April Employment Report

By Thomas Cooley and Peter Rupert

The release of April’s employment report from the BLS showed an increase in payroll employment of 211,000, with 194,000 of that from the private sector. An upward revision of 13k for February and a downward revision for March of 19k nearly offset each other. There were only a couple of small declines throughout the major sectors. In the goods producing sector, durable goods fell 3k and in the service producing sector, employment in information fell 7k, the third consecutive decline in that area.


Mining and logging employment (mainly oil) has increased for the sixth month in a row although still about 6% below the level in 2008.



Average weekly hours of work rose from 34.3 to 34.4 and has been bouncing between the two since March, 2016. Average hourly earnings rose 0.3% from $26.12 to $26.19.



The household data showed little change in the labor force, up 12k, while then number of persons unemployed fell by 146k, leading to a decline in the unemployment rate from 4.496 to 4.404, the lowest in about a decade.

While the Fed seemed to brush off a weak Q1 GDP report, then stating, “Job gains were solid, on average, in recent months, and the unemployment rate declined,” kept the door open for a possible rate hike at the next meeting. However, while job gains are “solid” the trend over the past several months points to a slightly weakening labor market. The question for policy makers is: Was the recent Q1 weakness transitory or, in combination with the downward trend in employment, has the economy weakened?



Weak Q1 GDP Growth

By Thomas Cooley, Ben Griffy and Peter Rupert

The advance estimate from the Bureau of Economic Analysis shows the weakest GDP growth in three years…although 2015 Q4 (0.9%) and 2016 Q1 (0.8%) were nothing to write home about.


Consumption (lack of) played a large role in the decline, only up 0.3%, along with a $39.2 billion decline in inventories. This is clearly at odds with the surge in consumer and business sentiment following the election of Donald Trump. That optimism about the economy has yet to translate into real improvement. The deeper issue is whether the first quarter weakness will spill over into the second.  Most observers think not although we are probably not on track for growth greater than 2%.


On the positive side, investment expenditures came in strong, both non-residential and residential. Overall, fixed investment was up 10.4% with non-residential structures up 22.1%, equipment up 9.1% and intellectual property products up 2.0%. Residential investment was also quite strong, growing 13.7% in the first quarter.


Government consumption expenditures and gross investment was down 1.7%, the main contributor to the decline was national defense spending, down 4.0%. State and local government was also down 1.6%.



While the weak GDP report along with the earlier weak jobs report may lessen the resolve for the Fed to move aggressively on rate hikes, the recent surge in employment costs may be signaling a tight labor market.


Underwhelming Job Growth

By Thomas Cooley, Ben Griffy and Peter Rupert

The BLS announcement of a 98,000 increase in payroll employment for March was far below expectations. Moreover, both the January and February employment growth numbers were revised down, -22,000 and -16,000, respectively. Many forecasters estimated job growth between 180,000 to 200,000, especially given the 236,000 increase from the ADP report. The household employment numbers shot up 472,000.



There was a decline in the number of unemployed persons, down 326,00. while labor force participation held steady at 63% and the employment to population ratio increased slightly from 60.0 to 60.1. Combined, these changes led to the headline unemployment rate ticking down to 4.5%




Average hourly pay rose from $26.09 to $26.14 while weekly average hours of work remained at 34.3 for the second consecutive month.


Other indicators of economic health, like the composition of jobs, suggested improving conditions: part-time for economic reasons fell by 151,000, while the number of marginally attached workers fell by nearly 150,000. In combination, it seems that conditions have improved for those without strong ties to the labor market. The composition of the unemployed continued to show signs of improvement.


Where The Jobs Are

The employment gains were largely in the service producing sector, up 61,000 despite a 29,700 decline in retail trade. Professional and business services was the largest gainer in the services sector, up 56,000. Construction jobs increased by 9,000.






Upward Revision to Q4 GDP

By Thomas Cooley, Ben Griffy and Peter Rupert

The third and final estimate of Q4 GDP growth reveals an upward revision from 1.9% in the advance and 2nd revisions to 2.1%. The increase came largely from a full one percentage point increase in PCE, from 2.5% in the advance estimate to 3.5% in the 3rd.



Fixed investment was revised down slightly, from 9.4% to 9.2% with a fairly large downward revision to intellectual property rights, falling from 4.5% in the 2nd estimate to 1.3% in the final. Non-residential fixed investment grew at 0.9% while residential grew at near double digits, 9.6%.



Exports fell by 4.5% while imports shot up 9.0%, leading to a large decline in net exports.


With the final estimate now in for real GDP, 2016 growth was the slowest since coming out of the Great Recession, 1.6% (tied with 2011).



Fed Raises Interest Rates On Strong Jobs Report

By Thomas Cooley, Ben Griffy and Peter Rupert

The Federal Reserve, as expected, increased the target Federal Funds rate by 25 basis points today in a sign the monetary policy is returning to normal after years of historically low interest rates. With inflation near the target level and continued strong employment growth the stage was set for the FOMC to continue pushing up the Federal Funds Rate and Fed officials for the past few weeks have been signaling strongly that a rate hike was imminent. Todays announcement set expectations for two more rate hikes this year conditional on the data.

The last compelling piece of evidence fell into place with the release of the establishment survey  last Friday by the BLS.  It showed continued strength in the labor market. Payroll employment increased 235,000, with gains spread across almost all sectors. Retail trade, however, was down 26,000 and employment in motor vehicles and parts declined by 8,000. The private sector added 227,000 and government added 8,000. The mining sector (oil and gas mainly) added 9,000. Payrolls were revised up 11,000 in January and down 2,000 in December.




Average weekly hours remained at 34.4, although the index of aggregate weekly hours increased 0.2%. Average hourly earnings moved up slightly, from $26.03 to $26.09.


The household survey admitted a surge in employment of 447,000.  The employment to population ratio also increased, from 59.9 to 60.0. The labor force participation rate increased, from 62.9 to 63.0 as a result of a 340,000  increase in the labor force. The number of persons unemployed dropped by 107,000, leading to a drop in the unemployment rate from 4.78% to 4.70%. In addition, the number of persons unemployed more than 15 weeks dropped by 184,000.



This is a remarkably healthy picture of the labor market, a contrast to the way it was depicted by the President Trump prior to his election.  But our analysis of the election results in November highlighted the importance of manufacturing job losses for Trump’s victory.  His primary message to voters was a promise to save and create traditional blue collar jobs. In this and subsequent posts we are going to track where the jobs are being added with the goal of providing a more nuanced picture of how the labor market evolves under this administration.

Where the Jobs Are

As a starting point it is useful to note that for several decades employment growth has been dominated by increases in service sector jobs. Manufacturing jobs have been in secular decline as a share of the labor force. That is the underlying reality of this economy.


Against this long term background, we can contrast recent employment growth in what are traditional blue collar jobs – manufacturing, construction, mining. Manufacturing has not recovered from the decline following the great recession, while construction has been steadily rebounding from it’s trough.  Mining, which includes the energy sector, rebounded rapidly from the recession, driven by high oil prices, and has since collapsed as prices fell.  The least volatile component of employment is services, rebounding steadily since 2009. Although much attention has been focused on manufacturing and other traditional blue collar jobs the blue collar jobs of this economy in the future are in the service sector – in health care, retail and the like. So it is misleading to focus only on the traditional blue collar jobs.



Ultimately, the test of this administration will be how many jobs it generates relative to the working population. There is no perfect indicator of this, but one useful benchmark is the employment to population ratio.  In the graph below we show how the employment to population has evolved over various presidential regimes. The clear champion job creator was Ronald Reagan followed by Bill Clinton. In subsequent posts we will track how the current administration compares as well as tracking where the jobs are created.