Month: October 2020

By Thomas Cooley and Peter Rupert

The BEA announced third quarter real GDP increased 33.1% seasonally adjusted at an annual rate…or 7.4% if not annualized. So, one might ask, “Why does the BEA annualize?” The answer is to make it easier to compare data since some data come out monthly, quarterly or annually. Most countries do not annualize the GDP numbers at all. For example, news reports show 3rd quarter GDP in Germany rose 8.2% and France up 18.2%, these are NOT annualized.

As a quick aside, note that 33.1% is not 4 times 7.4%. What annualization does it assumes that the growth rate for each quarter in the year would be 7.4%, so compounding is involved. The formula to annualize quarterly GDP say is: (((GDP_t/GDP_t-1)^4)-1)*100.

In any event, this was by far a record increase for the US with the next highest being 16.67% in Q1 of 1950. Given the crazy gyrations seen in 2020: Q1 down 5.0%, Q2 down 31.4% and Q3 up 33.1%, where are we relative to where we were at the beginning of 2020? Real GDP in 2019 Q4 was $19.25 trillion and today stands at $18.58 trillion, so we are down about 3.5%.

Over a longer time span, the Great Recession and COVID-19 have pushed our economy well below our long run (linear) trend on a per capita basis. And although the record bounce-back looks like a sharp V shaped recovery there has been significant “scarring” of the economy and there are sectors that simply won’t recover anytime soon – possibly never. Most obvious are the sectors everyone cites – travel, leisure, hospitality, retail, aeronautics, higher education, commercial real estate and fossil fuels. It goes without saying that all of these imply substantial resource reallocation.

Many, many records have been set for the various GDP components. Personal consumption expenditures up 40.7% with durable goods up 82.2%. Gross private domestic investment up 83%, equipment up 70.1%, nonresidential structures down 14.6% and residential up 59.3%. Households are investing in their home-based consumption, buying bigger houses, better appliances, newer cars and so on. But investment in non-residential structures dropped like a rock and shows no sign of recovery.

Obviously the pandemic looks nothing like a “standard” recession. It is easy to see from the graphs that typically it takes years for the economy to reach bottom and then many more years to get back to where it was before the recession hit. During the pandemic things are happening at warp speed. Massive one month or one quarter declines with a rebound the next month or quarter.

The labor market continues to be stressed and with the failure of Washington to deliver more stimulus we may soon see increased labor market pain and a drop in consumption as well. Next week will give us the latest snapshot of labor market conditions.

By Thomas Cooley and Peter Rupert

The BLS reported nonfarm payroll employment rose 661,000 in September and reported 145,000 in upward revisions , 27,000 for July and 118,000 for August. The private sector gained 877,000 jobs while the public sector shed 216,000. Although the headline number fell below a million for the first time since May, the gains were broadly spread with every major sector except government increasing employment. Moreover, the not seasonally adjusted increase was 1,113,700. This is an impressive rebound but there is more to be done.

Average hourly earnings ticked up slightly and average hours of work increased to 34.7. Both May and September average hours at 34.7 are the highest levels dating back to the beginning of the series in March, 2006.

The household survey showed a decline in the labor force of 695,000 and nearly a million fewer unemployed persons (970,000). The unemployment rate fell to 7.86% from 8.42%. After the great recession it took about 7 years for the unemployment rate to fall by half, from about 10% to 5%. The fall to half of the unemployment rate after the pandemic has been fast, about 5 months, it was the government, stupid. Keep in mind also that a drop in labor force participation caused by people opting to sit on the sidelines lowers the unemployment rate as well. The labor force declined by 695,000 and the labor force participation rate fell to 61.4 from 61.7.

The relationship between unemployment and job vacancies is known as the Beveridge Curve. What has been remarkable is that for all of the labor market turmoil, the job openings rate has not changed much. During the Great Recession the job vacancy rate fell roughly in half while during the pandemic it fell slightly and is now near its highest ever recorded. When the job vacancy rate is over 4% the unemployment rate is typically at or under 4%.

Seasonally adjusted initial claims fell somewhat, to 840,000 and continued claims fell to . Once again, however, the not seasonally adjusted claims actually rose slightly.

The overall picture in the labor market is of an economy that is resilient and capable of recovering fairly quickly. Key to that continued recovery is that individuals have the purchasing power to buy goods and services and the willingness to do so. In terms of consumption it is typical during a recession for durable goods expenditures to fall and take time to recover. As the following graph shows, however, the US is largely a service economy. All three components took a major hit with services the largest decline.

To get a better look at what has happened to the components, the graph below indexes the expenditures. Services remains much below its peak before the pandemic. Durable consumption, however, has rebounded sharply, taking only 4 months to recover to its pre-pandemic peak in January, 2020, and is now 9% higher than in January. The Great Recession showed a much different pattern. It took durable consumption about 5 years to get back to its previous high.

While spending has begun to return to prior levels, household debt has fallen for most categories. Given the lower levels of debt, households are in a position to ramp up spending when some of the uncertainty gets resolved. While the personal savings rate has fallen from historic highs, it is still about 14%. Moreover, nonfinancial corporate business debt as a percentage of the market value of corporate equities is also quite low.

The CARES Act went a long way to putting a floor under the fortunes and consumption of the weakest consumers. These “hand-to-mouth” consumers are the service workers who do not have assets to cushion them through an economic shock. Detailed transaction data show that spending by consumers in lower income zip codes has nearly recovered its level in January 2020 but spending in high income zip codes is still way off. The key to the recovery will be the return of well-to-do consumers and that will depend entirely on how safe they feel, i.e. controlling the virus.