March 2015 – U.S. Economic Snapshot

Final Estimate of 4th Quarter GDP

Posted on March 27, 2015 by Peter Rupert

by: Zach Bethune, Thomas Cooley, Peter Rupert

The third and final estimate of GDP released today by the Bureau of Economic Analysis provides no substantial new information on the growth of the economy…and therefore little to guide us to the future of interest rate changes by the FOMC. The final number for real GDP growth for Q4 is 2.2%, seasonally adjusted at an annual rate.

Since the negative growth rates in 2008 and 2009, real GDP growth has been weak, but fairly steady year to year, 2010: 2.5%, 2011: 1.6%, 2012: 2.3%, 2013: 2.2%, and 2014: 2.4%; but, as noted here and elsewhere, quite slow relative to previous expansions.

Consumption growth received a small boost, as did net exports, but inventories took a hit.

Real investment took about 25 quarters to get back to it 2007 peak, typically taking only about 10 quarters. Residential fixed investment has yet to get back to its peak in 2007, it is still about 14% below that level.

There is still real debate within the FOMC, however. From KC President George’s remarks: “While the FOMC has made no decisions about the timing of this action, I continue to support liftoff towards the middle of this year due to improvement in the labor market, expectations of firmer inflation, and the balance of risks over the medium and longer run. Liftoff in the middle of this year, in my view, would be fully consistent with the FOMC’s Statement on Goals and Monetary Policy Strategy, which reminds the public that monetary policy actions tend to influence economic activity and prices with a lag.” But, Chicago President Evans from a speech in London: “What is my personal view of the appropriate path for Fed policy? I think economic conditions are likely to evolve in a way such that it will be appropriate to hold off on raising short-term rates until 2016.”

In their own words, the future of lift-off will be “data-driven.” When isn’t it?

February Employment Stays Strong

Posted on March 6, 2015 by Peter Rupert

by: Zach Bethune, Thomas Cooley, Peter Rupert

According to the Bureau of Labor Statistics establishment survey, employment increased 295,000 from January to February and has increased by about 3.3 million since February 2014. January employment was revised down slightly by 18,000 and December had no revision. This continues the trend of strong employment growth consistent with an an ongoing robust recovery. The unemployment rate fell further to 5.5% average weekly hours were flat and average hourly earnings rose only slightly.

Job gains were robust, only mining and logging, non-durable goods, and temporary help services saw small declines. Is the decline in temporary help services, for the second month in a row, a signal of underlying strength in that firms are relying more on full-time workers rather than temps? Maybe, but, as the chart below shows, as a fraction of total employment, firms use temp help much less during downturns. Moreover, the use of temp services has doubled relative to total employment since the early 1990’s.

Average weekly hours have remained fixed at 34.6 for the past 5 months after being stuck at 34.5 for the previous 7 months. Average hourly earnings rose only slightly from $24.75 to $24.78.

While the establishment survey provided solid numbers, the household survey provided some mixed messages. True, the unemployment rate fell from 5.7% to 5.5%.

But the labor force fell by 178,000 leading to a decline in labor force participation from 62.9 to 62.8 and no change in the employment to population ratio at 59.3.

The number of persons working part time for economic reasons fell by 175,000, with 165,000 fewer reporting slack work reasons. The number of persons reporting part time for non-economic reasons increased by 15,000.

$parttimefrac-2015-03-06$

All of this seems to provide further support for the view that the Fed should begin normalizing monetary policy sooner rather than later. Although recent communications have emphasized the view that they could be “patient,” we expect that language to disappear. The graphs below show the continued strength in the labor market, albeit slower than coming out of previous recessions.

4th Quarter GDP….Downward Revision….Keeps Us Guessing

Posted on March 1, 2015 by Peter Rupert

by Zach Bethune, Thomas Cooley and Peter Rupert

GDP Report
The BEA’s second estimate of 4th quarter GDP trimmed the growth rate to 2.2% from 2.6%. The downward revision will certainly give those more “patient” policy makers additional ammo to sit back and let the dust settle further before making any moves.

Since the recovery began, real GDP has continued a long, slow climb out of the depths. As is evident in the graph below, the growth has been weaker than the typical recovery. Said differently, almost 30 quarters since the previous peak real GDP is less then 10% higher now; however, in the past real GDP was 20-30% higher after 30 quarters from the previous peak.

Meanwhile, a version of the Taylor Rule with unemployment targeted at 6% and inflation at 2% calls out for an increase…and has been for more than 4 years.

However, average hourly earnings growth has been anemic, stuck around 2% since 2010, meaning any changes in real earnings came from changes in inflation. The latest drop in inflation has meant an increase in real hourly earnings of about 2%. As can be seen in the graph below real hourly earnings growth since 2010 spent lots of time in negative territory, rarely hit even 1% and has averaged about zero.

Moreover, five year out inflation expectations are also low.

With no inflation pressures now or later, many on the FOMC likely feel little reason to begin liftoff. Indeed, from Chair Yellen’s remarks to Congress,

In sum, since the July 2014 Monetary Policy Report, there has been important progress toward the FOMC’s objective of maximum employment. However, despite this improvement, too many Americans remain unemployed or underemployed, wage growth is still sluggish, and inflation remains well below our longer-run objective.

While many were thinking that liftoff might begin in the middle of this year, but these words from her testimony imply later rather than sooner,

The FOMC’s assessment that it can be patient in beginning to normalize policy means that the Committee considers it unlikely that economic conditions will warrant an increase in the target range for the federal funds rate for at least the next couple of FOMC meetings. If economic conditions continue to improve, as the Committee anticipates, the Committee will at some point begin considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis.

But recent data have confirmed that falling oil and commodity prices may be masking movements in prices. Core inflation – excluding food and energy – jumped at the last reading and markets reacted. The FOMC seems to be leery of acting too soon on liftoff but the bigger worry is that the costs of acting too late might be higher.

Finally, from the end of the testimony,

As always, the Federal Reserve remains committed to employing its tools to best promote the attainment of its objectives of maximum employment and price stability.

Good to know, thanks.