The BEA announced that Q3 real GDP increased 2.02%, falling below many forecasts that were in the 3.0-3.5% range. The decline most likely reflected the Delta variant, supply chain issues and new inflation fears. Have you tried to buy a car lately? Weakness in personal consumption expenditures (PCE) played a big role in the weakness, increasing only 1.58%. Durable good consumption has been exceptionally wacky, falling 26.2%. The volatility in durable goods consumption has increased substantially throughout the pandemic, here are the numbers: Q3, 2020= 89.0%; Q4, 2020=1.1%; Q1, 2021=50.0%; Q2, 2021=11.6% and now -26.2%.
Although real investment saw a spike up by 11.7%, both residential and non-residential structures took a big hit, down 7.7% and 7.3%, respectively.
Personal Income and Outlays
The BEA delivered some additional bad news, personal income declined 1.04% in September following a 0.2% rise in August. Real disposable personal income sank by 1.6% and the personal savings rate fell sharply to 7.5%. Further complicating the forecast, the PCE price index climbed to 4.38% and will likely be a major topic in the upcoming FOMC meeting in the coming week.
Unemployment Claims
On the better news front, initial unemployment claims dropped again, now at 281,000, the lowest since the pandemic started. The same for continued claims, falling to 2,243,000.
Although many stats show the labor market looking a bit more “normal” there appears to be ongoing difficulties in finding suitable workers. This mismatch is evident as there are now about 2 million more people unemployed than the number of job vacancies. This will also be a discussion by the FOMC in relation to supply chain issues. All of this makes for a pretty spooky Halloween. Stay safe.
This is a very difficult post to write. Tom Cooley, my dear friend, mentor, collaborator and drinking buddy passed away on Saturday, October 9. Tom had been ill for several months and was at home with his loving family during his last days. Much will be written about Tom’s contributions to the economics profession and to the world at large. He had boundless energy and deep insights. We started this blog site many years ago in the hopes of bringing perspective to the data that appear on a regular basis. I have not included his name as an author today even though we had talked about these issues weeks ago. He was always the inspiration for this blog and an inspiration for many generations of students and colleagues. Tom was a master at making sense of economic models and data. He was the filter for this blog and it was far too often sobering when he would say, “You can’t say that, makes no sense.” And would then put you on the right track. I will miss him deeply.
Establishment Data
The BLS announced that payroll employment was up 194,000, a number that was met with disappointment it appears: NYT and CNBC. Evidently, experts had (predicted, hoped, thought) that employment would increase by about 500,000, see the CNBC source above. This report, however, was much stronger that the “headline” number everyone gloms onto. The employment report is supposed to give a glimpse of the health of the labor market that, in turn, tells us about how the overall economy is doing. More employment -> more output -> more income. A small increase then means that the economy is not producing much more stuff. Unfortunately, the headline number is really not enough to deliver such a message. Indeed, the September report was actually quite good.
There are several reasons as to why the report was much better than most analysts thought. First, the BLS revises the preliminary data over the ensuing two months after the preliminary number is reported. In this case there was an upward revision of 169,000 (131,000 in August and 38,000 in July). So that’s a bit better.
Second, the private sector employed 317,000 more while the government sector declined 123,000. Depending on the weight you put on the private sector as a driver of the economy this number makes the report a bit better as well (I am not sure how that sentence would have come through the Tom filter).
The labor market has seen a massive increase in quits. For example, quits in the leisure and hospitality sector have shot up to levels never seen before, nearly 1 million in August, certainly adding to the labor shortage people have been talking about.
Inflation has begun to put a damper on the recovery from the pandemic and has the Fed starting to fret a bit. CPI inflation increased 5.4% YOY and PCE inflation up 4.3%. Given that inflation growth is above that of average hourly earnings growth, real purchasing power has declined. However, there are other measures of inflation. After all what is trying to be measured is some average price change across the economy. The Fed has chosen the PCE as their go to measure, for example. The “core” inflation rate removes food and energy since those are quite volatile month to month. The Dallas Fed produces a “PCE trimmed mean inflation rate” that trims off high and low outliers, giving a 2% inflation rate. The Cleveland Fed produces a “median PCE” that shows a 2.4% increase.
Household Survey
The labor force declined 183,000 and the number of unemployed fell by 710,00, leading to a large decline in the unemployment rate from 5.19% to 4.76%. Note, however, that there are still almost 7.7 million people unemployed. The employment to population ratio increased to 58.7.
Overall, the latest employment report was much better than many have suggested. Of course there are still many supply chain issues, inflation has begun to creep up and labor shortages have also been plaguing the recovery. This is exactly where Tom would have provided commentary about the overall economy and what we should do about it. Thank you Tom for all you have done for all of us.
