Month: March 2016

by Thomas Cooley, Ben Griffy and Peter Rupert

The final estimate of 4th quarter GDP for 2015, 1.4% doubled the first estimate from January, 0.7%.  Yet, looking at the year -over-year change (the blue line in the graph below) growth has slowed over the past several quarters and one can pick out some “mini-cycles” since the Great Recession. The final estimate for annual growth for 2015 came out at 2.4%, exactly the same as 2014.

Real personal consumption expenditures (PCE) grew at 2.4%, a slight revision up as well, but again shows a downward trend over the past year or so. Residential fixed investment (structures) grew at a solid 10.1% and has remained at fairly steady pace since the 4th quarter of 2014. However, nonresidential structures declined at a 5.1% pace after declining 7.2% in the 3rd quarter of 2015.

Since the trough of the last recession, dated Q2 of 2009 from the NBER, the recovery has been the weakest in recent history, as can be seen in the graph below. For example, take the 1969 cycle, about in the middle of the lines below. Roughly 7 years after bottoming out, the economy grew by about 25%. The current recovery is  but 15% higher 7 years after the trough. The same slow growth is true about consumption.

The table below shows the averages for contractions and expansions since 1854. Over time the contractions have gotten shorter and the expansions longer. Just as a point of reference, the current expansion is about 28 quarters long.

Cycles	Contraction (quarters)	Expansion (quarters)
1854-1919 (16 cycles)	21.6	26.6
1919-1945 (6 cycles)	18.2	35.0
1945-2009 (11 cycles)	11.1	58.4
1960-2009 (8 cycles)	11.6	65.1

The U.S. economy continues to grow and add jobs in spite of  weakness elsewhere in the world.  We are now well beyond talking about this as a recovery – it is a mature expansion albeit with growth rates slightly lower than we would like and lower than previous recoveries as our graphs show. The good news is that we have full employment and we continue to grow and be a driving force in the world economy in spite of weakness almost every where we look. The slowdown in China, the contractions in Japan, Brazil and other emerging markets, and the uneven growth in Europe have not been enough to interfere with our party. This does not mean there are no problems – labor force participation rates and wage growth are low and thus are not making inroads into the declining fortunes of the middle class.  These problems are long term and structural and to a large extent the result of the most recent wave of globalization.

GDP Growth

Last Friday’s release of the 2nd estimate for real GDP in Q4 2015 increased growth from the advance estimate of 0.7% to 1.0% at a seasonally adjusted annual rate. The revision increase was mainly from inventories, according to the BEA. The report did little to change the perception of the underlying strength of the economy. According to ActionEconomics!, the big upward surprise to inventories was primarily due to the difficulty estimating quarter-end prices from such large declines in oil prices. Overall, for 2015, GDP increased 2.4%, the same as in 2014.

Growth in Personal Consumption Expenditures (PCE) was a major contributor to strength, but its growth has slowed over the past few quarters, increasing at a 2.0% clip.

Employment

The Bureau of Labor Statistics released the employment situation for February, revealing a 242,000 increase in payroll employment. In addition, employment was revised up for both December, +9,000 and January +21,000.

The 254,000 increase in private service producing jobs was led by health care and social assistance, +57,400, retail trade, +54,900 and leisure and hospitality, +48,000. The goods producing sector, on the other hand, shed -15,000, led by the continued decline in the mining and logging sector (oil), -18,000 and manufacturing -16,000; however, the construction sector added +19,000.

While the overall employment numbers are encouraging, average weekly hours fell slightly to 34.4, and there was a slight decline in average hourly earnings, $25.38. These are not significant given the extent of variation in these numbers. What is clear is that wage growth is beginning to look more like previous cycles and as the job markets tighten it may be that this trend will improve. Productivity, which had been showing signs of improvement, drifted down slightly but some of this may be seasonal.

 

Interestingly, the household measure of employment has shown an acceleration over the past four or five months.

Both the participation rate and the employment to population ratio ticked up to 62.9 and 59.8 percent respectively, while unemployment was essentially unchanged at 4.92%.

Overall, the employment picture along with the GDP data suggest growth, but there is enough weakness around to give the Fed pause at the next meeting.