Author: Peter Rupert

by Thomas Cooley, Ben Griffy and Peter Rupert

Reading through today’s release of the employment situation from the BLS one is struck by how many times the phrase “little changed” shows up. Employment gains from the establishment survey were weak, up 151,000. Revisions over the past two months were almost off-setting, up 28,000 for November and down 30,000 for December, so, little change there.

Employment in mining and logging continues to decline, down 7,000 and down 29,000 over that past three months.
Manufacturing was up 29,000 and services up 118,000. However, temporary services declined 25,200. Health care and social assistance as well as leisure and hospitality rose by 44,000.

Average weekly hours were up to 34.6 but have bounced between 34.5 and 34.6 since March of 2014. Average hourly earnings rose from $25.27 to $25.39, up 2.5% over the year.

The household survey also showed very little change in most headline numbers. The unemployment rate remained at 4.9% and the unemployment rate including marginally attached workers remained at 9.9%. Here are the numbers for the unemployment rate since September, with a lot of digits:

2015-09-01 0.05052050
2015-10-01 0.05028136
2015-11-01 0.05035331
2015-12-01 0.05007825
2016-01-01 0.04920580

Given the amount of vacancies out there, however, the unemployment rate remains somewhat high, as can be seen in the Beveridge Curve.

There has been no significant change in the employment to population ratio or the labor force participation rate, those unemployed 27 weeks and longer, or those working part time for economic reasons.

Output per hour fell 3.0% at an annual rate in the fourth quarter of 2015 and has not shown any upward trend over the recovery. Indeed, it is only about 7% higher today compared to the peak before the great recession, by far the slowest rate of growth across all recessions and recoveries since the 1960’s, except for the 1973 recovery.

The BLS also undertook the annual revision to earlier data based on a more complete set of data. The annual revisions lowered December payrolls by 105k. The total nonfarm employment level for March 2015 was revised downward by
206,000 but this left a boost for job growth as the over-the-year change in total nonfarm employment for 2015 was revised from 2,650,000 to 2,735,000.

Overall, then, the slow GDP growth reported earlier this month along with the fairly weak labor report shows an economy that continues to grow at a fairly anemic pace. Moreover, it seems less likely the Fed will signal any moves in the near future.

By Thomas Cooley, Ben Griffy and Peter Rupert

Today’s release of the “advance” estimate for GDP for 2015 QIV shows 2015 ending with a dud as growth slowed throughout the year. Real GDP increased only 0.7% at a seasonally adjusted annual rate. Both real GDP and real personal consumption expenditures (PCE) have taken a decidedly downward turn. The weak numbers were widely anticipated, presaged by falling industrial production, declining exports and weak consumer demand. The question on everyone’s mind is whether this portends a more prolonged contraction in the economy.

Looking at previous business cycles, it is clear that this recovery, while weak, is beginning to look mature.  Job growth has continued strong and the unemployment rate is low  but this recovery has been in progress for several years now.  What are the forces weighing on economic growth that would tip the economy into a contraction?

Exports have shown gradual flattening out and then more recently a decline precipitated by weak demand elsewhere in the world and a strong dollar. Expectations are that this will continue and continue to pull down U.S. growth.  Consumption was also weaker in the fourth quarter after looking stronger earlier. PCE slowed to 2.2% after growing 3.6% and 3.0% in QII and QIII, respectively. Moreover, as the graph below shows, once PCE goes south it takes a while to reverse course. Investment in non-residential structures (-5.3%) and equipment (-2.5%) fell sharply, leading to an overall investment decline of -2.5%. Residential structures, however, grew at 8.1%.

 

 

Headwinds

The U.S. economy has always been an important driver for growth elsewhere in the world. As the first picture below shows the fate of the U.S. economy is closely aligned with the fate of nearest and most important trading partners, Mexico and the U.S. but in the age of globalization other trading partners – China, Europe Japan are very important as well. As you can see from the following charts, Europe and Japan are stagnant and the emerging markets, while not completely foundering, are likely not to lift others, particularly as China’s growth slows.  These are serious concerns for the future strength of the U.S. recovery.

 

 

 

by Thomas Cooley, Ben Griffy and Peter Rupert

The December employment situation delivered this morning from the BLS showed continued strength across the board. Payroll employment increased 292,000 and the news gets better as payrolls were revised up for both October (+9,000) and November (+41,000). The mining and logging sector continued to decline, falling another 8,000 after falling 11,000 in November and 1,000 in October as a result of the continued decline in oil prices. The motor vehicle and parts sector also fell for the third straight month, shedding 6,500 jobs over that time span.

Most of the job gains were in the service sector with health care and temporary services showing significant gains. In the goods producing sector most of the gains were in construction.

Average weekly hours were essentially unchanged as were average hourly earnings.  The latter is important because it means that strong job growth has not yet generated more upward pressure on wages.  But a more careful look at wages is provided by the Federal Reserve Bank of Atlanta’s wage tracker. It shows across a broad set of categories a three month moving average of median wage growth of roughly 3.1% . This is a sign of a healthy labor market. The labor force participation rate and the employment population ratio also inched up very slightly. These strong results provide some validation for the Federal Reserve’s first interest rate hike in nearly a decade, which occurred in December.

Global weakness as well as falling oil prices still loom on the horizon. On two separate occasions this week, the Chinese stock market fell by more than 7 percent, prompting a halt to trading on Wednesday. Uncertainty about the interest rate environment, as well as concern about the Chinese stock market caused the Dow, Nasdaq, and S&P 500 to close down, despite the strong jobs report. This, among other data concerns prompted GDP Now, a predictive algorithm maintained by the Federal Reserve Bank of Atlanta, to revise its estimate of quarterly GDP in the fourth quarter of 2015 from 1.0 percent to 0.8 percent.

Many observers noted weakness in the U.S. economy in the fourth quarter – signs that showed up mainly in the purchasing managers indices and industrial production. So far that pressure has not appeared in the U.S.  labor market.  The number of people employed part time for economic reasons has continued to decline as has the duration of unemployment.

How long this recovery can continue in the face of much global turmoil remains to be seen, but for the time being the major puzzles of the labor market seem to be structural not cyclical.  We will discuss these structural issues in a subsequent post.

Average hours of work remained at 34.5 and average hourly pay fell slightly to $25.24 from $25.25.

 

 

 

by Thomas Cooley and Peter Rupert

Establishment Survey

The Bureau of Labor Statistics establishment survey for November shows an employment increase of 211,000 jobs, with an upward revision of 27,000 jobs for October and down 5,000 jobs for September.

Average weekly hours fell slightly, from 34.6 to 34.5 and average hourly earning were essentially flat. Since 2009 the BLS also produces data for all private workers, evidently higher than for just production and non-supervisory workers; however, the same basic pattern emerges. The recent climb in real hourly earning stems almost entirely from the decline in inflation as nominal earnings growth has hovered around 2% for the last five years or so.

Household Survey

The household survey reveals very little significant change  over the past few months. The unemployment rate ticked up ever so slightly…from 5.036 to 5.046, but who’s splitting hairs. The participation rate also ticked up slightly and the employment to population ratio was essentially unchanged. The number of people working part time for economic reasons  popped up by 319,000 but it has been declining steadily for months.  The composition of the unemployed changed slightly with more more new-entrants to the labor force and more re-entrants.  The overall picture is of a recovered labor market with some continuing longer term structural issues.

 

By Tom Cooley and Peter Rupert

Today’s release of the second estimate for Q3 by the Bureau of Economic Analysis (BEA) reveals an upward revision from 1.5% in the advance estimate to 2.1% for real GDP.

As pointed out in the release, “The upward revision to the percent change in real GDP primarily reflected an upward revision to
private inventory investment that was partly offset by downward revisions to PCE and to exports.” Personal consumption expenditure was revised down from 3.2% to 3.0%.  The weakness in consumption and the higher than anticipated inventory investment are signs of weaknesses that are confirmed elsewhere.

In our last post we mentioned that what looked like some bad news was not so bad. This time, what looks like good news with the upward revision reveals some troubling signs for the future path of interest rate hikes. It seems that the Fed will do what the Fed will do this December, as there is not much in the way of strong evidence to not raise rates at the next meeting and there is a strong desire to move off the zero lower bound. But weaknesses in the recovery are likely to affect the future path of the federal funds rate. Moreover, this is now quite a “mature” if tepid recovery, as can be seen in the first chart below –  other recoveries had expired this many quarters out.

Consumption, investment and its components are all consistent with a continued, but weak, recovery; and this recovery is set in the context of a world economic order that is fragile and changing. Europe has continued to be slow to improve, Japan and China show signs of weakness and many emergent market economies are beset by the falls in commodity prices.

Weakness in Manufacturing

A strong dollar and aggressive monetary expansions elsewhere in the world have contributed to weakness in U.S. manufacturing.  Industrial production has been weak over the past year or so and capacity utilization continues to be below the estimated “boom-bust” level of 82.5.

 

Barring a bad jobs report, the weakness in manufacturing is not likely to constrain the Fed from raising rates at its next meeting.  But along with other factors it is likely to constrain the path of interest rates for some time to come.

By Thomas Cooley and Peter Rupert

The preliminary establishment data released by the BLS for October shows strength  across the board in the labor market. Employment rose by 271,000 in October, and 268,000 of those were in the private sector.  Average weekly hours increased, the employment population ratio increased and the labor force participation rate stayed flat, although these two measures remain at historically low levels.

Earnings and Productivity

Another encouraging sign is that average hourly earnings and productivity both increased slightly, suggesting that competitive forces are beginning to assert themselves.

The Unemployed and The Underemployed

In addition to the improving jobs and compensation numbers there is evidence that  long duration unemployment is declining and the numbers of those that are employed part-time for economic reasons are declining.

The Labor Market and the Fed

The business press and economic pundits all view this strong jobs report as erasing one of the remaining justifications for the Fed’s reluctance to normalize monetary policy and begin raising rates. That may very well be true but it doesn’t mean that the labor market has emerged from the long shadow cast by the great recession. The recession inflicted lasting damage to the labor market, damage that is revealed in the continuing low participation rates and more importantly in the deterioration of the market’s ability to match workers with jobs as is suggested by the outward shift in the Beveridge Curve for the U.S.  These problems are long term and structural and not likely to be solved by monetary policy.

By Thomas Cooley and Peter Rupert

The Bureau of Economic Analysis released the advance estimate for GDP the day after the October meeting of the FOMC. Kind of bad timing…would the FOMC statement have been the same after knowing GDP in the 3rd quarter increased by just 1.5%? Most prognosticators expected a large drop in GDP growth compared to Q2, so the weakness was not entirely unexpected. In fact the fundamentals of the GDP report were not disappointing at all if you look at the composition and were not so far off Q2 results. But, markets will take some time to digest what it all means and what it means for liftoff. The way we read the numbers, there is very little reason for the “data driven” Fed to wait.

While the headline GDP growth number was lower than in Q2, the components of final demand were strong. Personal consumption expenditures grew at a 3.2% clip after climbing 3.6% in Q2. The contribution of gross private domestic investment to GDP growth fell by .9%, caused by a small decline in nonresidential structures and a big decline in inventories. Weaker exports were also a factor.

What next?

It is clear that the U.S. economy is continuing to grow. That consumption and basic investment are strong is a sign that the domestic fundamentals are pretty strong. Real disposable personal income increased by 3.5%. Declines in the energy sector have held back investment in non-residential structures and equipment and that doesn’t promise to improve in the near future.  Most of the uncertainty and worry are  external. The biggest worry is about the much discussed slow-down in China and the knock-on effects that has for other commodity exporting nations like Brazil and Australia, as well as continued slow growth in Europe and Japan.  The world economy is not booming and that raises the legitimate question of what our expectations should be and what considerations should guide Fed policy. At the moment they seem to be operating on the basis of a “first do no harm” principle. There is a growing chorus of people who believe that they are doing unseen harm by not normalizing monetary policy. There will be a couple more employment reports and the second estimate of Q3 GDP before the next FOMC meeting in mid-December, so time and data will tell!

By Thomas Cooley and Peter Rupert

Today’s release of the employment situation shows a modest increase in employment of 142,000. Moreover, employment over the past two months was revised down by a total of 59,000 (22,000 for July and 37,000 for August). While the mining and logging sector (oil) continued to shed jobs, manufacturing employment was down for the second month in a row; falling 9,000 in September after falling by 18,000 in August. Although the housing sector has shown some growth, construction employment is still lagging. Average weekly hours also fell back to 34.5.

The household survey also had a weak flavor to it. The unemployment rate stayed at 5.1%, but the labor force fell by 350,000. The employment to population ratio also fell to 59.2.

Last week, the third “estimate” of real GDP for the 2nd quarter of 2015 shows  that output of final goods and services grew by 3.9% at an annual rate compared to 3.7% from the 2nd estimate. There was no change in the final estimate of 1st quarter GDP, remaining at 0.6%.  Personal consumption expenditures (PCE) was the largest contributor, providing 2.42 percentage points of the 3.9% gain.

Chairperson Yellen’s remarks on September 24 mentions again that they could (expect to?) raise rates by the end of the year:

Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter. But if the economy surprises us, our judgments about appropriate monetary policy will change.

The last sentence in the Yellen quote once again provides an out for the Fed not to do anything. It is the nature of the beast that quarterly or monthly outcomes can be much different from the trend without signaling a change in direction. That is, if in the next employment report there is a slight uptick in the unemployment rate, or an employment change of say only 100k workers, will that dissuade members of the committee? There is (almost) always something in a given report, GDP or employment, that can be read as surprising. Perhaps non-residential investment is particularly low, for example. Here are the numbers for the annualized percentage change in non-residential structures over the past six quarters, i.e., starting in 2014Q1: 19.1%, -0.2%, -1.9%, 4.3%, -7.4%, 6.2%. And this for equipment over the same time period: 3.5%, 6.5%, 16.4%, -4.9%, 2.3%, 0.3%.

The bigger question is whether the economy is in a sustained recovery or have we hit a rocky spot giving the Fed further pause? That said, a return to normal monetary policy that begins to eliminate some of the distortions caused by several years of zero interest rates would seem to be beneficial and it is surprising that the FOMC did not see it that way.

by Peter Rupert

The moment of truth concerning liftoff is upon us as the FOMC makes their decision and delivers their verdict tomorrow. With the release of the latest Job Openings and Labor Turnover Survey (JOLTS) and the previous employment report, it appears the labor market is firing on many, if not all, cylinders. The JOLTS data reveal both the highest level (about 5.7 million vacancies) and rate (3.9%) of job openings since the series began in December of 2000.

The unemployment rate is also quite low and the Beveridge Curve (a plot of vacancies vs. unemployment) is now looking much healthier after its typical counter-clockwise journey. Many of the previous statements from the meetings suggested that there was still some slack in the labor market, but it was dissipating. With vacancies as high as ever it appears that businesses are in hiring mode big time…but, inflation is not in sight.

So, the question is: When is the right time? Financial markets are volatile for sure; however, to what extent has Fed policy fed into the volatility? The rest of the world has its problems, but many areas will continue to be problematic for some time to come, see our commentary here.

If the FOMC does not raise rates today, here is what they will likely say: “While labor markets appear to have reduced slack, there is little evidence of inflation. The rest of the world is still in turmoil.” And if they do raise rates, “Labor markets have continued to recover and are now near levels thought to be in the target range. While global markets are still somewhat fragile, the evidence in the US suggests that the current stance of policy is not in line with normal policy.”

by Tom Cooley and Peter Rupert

The Bureau of Labor Statistics establishment survey for August revealed a somewhat expected, yet somewhat disappointing, 173,000 employment increase. Upward revisions totaling 44,000 over the past couple of months took some of the edge off of the disappointment. Private employment posted only a 140,000 gain, however, and government continued to climb, up 33,000. Goods producing declined by 24,000, with manufacturing down 17,000 and mining and logging down 10,000. Given the tendency for the August numbers to be revised upwards this report is in keeping with previous months and is not likely a sign of weakness in the economy.

Hours and Wages:

The average workweek ticked up to 34.6 after three consecutive months at 34.5. Average hourly earnings were also up slightly.

Participation:

From the household survey, the number of unemployed fell by 237,000; however, the labor force was also down, 41,000, leading to a decline in the unemployment rate to 5.1% and no change in the labor force participation rate at 62.6. This is really the major conundrum for the U.S. economy. Labor force participation is at a forty year low. The employment to population ratio has picked up slightly but not anywhere near enough to reverse the precipitous drop during the Great Recession.  The low participation rates suggest there are many workers who have been effectively disenfranchised by the Great Recession which continues to cast its long shadow over the economy.  But these are now structural issues not cyclical ones.

The number of people unemployed less than 5 weeks fell by 393,000 while the number unemployed 27 weeks or more rose 7,000; again showing that the issues seem more structural than cyclical.