Author: Peter Rupert

The Bureau of Economic Analysis announced here that real GDP increased by a seasonally adjusted annual rate of 2.5%. The increase was fueled largely by personal consumption expenditures (contributing 2.24 percentage points to the overall 2.5 percentage point increase).

What worked against the increase in real GDP growth was a large decline in government spending along with a big rise in imports.  Although this report represents yet another quarter of growth below the long run trend, it was positive growth in contrast to Europe which is sinking back into recession.

On the bright side, the economy continued to generate positive growth without the boost from Government spending.  Signs that housing markets contributed to the positive growth represent an encouraging phase in the recovery–historically, housing  has led the economy out of contractions.

The bar graph shows another way of looking at the recent behavior of real GDP. The bars in the graph show the quarter-to-quarter change (s.a.a.r.) in real GDP while the blue line indicates the year-over-year change (s.a.a.r.). The first thing that stands out is the very large decline in real GDP during the last recession. The recession in the earlier part of the decade hardly looks like a recession at all in comparison. And, while the quarterly change in Q1 was 2.5%, the year-over-year change between 2013Q1 and 2012Q1 was 1.8%. Moreover there appears to be somewhat of a decline in the average year-over-year change: the average pre-2001 recession year-over-year change was higher than that in the years between the 2001 recession and the recession beginning in 2007 and that is higher than the recovery phase starting in June, 2009 (according to the NBER business cycle dates).

An alternative way to think about long-term economic growth is to decompose real GDP into a trend component and movements around this trend, that is, the cyclical component of the business cycle.  Many economists use the Hodrick-Prescott (HP) filter to do this decomposition. The HP filter, however, has some issues that we have pointed out previously here about estimating the growth trend at the end of the data series.

If one believes we will eventually get back to 2% real growth, the trend line will be something like the dashed red line in the following two graphs. The green line represents the HP filter’s trend which equates to about 0.8% annual GDP growth.

The implication of this is that the recent recession and recovery will appear much worse if we believe that GDP will grow at 2% over the long term. The red dotted line in the graph below has shown no signs of returning to the historical trend, and won’t, as a long as the quarterly report consistently comes in below 2 percent. On the other hand, if you believe that the financial crises and Great Recession inherently altered the growth potential of the US economy and that the long-term growth trend has shifted down, as the green line shows, then the recovery doesn’t look nearly as anemic. In fact, with this view GDP has already recovered and is above trend.

Many may be aware of what has been called the Great Moderation, a period where the volatility of real GDP declined markedly–between the mid 1980’s and 2007. While some have mentioned that this may be the result of better policies, the recent episode may suggest that the great moderation was nothing but a series of smaller, or less consequential shocks.

If one believes that we will once again move to the sustained 2% growth path, then the graph above leaves plenty of room for concern in the short-term.

Meager growth in employment

The tiny increase in total non-farm employment reported in the  Employment Situation for March undershot analysts expectations…or rather their hopes? However, there was a little good news. First, January and February employment were revised up, from  +119,000 to +148,000, in January and from +236,000 to +268,000 in February, as can be seen in the employment change graph below.  Second, the average workweek for all employees actually rose to 34.6–only one other time, February of 2012 was it that high since June of 2008. The picture that emerges is of a labor market that usually turns out to be a little bit stronger than first estimates suggest. But, while the economy has continued to add jobs, it has not done so at a pace that is consistent with population growth.  The employment to population ratio ticked down once again from its stubbornly low ratio and the labor force participation continued its steady decline. It is now as low as it has been since the early 1980s. The household survey paints an even more dismal view of the labor market.  Employment declined by more than 200,000, the biggest decline in a couple of years.

Unlike previous months, employment in the government sector didn’t change very much but that is likely to be temporary.  Early indications are that the sequester is gooing to further impact employment in the sector

Solid growth in employment

The increase in total nonfarm employment, +236,000 as seen in today’s Employment Situation, beat most analysts expectations, although January employment was revised down slightly, from +157,000 to +119,000, as seen in the Net Employment Change chart below.

Private sector employment was up +246,000 while the government sector continued to shed jobs, -10,000. State government was responsible for 80% of that decline. The largest gain came from private service workers, +179,000. Professional and business services added +73,000. Goods producing employment was also up, +67,000, led mainly by construction, +48,000, and in that sector the largest gain was in specialty contractors. Total employment continues to grow steadily, but is still not back to its level in December of 2007.

The unemployment rate ticked down from 7.9% to 7.7%, and at 12,032,000 there were about 300,000 fewer unemployed persons compared to last month. However, those unemployed more that 27 weeks edged up by 89,000. Overall there are about 4.7 million persons who have been unemployed more than 27 weeks.

The employment to population ratio was unchanged from last month at 58.6%, moreover, it was also 58.6% in February of 2012 and was close to that level three years ago. While this picture reveals no growth over the past year, it is not necessarily a sign that labor market is still under considerable duress. There are many factors that drive this statistic, such as decisions about entering the labor force,  retiring, or staying in school. The point is that while the employment population ratio is indicator of labor market health, there are lots of things that drive it. The ratio at the beginning of the recession in December of 2007 may have been “cyclically” high, and now has adjusted to a new level. This can also be seen in the labor force participation rate, which actually declined slightly over the month, from 63.6% to 63.5%.

The Beveridge curve depicts the relationship between the reported vacancies and the unemployment rate. As is evident in the graph, the unemployment rate is much higher given the vacancy rate than it was before the last recession. The first red dot to the  left shows that at the beginning of the recession the vacancy rate was about 3% (3 vacancies for every 100 employed) and the unemployment rate was under 5%. Today, the vacancy rate is just under 3% yet the unemployment rate is 7.7%. Why those unfilled vacancies remain unfilled given that level of unemployment remains an open question.

Data released by the Federal Reserve shows that household sector debt outstanding rose at a 2.5% annual pace in the last quarter of 2012. It was the first time since the beginning of the recovery that household debt didn’t fall as a percentage of GDP. Households had been steadily de-leveraging until the most recent quarter. Debt to GDP remains 15 percentage points below its level at the peak of the cycle and those levels will not likely be seen again soon. Total borrowing by the household sector also increased in the fourth quarter, indicating that the household sector is willing to take on additional debt in this very low interest rate environment.

In terms of net worth (assets minus liabilities), households’ balance sheets are slowly improving, aided by a recovery in the housing sector and rising equity prices. As a percentage of GDP, the fall in household net worth from the peak in 2007 was 4 times as severe as the fall caused by the dot-com bust that spurred the 2001 cycle. The difference, of course, was the collapse of the housing market. The total market value of real estate assets fell 40 percent more than the fall in GDP. This was combined with a similar fall in the value of household’s holdings of financial assets.

Non-financial business corporate debt rose at an even faster pace in Q4 (8.75% annually). A large portion of the increase was due to increased corporate bond issuance.

There has been a lot of talk (here is one example) about how corporations are hoarding cash and are reluctant to invest earnings. The figure below shows the amount of checkable deposits and currency held by the non-financial corporate sector (only one form of liquid assets corporations hold).

The total size of this cash hoard is now nearly twice as high as it was before the peak of the cycle and nearly $400 billion higher than at the trough. Before you make the call in favor of hoarding though, take a look at the evolution of total currency and deposits as a percentage of total assets.

As a percentage of total assets, the business corporate sector’s holding of currency and deposits is relatively low and is returning to the levels of the 1980’s. A similar picture can be shown looking at a broader category of liquid assets (including savings, time depots, mmmfs, etc.). There doesn’t seem to be any extraordinary behavior on the side of firms. Similarly, households appear to be carrying relatively low levels of cash and deposits relative to total assets.

The second estimate of Q4 Real GDP, released yesterday indicates that output grew a tiny bit in the fourth quarter and there was an upward revision in the third quarter. than previously estimated at 2%. On the face of it this seems like good news but it is really insignificant and is much smaller than typical revisions. The fundamentals that we look to for evidence of a robust recovery were not encouraging.

The BEA also released January 2013 personal income and savings. Personal income declined by 3.6% compared to a gain of 2.5% in December and the personal savings rate dropped with it, plunging back down to 2.5%. As we showed last month, the effects of fiscal policies were clearly evident in the December 2012 personal income gain, as companies shifted dividend payments forward to avoid the end of the payroll tax holiday. January’s numbers reinforce this idea.

As always, we show the components of GDP measured from the peak of the business cycle.

The advance estimate of Q4 Real GDP released on Wednesday showed that US output contracted by 0.1 percent in the final quarter of 2012. The effect of fiscal policies as well as weakness of the European economy and the rest of the world can clearly be seen in the negative aspects of the report.  The overall decline was due to a reduction in  exports (-5.7%) and a rundown in inventories as well as a large decline in government spending (-6.6%) caused by a 22.2% cut in defense.

The negative headline number hides overall positive growth in domestic fundamentals. Consumption expenditures on durables increased at a faster pace than in Q3, and both residential and non-residential fixed investment recorded the highest combined growth since the second quarter of 2010. There are signs that spending on services and non-durables are slowing down, which will be a cause of concern if the trend continues into 2013.

Fiscal policies matter. The expected end of the payroll tax holiday had a large effect on personal income and savings toward the end of the year. In the final two months of 2012, real disposable personal income increased by 1.3% and 2.8% in November and December. This is in stark comparison to the .14% growth in the first 10 months of the year. The run-up in income can almost entirely be attributed to companies shifting dividend payments forward. The result lead to a jump in the savings rate, up to 6.5%, but no apparent change in personal consumption expenditures.

                           Aug.     Sept.    Oct.     Nov.     Dec.
                           (Percent change from preceding month)
Disposable personal income:
  Chained (2005) dollars  -0.3      0.1     -0.1      1.3      2.8
Personal consumption expenditures:
  Chained (2005) dollars   0.0      0.5     -0.2      0.6      0.2

Personal Savings Rate      3.6      3.3      3.4      4.1      6.5

Inventory Changes

Interpretation of the downward change in business inventories is difficult. The negative view is that businesses are cutting back on production for fear of weak demand in the future perhaps in anticipation of tax and spending cuts in the New Year. The positive view is that sales in the fourth quarter were unexpectedly high. So the question that really should be asked is when are negative inventory changes indicative of a slowdown in output?

A first step is to see how inventories are related to the business cycle. The graph below shows the real change in private inventories adjusted for the level of output (in red) and the business cycle component of real GDP (in blue) since 1970. Inventories are positively correlated with output and tend to lead the business cycle, meaning that generally inventories decline before output. However, the change in inventories is noisy. A quarter decline is much less informative than a prolonged period of inventory depletion. The implication is that we will have to wait a bit longer  to understand the full importance of the recent decline.

 

As always, we show the components of GDP measured from the peak of the business cycle.

There was little news in an altogether moderate  jobs report for December. Non-farm payrolls added 155,000 jobs in December, coming close to the average monthly net change in 2012 of 153,000. The gains largely came from health care (+45K) and food services and drinking places (+38K). Retail trade and temporary help services both contracted (-11K and -.6K respectively).

61 months after the start of the recessions and most labor market indicators are still well below their peak level. Non-farm employment remains close to 3% below while hours remains 5.4% below and showing signs of slowing down. 
The unemployment rate remained at 7.8% showing that the labor market has made little progress since the end of the summer.  Participation also remained steady at 63.9% as well as the employment population ratio at 58.6%. There are a few positive signs in the report that suggest improvements in the labor market may be ahead for 2013. The mean duration of unemployment fell from 39.7 weeks to 38.1, marking the biggest monthly decline since the recession began. It is still a far cry from an average of 16.6 weeks at the peak of the cycle, but it is the first signs that the whole distribution of unemployment duration is shifting lower.

The BEA released the third estimate of GDP and its components, showing real GDP increasing 3.1% for the third quarter–the second estimate came in at 2.7% and the advance estimate at 2.0%. The increase was higher than consensus expectations. As we stated in an earlier post though, you may want to keep the celebration in check. Although final sales perked up, 2.4% in Q3 compared to 1.7% in Q2, and residential investment increased 13.5%, nonresidential structures investment was flat, 0%, and equipment and software investment was down -2.6%. In fact, the overall trend in nonresidential investment over the last year is a significant cause for concern. It also coincides with the slowdown in employment growth.

Federal Government spending was revised up to 3.9%,  from a previous  3.5% in the second estimate. The major part of the increase was driven by a large 9.5% increase in Federal Government spending and a big part of that was defense spending: National defense spending rose 12.9%. Overall, the increased Federal spending accounted for .75 percentage points of the 3.1% growth in real GDP, and Personal Consumption expenditures accounted for about 1/3 of the increase, 1.12 percentage points .  Note that the government spending increase was the first increase in 8 quarters. The last time government spending fell for 8 consecutive quarters was the unwinding of the Korean War, from 1953:Q3 to 1955:Q2.

Overall, it appears that consumption growth remains sluggish and fixed investment can not get its act together–especially business fixed investment. Concerns throughout the rest of the world appear to have generated a decline in trade overall, although exports were up 1.9%, imports fell, -0.6%.

Continue reading “Q3 GDP Revised UP, Some Troubling Areas Remain” →

The effects of hurricane Sandy on the labor market obviously make interpreting the data more difficult. However, the BLS issued a statement in today’s  Employment Situation report stating:

...our survey response rates in the affected states were within 
normal ranges. Our analysis suggests that Hurricane Sandy did 
not substantively impact the national employment and unemployment 
estimates for November.

This morning’s report shows non-farm payrolls increasing 146,000 in November with total private employment rising 147,000.  The increase is slightly lower than the average monthly employment gain in 2012 of 151,000 and of 2011 of 153,000. As seen in the graph below, both the pace and the level of the recovery of the labor market are still well below the average from the previous four cycles. Employment gains were found in retail trade, professional and business services, and health care.

While the report does show that employment was up, there is also some down: goods producing industries declined over the month, with construction falling 20,000. The report also included downward back-revisions for the previous two months of 49,000. As is well-known, the BLS procedures for employment involve an initial estimate that gets revised in each of the next two months to arrive at the “final” estimate. The chart below shows these revisions since June, 2011. The red dots represent the initial headline estimates, while the green dots and bars represent the two revisions.

The graph makes evident how much noise is in the estimation process. On average, since the start of the recovery in July 2009, the average revision from the first to the final estimate has been +30K. One can argue that this error is quite large, especially when the economy is adding only 150K jobs a month. Another interesting observation is if there is any predictable under or over estimation occurring, especially over the business cycle. It is difficult to observe any systematic behavior from the graph below, but it does seem that the first revisions are relatively persistent to the previous data point. During times when the employment change is increasing, the BLS tends to underestimate the true value. In times when the employment change is decreasing the opposite is happening and the BLS tends to overestimate.

The national unemployment rate decreased over the month to 7.7%. However, there was little change in the number of unemployed persons, approximately 12 million. The decline in the unemployment rate was a result of a decline in the labor force.  The participation rate fell from 63.8% to 63.6%. Moreover, the employment to population ratio also declined slightly, from 58.8 to 58.7.

Continue reading “Labor market ups and downs” →