Month: July 2020

By Thomas Cooley and Peter Rupert

The BEA announced that Q2 real GDP declined 32.9%, pretty much as expected, but still hard to fathom. In fact, due to the government shutdown, these numbers are very difficult to interpret. To what extent has the new surge in COVID-19 cases, prompting more shutdowns in some areas, raised uncertainty of the future path of GDP for Q3 and Q4? It is certainly not out of the realm of possibility to see a 30% increase for Q3! These massive gyrations have made it even more problematic to gauge the underlying health of the economy.

To be clear the 32.9% number is quarter on quarter growth annualized. The quarter on quarter growth is -9.5%. Whichever you prefer, this is the largest drop ever recorded!

The Great Recession seems to have had an impact on the trend rate of growth of real GDP and the current pandemic has moved us even farther from the historical long run trend.

Our view is that the government shutdowns, CARES/PPP and the change in the due date for taxes have made the data impossible to put in historical context. For example, the graph below shows the percent change in real GDP along with the percent change in real disposable income. In general the two move more or less together. The recent shutdowns combined with the recent transfer payments have thrown a monkey wrench into the behavior of these series. While real GDP fell 32.9% real disposable income increased 44.9%. Of course the disposable income numbers also reflect the fact that tax deadlines were moved from April 15 to July 15.

Monthly disposable income and personal consumption expenditures was released by the BEA today (July 31) again showing large zig-zag patterns. Real disposable income in June decreased 1.8% following a 5.2% decline in May, while real personal consumption expenditures increased 5.2% in June following an 8.4% increase in May.

The quarterly declines were seen in virtually every component. Personal consumption expenditures down 34.6%, real investment fell nearly 50% with fixed investment down 30%, exports down 64.1% and imports down 53.4%. Non-defense government spending was up 39.7%.

Initial claims were also announced today and, like in our recent post on initial claims, the seasonally adjusted claims increased while the not seasonally adjusted decreased as they did last month.

The stock market appears to have shrugged off the early signs of illness and has been climbing, with the Nasdaq setting records almost daily.

Equity markets seem to be pricing in a V shaped recovery. We have argued for a short V-shaped response followed by a long slow slog back to potential. A lot of this depends on the consumer and how they respond as the bills come due, how employment recovers, and how the government resolves its current impasse over unemployment benefits and further stimulus.

The Federal Reserve is doing all it can think of to do and it remains to be seen how effective is the accommodation they have made so far. This drama has many episodes and we are only a few months in.

by Thomas Cooley and Peter Rupert

Data on initial claims for unemployment insurance and continued claims (aka insured unemployment) were released today. Many of the headlines took the announcement and provided articles titled Rise in Weekly Unemployment Claims Points to Faltering Jobs Recovery (WSJ) or Weekly Unemployment Claims Rose to 1.4 Million in U.S.: Live Updates (NYT). While technically true these articles are misleading. The reason is that the headline numbers that come out are almost always seasonally adjusted. Here is a graph of the seasonally adjusted data for initial claims starting at the peak on March 28:

As mentioned by the media, indeed claims increased from 1,307,000 to 1,416,000, an increase of 109,000 people. However, seasonal adjustment alters the raw data by applying seasonal adjustment factors. When times are crazy, when something very odd happens, seasonal adjustment can give misleading information. Here is a graph of not seasonally adjusted initial claims:

The actual number of people applying for initial claims actually fell from 1,512,763 to 1,370,947, a decline of 141,816! Moreover there was an increase in initial claims from July 4 to July 11.

So, what is going on? Think about what happens when, say, Christmas is approaching. We know every year that Christmas is on December 25. Knowing that there will be increased shopping in the preceding months, producers and stores ramp up employment to deal with it. The following graph plots payroll employment both seasonally adjusted and not. Note how the not seasonally adjusted (red) data is so regular. October and November build up employment and every January and February it falls. The seasonally adjusted data (blue), on the other hand is quite smooth. Why? Essentially the statistical adjustment accounts for the fact that every November employment goes up in anticipation of Christmas. What the seasonal adjustment does is to compare, say, this November with last November.

Imagine now the government mandated that Christmas would be on November 25 instead of December 25. In anticipation of that change the employment build up would most likely be shifted by a month. However, the seasonal adjustment factor would apply the old seasonal.

This pandemic has altered the traditional employment unemployment cycles. Stores were closed, schools were closed, auto retooling changed months, and so on. To understand where we are then we should really be looking at the not seasonally adjusted data. This begs the question as to why we look at seasonally adjusted data at all. Back to the Christmas example. Is the holiday season a boom or a bust? The only way to think about that is to compare this season to last season and not this December to this November. That is essentially what seasonal adjustment does.

To be sure, given all of the caveats above, we still ain’t doing so hot.

By Thomas Cooley and Peter Rupert

The BLS announced that nonfarm payroll employment increased 4,800,000 in June. The largest increase was in private service producing, increasing 4,263,000. It should be noted however that COVID-19 has had a large impact on the measurement of labor market variables. In particular, the raw counts should be used with caution as there are potentially large misclassification issues. For example, the BLS writes:

In the establishment survey, workers who are paid by their employer for all or any part of the pay period including the 12th of the month are counted as employed, even if they were not actually at their jobs. Workers who are temporarily or permanently absent from their jobs and are not being paid are not counted as employed, even if they are continuing to receive benefits.

Initial claims have come down steadily although the continuing claims have not.

The bulk of the added jobs were in leisure and hospitality (2.1 million) as bars, restaurants and related business began to reopen. Many of these jobs may disappear again as some authorities begin to respond to the dramatic surge in Covid cases by shutting bars, restaurants and other services down again. Retail trade added 758,000 jobs. Education and health services accounted for 568,00 jobs and other services added 357,000 jobs. Many of these service sector jobs reflect re-allocation across firms – jobs lost in retail replaced by increased hiring at Amazon and Walmart. Some of them reflect recall from furlough to employment.

Manufacturing added 356,000 jobs after losing 757,00 since February. Most of these were in durable manufacture and the automotive sector.

Average hourly earning decreased by 1.2% reflecting the fact that the service sector jobs added or reactivated are the lower paid employees.

According to the household survey the labor force increased by about 1.7 million so that the labor force participation rate increased from 60.8 to 61.5. The number of persons unemployed fell by 3.2 million. However, again the BLS warns of data issues in terms of misclassification:

If the workers who were recorded as employed but absent from work due to “other reasons” (over and above the number absent for other reasons in a typical June) had been classified as unemployed on temporary layoff, the overall unemployment rate would have been about 1 percentage point higher than reported (on a not seasonally adjusted basis). However, this represents the upper bound of our estimate of misclassification and probably overstates the size of the misclassification error.

Moreover, the data are as recorded by the interviewers as per usual and the BLS has not altered the data to account for such misclassification…and rightly so.

The increase in employment and the fall in the unemployment rate will give optimists further hope for a V-shaped recovery. But the measured unemployment rate is a still staggering 11.1% as measured and is more likely higher. The unemployment rate including all marginally attached person, plus total employed part time for economic reasons declined from 22.8% in April to 21.2% in May and now sits at 18%.