July 2014 – U.S. Economic Snapshot

by Zach Bethune, Thomas Cooley and Peter Rupert

GDP Report

The BEA advance estimate for real GDP in the 2nd quarter increased at a saar of 3.948% (the BEA has written 4.0% in their actual release). This is a welcome estimate after the negative growth rate in the first quarter. Real GDP is now estimated to have contracted by 2.1% in the First Quarter of 2014. The largest contributions to the turnaround was the swing in investment and a big part of that came from inventories which accounted for 1.5 percentage points of the growth. Consumption increased by a healthy amount after declining in the first quarter.

This is a strong and encouraging report but the larger issue is whether it portends a return to more typical growth rates. Perhaps the biggest topic of discussion among policy makers and observers is whether the U.S. is stuck in low gear and why. GDP is still lagging significantly below its post-war trend of steady 3% growth and is showing no signs of catching up (figure below). The FOMC has lowered its central tendency of long-run growth to 2.1-2.3%. In addition, low investment, low labor force participation rates, a decline in immigration of skilled workers are all factors that seem to suggest a less dynamic economy.

A look at this recovery in comparison to previous recoveries suggests that we may be stuck in a low growth equilibrium as many commentators have warned. The chart below shows the average rate of growth from the trough to the peak over all previous business cycles going back to 1949. The last bar represents the current recovery. With yesterday’s strong GDP report we are now growing at an average rate of 2.1% over this recovery.

Looking back we see that growth rates of 4% or more were common in earlier recoveries and while there certainly seems to be a long slow-down in growth, none of the recoveries was as tepid as the current one. This does not bode well for the future. On the one hand, given this tepid recovery it is easy to understand why the Fed is continuing to keep its powder dry with respect to monetary policy even though there is a growing chorus of dissenters. On the other hand, the figure above might suggest there isn’t much the Fed can do to bring output back up to trend, and keeping the punch bowl out too long is as dangerous as pulling it away too quickly.

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Below we show our “Snapshot” style figures for GDP, Consumption, and Investment. As always, the entire Snapshot is available from the link on our homepage.

by: Zach Bethune, Thomas Cooley, Peter Rupert

The minutes for the June 17-18 meeting of the FOMC revealed a discussion about the end of bond purchases in October but only a vague notion of when liftoff might occur. Many believe that “slack” labor market conditions are still a concern:

In assessing labor market conditions, participants again offered a range of views on how far conditions in the labor market were from those associated with maximum employment. Many judged that slack remained elevated, and a number of them thought it was greater than measured by the official unemployment rate, citing, in particular, the still-high level of workers employed part time for economic reasons or the depressed labor force participation rate.

The first estimate from the BLS establishment survey reports total non-farm employment increased by 288,000 in the month of June and the prior two months have been revised up by an additional 29,000. Here are our takeaways:

Monthly employment growth continues to be strong(ish).

The employment gains were broad-based.

All major BLS sectors (goods, services and government) added jobs in June. The next two charts illustrate these gains. The width of the bars represents the weight of each industry in total employment. For instance, employment in trade, transportation and utilities represents about one-fifth of all U.S. employment whereas industries like information or mining make up a much smaller fraction.

In June, every industry with the exception of ‘other services’ added jobs. As you would expect from a healthy labor market, the largest job gains predominantly came from the largest sectors with trade, transportation and utilities and professional and business services adding a combined 139,000 jobs.

Over the year, the story is similar. The largest four private sector industries have led the growth in employment. Of course government is a glaring exception.

Unemployment dropped for (almost) all the right reasons.

The unemployment rate dropped to a post-recession low of 6.1%, and it dropped for all the right reasons because the unemployed found jobs instead of leaving the labor force. Both the labor force participation rate and the employment to population ratio held steady. The only cautionary note is that a large number of the job gains were from involuntary part-time jobs. These are households that would like to have a full-time position, but could only find part-time work.

The recent trend in the job finding rate, those going from unemployment to employment, since the beginning of the year continued. The largest gains were recorded from the short-term unemployed workers.

The index of average weekly hours for private sector employees has continued to climb steadily.

Unemployment and unemployment claims continue to fall.

The unemployment rate and the “U6” unemployment rate (Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force) have fallen substantially, yet remain elevated relative to pre-2007.

Initial claims are now near their pre-2007 level.

Job vacancies have shot up lately.

According to the Job Openings and Labor Turnover Survery (JOLTS) job openings have shown a large spike up. The hiring rate, however, is still somewhat subdued.

But long-term unemployment remains a problem.

The fact that mean unemployment duration has risen much more than the median indicates there are many more unemployed for 27 weeks or longer.

Wage growth has been tepid.

Nominal wage growth has slowed and real wages grew mainly due to a fall in inflation…but due to the recent tick up in inflation, real wage growth is close to zero.

Again, from the FOMC minutes:

Aggregate wage measures continued to rise at only a modest rate, and reports on wages from business contacts and surveys in a number of Districts were mixed. Several of those reports pointed to an absence of wage pressures, while some others indicated that tight labor markets or shortages of skilled workers were leading to upward pressure on wages in some areas or occupations and that an increasing proportion of small businesses were planning to raise wages. Participants discussed the prospects for wage increases to pick up as slack in the labor market diminishes.

Month: July 2014

Are We Finally Getting Back To Trend? Probably Not.