Update – Third Quarter Revisions

Welcome to the Cooley-Rupert Economic Snapshot – our view of the current economic environment. As in previous snapshots we present the data in a way that we find particularly useful for assessing where we are in the business cycle and tracking the U.S. economic recovery. The paths of all the series presented are plotted relative to the their value at the peak of the respective business cycles. We use the business cycle dates identified by the National Bureau of Economic Research.


As before, we present the data in four sections. The first summarizes the path of Gross Domestic Product and its components. This post features revisions to third quarter GDP and its components released by the BEA. We also present the most recent labor market data and the summary of activity in credit markets. The final section summarizes the features of industrial production and inflation.

As always we welcome any suggestions for additional data that you would like to see and suggestions for how to improve the presentation of the data. Click here to go to the latest snapshot in one pdf document.

Third Quarter Revisions – A More Sluggish Recovery

The most recent GDP numbers include the revisions of preliminary data on economic activity for the third quarter. The revisions scale back the more optimistic assessment of the preliminary number and now place annual GDP growth at 2 percent per annum rather than the 2.5 percent previously estimated. There is still no evidence that we are slipping into a double-dip recession but the economic turmoil in Europe and the fiscal uncertainty in the U.S. remain powerful countervailing forces for the recovery.

The third quarter downward revisions were due in large part to changes in inventories. There were also small downward revisions to other components of investment. Some observers interpret this in a positive light implying better inventory management and increased fourth quarter production. Others view it as reflecting the uncertainty and pessimism over the global economic turmoil.

Once again the glaring Albatross is Fixed Private Residential Investment that continues to be completely stagnant, bouncing along at a level that is 40% below the previous peak. To repeat the thought experiment from our previous blog, GDP is roughly $15 trillion and Gross Private Domestic Investment is roughly $1.9 trillion or 12.6% of GDP. Private Residential Fixed Investment is just over $300 billion more than $300 billion below its business cycle peak and nearly $500 billion its own peak. Since there is currently no compelling scenario under which residential investment is likely to recover this will continue to drag down the economy for many quarters to come. In no other post 1970 recession did it fall so far and continue to stagnate nearly four years since the recession began. The last time residential investment was this low was in 1996 when GDP was slightly more than half what it is now.

One encouraging sign is that policy makers and pundits have returned their attention to strategies for directly addressing the problems of the housing sector and the vast number of underwater and non-performing mortgage loans. At the outset of the housing crisis there were many proposed strategies to address these problems. They turned out to be either unworkable solutions, ineptly implemented, or they were ignored. Perhaps this time will be different, but the initial indicators are not encouraging.

Investment in Equipment and Software continues to improve but it would have to be nearly a third larger to counter the decline in residential investment. Exports are increasing and Imports are evolving in a way that is typical of previous recessions.

The Labor Market

The latest employment situation report from the BLS shows a net addition of 80,000 non-farm jobs in October. The unemployment rate declined slightly to 9.0%. While the 80,000 figure is really nothing to write home about, the revisions to August and September were substantial. Prior payrolls were revised higher for both August (104,000 from 57,000) and September (158,000 from 103,000). Private sector jobs increased by 104,000 and the government sector continued to shrink, losing another 24,000 jobs. Construction continues
to get hammered, losing another 20,000 jobs. Since May the construction sector has been see-sawing up and down, but on net has shed 1,000 jobs. The employment to population ratio continued to slowly creep up. However, there was virtually no change in the labor force participation rate. The number of long term unemployed (27 weeks and over) fell
by 366,000.

As we noted in a previous post, the dating of business cycles by the NBER is based on a mixture of evidence that often includes reference to the labor market. Indeed, when the NBER dating committee dated the beginning of this past recession, they made it clear that the labor market was a key variable in their decision, as can be seen here. However, when the committee announced the trough there was no mention of the labor market, which has not shown any signs of recovery. Indeed, the paths of the employment/population ratio and the labor force participation rate make the strongest case for concern about a double dip recession.

In this post we take a deeper look at the labor market, including data on Aggregate Hours of work and the duration of unemployment. Aggregate Hours captures changes in both the extensive margin of labor force adjustment (employment), and the intensive margin (hours of work). Many believe this offers a more accurate picture of the economy …and the picture is grim. The data on the duration of unemployment is particularly discouraging.

We also include data from JOLTS, the Job Openings and Labor Turnover Survey. JOLTS data shows more refined features of the labor market and permit comparison to the 2001 business cycle. The JOLTS data confirms what the latest jobs report shows – modest improvement in the labor market. There has been an increase in vacancies, and an increase in quits. Both of these suggest that the labor market is beginning to show more flexibility than in the last several months. In fact while the level of openings and quits are still well below their value from December 2007, the start of the cycle, they closely track the trend from the 2001 cycle. The changes are modest but encouraging.

The Credit Markets

Credit markets continue to show the after-effects of the tremendous increase in leverage the took place prior to the 2007-2009 crisis. Households are continuing to reduce their debt and at an increasing rate. Corporate sector borrowing continues to improve and is following a path that is typical of prior recessions. The big story in credit markets is the dramatic shift of leverage to the public sector. Public sector debt outstanding is reaching levels unprecedented in the post-war economy.

Industrial Production and Inflation

In this section we present some plots of miscellaneous series that reflect other characteristics of this business cycle. The decline in industrial production is dramatic. There is no evidence of inflation or deflation.

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