Author: peter.c.rupert

By Thomas Cooley and Peter Rupert

The BLS announced the much anticipated March employment report that seems to have captured more of the COVID-19 effect than originally thought. Payroll employment fell 701,000 with a decline in 713,000 in the private sector.

While not unprecedented, it is certainly a major event. During the Great Recession between November, 2008 and April 2009, employment changes were:

November, 2008	-727,000
December, 2008	-706,000
January, 2009	-784,000
February, 2009	-743,000
March, 2009	-800,000
April, 2009	-695,000

The largest one month decline occurred in September, 1945, with a loss of 1,959,000. There have been many one-month declines of 600,000 or greater.

But it is important to remember that that the reference week for this report was mid March and the last two weeks have been brutal with record unemployment initial claims of 3,307,000 in the week ending March 21 and another 3,341,000 in the week ending March 28, bringing the total to 6,648,000 new claims for unemployment benefits, roughly 10,000,000 new claims over the past two weeks. Even those lag reality because unemployment insurance systems have been unable to keep up with the influx.

Given the headline of initial claims being thrown about, it is useful to understand exactly what this statistic measures. The BLS defines initial claims as, “An initial claim is a claim filed by an unemployed individual after a separation from an employer. The claimant requests a determination of basic eligibility for the UI program. When an initial claim is filed with a state, certain programmatic activities take place and these result in activity counts including the count of initial claims. The count of U.S. initial claims for unemployment insurance is a leading economic indicator because it is an indication of emerging labor market conditions in the country. However, these are weekly administrative data which are difficult to seasonally adjust, making the series subject to some volatility.”

In addition, continued claims are defined as, “A person who has already filed an initial claim and who has experienced a week of unemployment then files a continued claim to claim benefits for that week of unemployment. Continued claims are also referred to as insured unemployment. The count of U.S. continued weeks claimed is also a good indicator of labor market conditions. Continued claims reflect
the current number of insured unemployed workers filing for UI benefits in the nation. While continued claims are not a leading indicator (they roughly coincide with economic cycles at their peaks and lag at cycle troughs), they provide confirming evidence of the direction of the U.S. economy.”

By far the biggest drops in employment were in the service sector – in retail trade and leisure and hospitality. The leisure and hospitality sector employs about 16.3 million workers, so the 459,000 drop is about 3% of the workforce. Many believe the fraction of that workforce will drop substantially more. The ensuing months will show the carnage in other sectors.

Several sectors had to increase their staff due to the surge for certain products. General merchandise stores, including warehouse clubs and supercenters saw an increase of 7,900 employees. Warehousing and storage up 8,200. Finance and insurance up 2,500. Professional and technical services up 6,500.

Average hours of work fell to 34.2, however average hourly earning rose from $28.51 to $28.62, likely reflecting the loss of jobs in the service and retail sectors.

The household survey showed a decrease in employment of 2,987,000 and a decrease of 1,633,000 in the labor force. The employment to population ratio fell to 60.0 from 61.1. The unemployment rate rose to 4.38% as the number unemployed increased by 1,353,000.

The expectation is that the second quarter will see a dramatic rise in the unemployment rate. What is different about this experience is that fall in economic activity is so widespread and the collateral damage is likely to be great. In the Great Depression unemployment took a few years to reach its peak of over 24%. We could see the unemployment rate reaching toward 20% in a few months. One uncertain element is the effectiveness of the massive stimulus package some of which is aimed at keeping firms from laying off workers.

By Thomas Cooley and Peter Rupert

The Bureau of Labor Statistics reported that establishment data showed a 273,000 boost to employment with an additional 48,000 added to January payrolls (from 225,000 to 273,000) and another 37,000 to December’s total (from 147,000 to 184,000). Early expectations by some forecaster’s was closer to 175,000. Of course, the Coronavirus would not have much of an impact on the February numbers. Indeed it had hardly shown up in the U.S. until now. Over the next several months the impact could be substantial but anything we write here would be pure speculation. We will have to wait and see what transpires over the next few months.

The goods producing sector saw another strong increase of 61,000 and the service sector 167,000 and the government sector added 45,000.

Average weekly hours increased to 34.4 and average hourly earnings climbed 11 cents to $28.52.

The household data showed a drop in the labor force, -60,000. The number employed was up only 45,000 while there were -105,000 fewer unemployed. Therefore, the labor force participation rate showed no perceptible change, the employment to population ratio down slightly and the unemployment rate dropped from 3.58% to 3.52%.

What happens next?

Clearly the coronavirus is going to have a significant impact on employment in the coming months. How big is a matter of speculation but the prospects are significant enough to have caused the Fed to lower its target rate by 50 basis points. The impact of the rate decrease is unlikely to be very significant aside from the fact that the Fed is using up its firepower with little clear objective in sight.

The immediate impacts of the pandemic employment will most likely be in services, particularly travel and transportation services. Tourism and leisure sectors will also be impacted relatively quickly. Off-setting factors will be increased demand for health care workers and laboratory and diagnostic services.

By Thomas Cooley and Peter Rupert

The BLS announced that establishments added 225,000 jobs in January and also revised the previous two months up by 7,000 (November up 5,000 and December up 2,000). Just to be clear how difficult it is to forecast an economy, professionals predicted something like 160,000-170,000…off by, well, a lot. The average monthly gain in 2019 was 175,000. This was a strong beginning for 2020, only November (261,000) showed a larger increase in 2019 compared to today’s January numbers.

Employment in the private sector grew by 206,000 with the government adding 19,000. Construction was up 44,000 while manufacturing jobs declined by 12,000, with most of that in motor vehicles and parts, down 10,600.

The service sector added 174,000 jobs with health care and social assistance growing 47,200 and leisure and hospitality 36,000.

Average weekly hours stayed constant at 34.3 and average hourly earnings rose from $28.37 to $28.44, increasing 3.1% year over year.

Average hourly earnings ticked up slightly and year over year have gained just over 3%. Workers are gaining steadily in this labor market and are showing the confidence to exit existing jobs and search for new ones.

The household survey showed an uptick in unemployment from 3.50% to 3.60%. The labor force participation rate increased from 63.2% to 63.4% and the employment to population rate also increased, 61.0% to 61.2% underscoring the strength of the labor market.

The strong labor market supports the Fed’s stance to sit tight for now and let the economy continue to grow. Everyone expects the Coronavirus Outbreak and the extreme measures being taken to fight it to subtract from growth in the coming months but we don’t know how long lasting and disruptive the event will be. We just have to wait and see.

By Thomas Cooley and Peter Rupert

The BEA announced that real GDP for Q4 increased 2.08%, nearly the same rate as in Q3. Real GDP increased 2.3% in 2019, 2.9% in 2018 and 2.4% in 2017. Personal consumption expenditures moderated, growing 1.8% and was up 2.6% in 2019. Gross private domestic investment fell considerably, down 6.1%, after falling 1.0% in Q3 and 6.3% in Q2. Non-residential structures fell by 10.1% and fell by 9.9% in Q3, 11.1% in Q2 and was down 4.4% in 2019.

The FOMC announcement seemed a yawner with nothing much to report other than that they are maintaining their stance from the last meeting. Boeings ongoing problems, the Coronavirus Epidemic, and the vagaries of the trade wars represent looming concerns for the economy. The outlook for the first quarter of 2020 is distinctly cloudy.

By Thomas Cooley and Peter Rupert

The BLS announced that payroll employment in December rose 145,000 with 139,000 in the private sector. October saw 4,000 in downward revisions and November down 10,000. Manufacturing declined by 12,000 while the construction sector gained 20,000.

Average weekly hours of work remained at 34.3 for the third straight month. Average hours are the lowest they have been since 2011 suggesting less intense use of the labor force. Average hourly earnings rose slightly to $28.32 from $28.29.

BTW, women are now 50% of the total nonfarm workforce.

Overall the data are consistent with the view of an economy that is growing at a most pace. The unemployment rate remains at a fifty year low, jobs are growing but more slowly and wages are keeping growing in real terms but at a slow rate.

All of this suggests that the Fed has achieved its goal of a soft landing at the end of a record expansion. Few will anticipate more stimulus from monetary policy.

The FOMC will convene for two days this week on Tuesday and Wednesday for policy deliberations. There seems to be consensus that the Fed will cut rates another 25 basis points following the recent 25 bp cut in July. The problem is that there is little by way of data that would indicate a cut at this time. Neither the output numbers nor labor market indicators suggest it.

Real GDP growth has remained fairly steady and many components show decent strength. While year-over-year growth has trended down a bit over the past year it is still averaging over 2% for the past few years.

Personal consumption expenditures (PCE) are solid, possibly reflecting confidence by consumers, with both durable and non-durable goods showing continued steady growth. There has been much talk about how the U.S. consumer is keeping the U.S. economy going with salutary impacts for our trading partners.

After taking a major hit during the Great Recession, investment has taken off and is now almost a half a trillion larger than before the recession.

Labor markets continue to show strength in pretty much every dimension. Both the headline unemployment rate and the U6 rate are at very low levels, falling below the levels seen in the run up to the Great Recession. Real average hourly earnings have picked up and the workweek has been fairly steady over the past several years.

There are more vacant jobs posted than unemployed individuals searching for them in every region of the country. Moreover, the Beveridge curve (plotting unemployment rates against job vacancies) has completely reversed itself since the Great Recession. Quit rates are pretty much as high as they have ever been since the JOLTS data began and layoffs and discharges at their lowest level.

So, what is driving all the negativity? Many have mentioned trade uncertainty. But the stock market seems to be defying those concerns. The question for the Fed is simply: Are the current trade fears large enough to justify another cut?

Nothing that we see in the current economic data suggests that another rate cut is called for. The Fed has promised “data driven” decisions so any decision to ease should be supported by the data that justifies it. The Taylor Rule suggests (of course it does not imply what the Fed should be doing) that the current level of rates is just right.

Is the Fed letting itself be stampeded by market expectations and Donald Trump’s tweets? It is a sad sad day if that is true.

By Thomas Cooley and Peter Rupert

The BLS announced an increase in payroll employment of 130,000. The private sector added only 96,000 jobs. The government sector increased its payroll by 34,000, due to the temporary hiring of census workers for the upcoming 2020 census. June and July payrolls were revised down, -15,000 and -5,000, respectively. While the headline number undershot expectations (around the 150k mark) digging into the report seems to show more strength than weakness.

This is the seventh straight month of decline in retail trade employment, falling 11,100 and the sector has shed 83,700 jobs since February. There were also some small scattered losses: mining and logging down 5,000; utilities down 1,400 and a couple others even smaller. Health care and social assistance increased 36,800.

On the positive side, average weekly hours increased from 34.3 to 34.4. Average hourly earnings rose $0.11 to $28.11. Moreover, earnings have been trending up and with inflation at bay, real earnings have also been rising.

The household survey also had some signs of strength. The labor force increased 571,000 and the number employed rose by 590,000. The number unemployed fell by 19,000. Overall, the unemployment rate fell from 3.71% to 3.69%.

The Jobs Opening and Labor Turnover Survey continues to show strength in that there are still more job openings that unemployed persons.

The Federal Reserve pays a lot of attention to the employment report. They have emphasized repeatedly over the past year that policy will be “data driven.” How then should this report impact policy? There is now talk about another interest rate cut at the Fed’s next meeting in September. We see little in this employment report that would suggest such a cut. Other data also do not really point to a cut. The last GDP report was on the strong side, consumption growth was up 4.7%, for example. Yesterday’s productivity report, that showed output per hour up 2.3%, also provides little support for a cut.

What is seemingly the principal motivation for a cut in interest rates is uncertainty over the effects of the trade war with China on GDP growth. Indeed a recent article from several Fed economists points to a reduction in GDP of nearly 1.0% due to trade uncertainty. Is that large enough to call for a “data driven” cut in rates? Why is the Federal Funds rate the right instrument for this shock? There is little evidence that firms are unable or unwilling to borrow so what problem will a rate cut address? It feels like it is time for the Fed to offer some more clarity on what it sees in the data.

By Thomas Cooley and Peter Rupert

The Bureau of Labor Statistics announced a 164,000 increase in payroll employment. There were 148,000 jobs added in the private sector and 16,000 added to government payrolls. There were 41,000 in downward revisions, 31,000 less in June and 10,000 less in May. The mining sector shed 5,000 jobs and retail lost 3,600 and Information was down 10,000.

These numbers certainly suggest some cooling in the labor market but it still is a healthy increase in employment. Labor force participation inched up slowly.

The trade war is having an impact on both exports and imports and eventually this will show up in the labor markets, but so far there is no cause for panic and little to support further Fed pre-emptive action.

Average weekly hours fell to 34.3 from 34.4. Average hourly earnings increased by from $27.90 to $27.98, a 0.28% increase.

The recent Fed cut and the tepid employment report likely mean the Fed will stay the current course with no expected cut in the near future without something more drastic happening in the economy.

By Thomas Cooley and Peter Rupert

The BEA announced a 2.1% growth rate for GDP in the advance estimate for the second quarter. Personal consumption expenditures led the way, rising 4.3%. Durable goods were up 12.9% and nondurables up 6.0%. GDP growth was well below the torrid pace of last quarter and recent history but the consumer kept the economy purring along.

Business fixed investment fell slightly, mainly in structures. Residential structures have declined in 8 out of the last 10 quarters. The evidence suggests some slowing of the economy but nothing too dramatic.

To what extent should these numbers set off alarms about the state of the economy? We know that European growth is weak and that China has slowed quite a bit as well; and yet the U.S. keeps on growing and labor markets are healthy. This is not a picture of an economy in trouble and in need of liquidity. Import growth has been flat and export growth has been negative and that dragged GDP down. These are both logical consequences of the trade war.

How should the Fed react in these circumstances? Markets have already priced in a rate cut by the Fed and every major commentator has urged the Fed to cut rates preemptively. Under these circumstances a rate cut may be benign but it is hard to see what good it will do when the real problem are trade wars and jobs skills. It will also be an unfortunate sign that Chairman Powell has allowed the Fed to become more politically responsive.

By Thomas Cooley and Peter Rupert

First, congrats to a long-time friend and first-rate economist, Chris Waller, who has been nominated to the Federal Reserve Board. Congrats to Judy Shelton as well!

Today’s employment report from the BLS blasted through “expectations” by adding 224,000 jobs. Expectations were in the 160,000 range. There were 11,000 in downward revisions, down 8,000 in April and 3,000 in May. Of course one month does not make or break a trend. Since climbing out of the depths of the recession, the labor market has shown remarkable stability. As many are aware we are now in the longest recorded economic expansion. The chart below shows payroll employment monthly change as well as the 12-month moving average.

The private sector added 191,000 jobs and government employment increased 33,000. Aside from a small decline in retail (-5,800) and negligible declines in mining and logging (-1,000) and motor vehicles (-200), the employment growth was robust. Service producing jobs increased 154,000 and goods producing increased 37,000.

The workweek remained at 34.4 for the third month in a row. And average hourly earnings increased 0.2%, from $27.84 to $27.90, up 3.14% year over year. Given inflation up 1.8% year over year implies real earnings growth.

The household survey also provided strong labor market signals. The civilian labor force jumped up 335,000, increasing the labor force participation rate from 62.8 to 62.9. The number employed was up 247,000 and the number unemployed crept up slightly by 87,000–all leading to an increase in the unemployment rate from 3.62% to 3.67%. The BLS defines the official unemployment rate as U3, plotted below is also the U6 rate: U-6 is total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force. The U6 rate currently stands at 7.2%, up slightly from 7.1% in May, but lower than any time in the last two decades.

The big picture

The latest strong labor market signals most likely put the idea of a cut in rates by the Fed on the back burner as recession fears remain on hold.