Month: July 2019

By Thomas Cooley and Peter Rupert

The BEA announced a 2.1% growth rate for GDP in the advance estimate for the second quarter. Personal consumption expenditures led the way, rising 4.3%. Durable goods were up 12.9% and nondurables up 6.0%. GDP growth was well below the torrid pace of last quarter and recent history but the consumer kept the economy purring along.

Business fixed investment fell slightly, mainly in structures. Residential structures have declined in 8 out of the last 10 quarters. The evidence suggests some slowing of the economy but nothing too dramatic.

To what extent should these numbers set off alarms about the state of the economy? We know that European growth is weak and that China has slowed quite a bit as well; and yet the U.S. keeps on growing and labor markets are healthy. This is not a picture of an economy in trouble and in need of liquidity. Import growth has been flat and export growth has been negative and that dragged GDP down. These are both logical consequences of the trade war.

How should the Fed react in these circumstances? Markets have already priced in a rate cut by the Fed and every major commentator has urged the Fed to cut rates preemptively. Under these circumstances a rate cut may be benign but it is hard to see what good it will do when the real problem are trade wars and jobs skills. It will also be an unfortunate sign that Chairman Powell has allowed the Fed to become more politically responsive.

By Thomas Cooley and Peter Rupert

First, congrats to a long-time friend and first-rate economist, Chris Waller, who has been nominated to the Federal Reserve Board. Congrats to Judy Shelton as well!

Today’s employment report from the BLS blasted through “expectations” by adding 224,000 jobs. Expectations were in the 160,000 range. There were 11,000 in downward revisions, down 8,000 in April and 3,000 in May. Of course one month does not make or break a trend. Since climbing out of the depths of the recession, the labor market has shown remarkable stability. As many are aware we are now in the longest recorded economic expansion. The chart below shows payroll employment monthly change as well as the 12-month moving average.

The private sector added 191,000 jobs and government employment increased 33,000. Aside from a small decline in retail (-5,800) and negligible declines in mining and logging (-1,000) and motor vehicles (-200), the employment growth was robust. Service producing jobs increased 154,000 and goods producing increased 37,000.

The workweek remained at 34.4 for the third month in a row. And average hourly earnings increased 0.2%, from $27.84 to $27.90, up 3.14% year over year. Given inflation up 1.8% year over year implies real earnings growth.

The household survey also provided strong labor market signals. The civilian labor force jumped up 335,000, increasing the labor force participation rate from 62.8 to 62.9. The number employed was up 247,000 and the number unemployed crept up slightly by 87,000–all leading to an increase in the unemployment rate from 3.62% to 3.67%. The BLS defines the official unemployment rate as U3, plotted below is also the U6 rate: U-6 is 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. The U6 rate currently stands at 7.2%, up slightly from 7.1% in May, but lower than any time in the last two decades.

The big picture

The latest strong labor market signals most likely put the idea of a cut in rates by the Fed on the back burner as recession fears remain on hold.