manufacturing (+9,000) and construction (+14,000) rose while  mining continued its decline (-7,000), consistent with continued weakness in the energy sector and oil prices.




The continued strength in the labor market also showed up in an increase in average weekly hours and average hourly earnings.  Earnings are now increasing at a rate of over 2.5% year over year.


Labor market dynamics from the household survey revealed an encouraging increase in labor force participation and employment and a decline in the number of persons unemployed, resulting in essentially no change in the unemployment rate at 4.89%. This means that fewer people are sitting on the sidelines. While the news is, on the whole, positive, the number of persons unemployed more than 27 weeks increased for the third straight month.



The big puzzle is how to reconcile the continued strength in the labor market  with the very weak GDP growth reported last week and how the parse the impact of this on the decision making of the Fed.  Most likely the reason for these diverging signals will be become clearer over the next few months. The widespread view is that the continued strength of the labor market makes it likely that there will be a rate increase in 2016, although the weak GDP numbers will keep the market guessing.


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.