Month: September 2019

The FOMC will convene for two days this week on Tuesday and Wednesday for policy deliberations. There seems to be consensus that the Fed will cut rates another 25 basis points following the recent 25 bp cut in July. The problem is that there is little by way of data that would indicate a cut at this time. Neither the output numbers nor labor market indicators suggest it.

Real GDP growth has remained fairly steady and many components show decent strength. While year-over-year growth has trended down a bit over the past year it is still averaging over 2% for the past few years.

Personal consumption expenditures (PCE) are solid, possibly reflecting confidence by consumers, with both durable and non-durable goods showing continued steady growth. There has been much talk about how the U.S. consumer is keeping the U.S. economy going with salutary impacts for our trading partners.

After taking a major hit during the Great Recession, investment has taken off and is now almost a half a trillion larger than before the recession.

Labor markets continue to show strength in pretty much every dimension. Both the headline unemployment rate and the U6 rate are at very low levels, falling below the levels seen in the run up to the Great Recession. Real average hourly earnings have picked up and the workweek has been fairly steady over the past several years.

There are more vacant jobs posted than unemployed individuals searching for them in every region of the country. Moreover, the Beveridge curve (plotting unemployment rates against job vacancies) has completely reversed itself since the Great Recession. Quit rates are pretty much as high as they have ever been since the JOLTS data began and layoffs and discharges at their lowest level.

So, what is driving all the negativity? Many have mentioned trade uncertainty. But the stock market seems to be defying those concerns. The question for the Fed is simply: Are the current trade fears large enough to justify another cut?

Nothing that we see in the current economic data suggests that another rate cut is called for. The Fed has promised “data driven” decisions so any decision to ease should be supported by the data that justifies it. The Taylor Rule suggests (of course it does not imply what the Fed should be doing) that the current level of rates is just right.

Is the Fed letting itself be stampeded by market expectations and Donald Trump’s tweets? It is a sad sad day if that is true.

By Thomas Cooley and Peter Rupert

The BLS announced an increase in payroll employment of 130,000. The private sector added only 96,000 jobs. The government sector increased its payroll by 34,000, due to the temporary hiring of census workers for the upcoming 2020 census. June and July payrolls were revised down, -15,000 and -5,000, respectively. While the headline number undershot expectations (around the 150k mark) digging into the report seems to show more strength than weakness.

This is the seventh straight month of decline in retail trade employment, falling 11,100 and the sector has shed 83,700 jobs since February. There were also some small scattered losses: mining and logging down 5,000; utilities down 1,400 and a couple others even smaller. Health care and social assistance increased 36,800.

On the positive side, average weekly hours increased from 34.3 to 34.4. Average hourly earnings rose $0.11 to $28.11. Moreover, earnings have been trending up and with inflation at bay, real earnings have also been rising.

The household survey also had some signs of strength. The labor force increased 571,000 and the number employed rose by 590,000. The number unemployed fell by 19,000. Overall, the unemployment rate fell from 3.71% to 3.69%.

The Jobs Opening and Labor Turnover Survey continues to show strength in that there are still more job openings that unemployed persons.

The Federal Reserve pays a lot of attention to the employment report. They have emphasized repeatedly over the past year that policy will be “data driven.” How then should this report impact policy? There is now talk about another interest rate cut at the Fed’s next meeting in September. We see little in this employment report that would suggest such a cut. Other data also do not really point to a cut. The last GDP report was on the strong side, consumption growth was up 4.7%, for example. Yesterday’s productivity report, that showed output per hour up 2.3%, also provides little support for a cut.

What is seemingly the principal motivation for a cut in interest rates is uncertainty over the effects of the trade war with China on GDP growth. Indeed a recent article from several Fed economists points to a reduction in GDP of nearly 1.0% due to trade uncertainty. Is that large enough to call for a “data driven” cut in rates? Why is the Federal Funds rate the right instrument for this shock? There is little evidence that firms are unable or unwilling to borrow so what problem will a rate cut address? It feels like it is time for the Fed to offer some more clarity on what it sees in the data.