Month: August 2016

By Thomas Cooley, Ben Griffy and Peter Rupert

Today’s revised estimate of Q2 GDP from the BEA saw only a small downward revision that did little to change the economic outlook. The advance estimated growth of 1.2% was revised down to 1.1%. Personal consumption expenditures continues to be the main driver it appears, contributing 2.94%, while there was also a smaller decrease in private fixed investment. Although, investment overall has continued to look weak.

The general weakness, PCE aside, will almost certainly keep the Fed sitting on their hand this September.

Yellen’s Jackson Hole Remarks:

Federal Reserve Chairwoman Janet Yellen spoke at the annual meeting in Jackson Hole this morning (link to transcript). Entitled “The Federal Reserve’s Monetary Policy Toolkit: Past, Present, and Future,” she focused on whether the current monetary tools are adequate for future downturns. Most specifically, she points to the ability of the Federal Reserve to affect the quantity of reserves held by banks. After the government pumped extra liquidity into the market following the Great Recession, the previous policy tool (changing the volume of reserves offered by the Fed in the overnight market) would have been dwarfed by the reserves available from banks. To prevent this from happening, the Congress implemented a policy in October 2008 to allow interest to be paid on reserved held by banks. The results have been nothing short of astonishing:

Yellen made the case for a gradually rising Federal Funds rate conditional on economic conditions continuing to strengthen.  This strengthened the prospect that we will see further rises this calendar year.  All told, the prospect seems to be for gradual improvement of the economy as reflected in the steady improvement in employment and wages, but no major moves in the Fed’s policy stance or targets.

By Thomas Cooley, Ben Griffy and Peter Rupert

The Bureau of Labor Statistics announced that non-farm payroll employment for July increased 255,000, beating the “expected” job gains of 180,000. In addition, both May and June were revised up, 13,000 and 5,000, respectively. The bulk of the gains came from service sector jobs, up 201,000 with the majority of those in business and professional services.Employment in manufacturing (+9,000) and construction (+14,000) rose while  mining continued its decline (-7,000), consistent with continued weakness in the energy sector and oil prices.

 

The continued strength in the labor market also showed up in an increase in average weekly hours and average hourly earnings.  Earnings are now increasing at a rate of over 2.5% year over year.

Labor market dynamics from the household survey revealed an encouraging increase in labor force participation and employment and a decline in the number of persons unemployed, resulting in essentially no change in the unemployment rate at 4.89%. This means that fewer people are sitting on the sidelines. While the news is, on the whole, positive, the number of persons unemployed more than 27 weeks increased for the third straight month.

The big puzzle is how to reconcile the continued strength in the labor market  with the very weak GDP growth reported last week and how the parse the impact of this on the decision making of the Fed.  Most likely the reason for these diverging signals will be become clearer over the next few months. The widespread view is that the continued strength of the labor market makes it likely that there will be a rate increase in 2016, although the weak GDP numbers will keep the market guessing.