Author: peter.c.rupert

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.

By Thomas Cooley, Travis Cyronek, and Peter Rupert

The Bureau of Labor Statistics released the jobs report for May that was weaker than many had expected. Payroll employment increased 75k and, on, top of that, there were downward revisions for March (-36k) and April (-39k) totaling 75k. This report will likely do two things: (1) Stoke recession fears and (2) Further fuel expectations of a Fed rate cut. Since 2017 average employment growth is about 195k per month with a standard deviation of about 75k. So the 75k decline is nearly two standard deviations below the mean. As seen in the figure below, February employment numbers were also quite weak but bounced right back. However, two of the last four months have seen less 80k increases in payroll employment. In 2012 there were three consecutive months less than 100k.

There was weakness pretty much across the board with only the service producing sector showing any large increase, up 82k. The government sector shed 15k jobs so that the private sector ended up with a gain of 90k.

Average weekly hours remained at 34.4 for the second consecutive month. Average hourly earnings ticked up from $27.77 to $27.83, an increase of 0.2% and 3.1% year-over-year. With inflation so low, it means there are have real earnings gains over the last few years.

The household survey from the BLS showed an increase in employment of 113k and the labor force increased 176k. There was no change in the employment to population ratio or the labor force participation rate. The unemployment rate crept up slightly from 3.58% to 3.62%.

The Job Openings and Labor Turnover Survey shows that in every census region there are more job openings than unemployed workers.

Output per hour (productivity) increased 3.4% in the first quarter and unit labor costs fell 1.6%. In addition, the BLS has begun calculating productivity by state. North Dakota has seen the highest productivity growth since 2007, California next highest and Louisiana

By Thomas Cooley and Peter Rupert

The BLS announced a 263,000 rise in payroll employment for April and 16,000 upward revision over the past two months.

What should be noted is just how difficult (and maybe not so useful) it is for economists to forecast even out a month. This from CNBC:

Economists expect that the job market remained strong in April, and the economy added 190,000 jobs, about the same as March.
Markets were already on edge heading into the Friday employment report, and economists point to some variables that could impact the headline number.

For one, some economists say Boeing’s production slowdown could be a negative for manufacturing jobs, while government hiring of census workers could provide a surprise increase in payrolls in the tens of thousands. Goldman Sachs economists expect 20,000 workers were eliminated due to weather, but they still expect total jobs of 195,000.
Bank of America economists expect an above average jump of 250,000 jobs. A tracker that the bank uses is seeing private payrolls rising 335,000.
Some economists said there could be an upside surprise in the jobs data because of ADP’s strong report of 275,000 private sector payrolls in April. But Moody’s Analytics chief economist Mark Zandi said the number was suspect, and he expects April jobs from the Bureau of Labor Statistics to be closer to 175,000 to 200,000.

The bottom line: a range between 175,000 to 335,000!

Private payroll employment was up 263,000 with the government adding 27,000. There were a few small negatives as well. Retail trade fell for the third straight month, down -12,000 in April. Utilities and motor vehicle parts have also been weak of late.

Average weekly hours fell slightly from 34.5 to 34.4 and average hourly earnings rose from $27.71 to $27.77. That average hourly earnings is much above the CPI means there are gains in real earnings.

The household survey shows a decline in the labor force, down 490,000 so the labor force participation rate fell from 63.0 to 62.8. The employment to population ratio remained constant at 60.6. The unemployment rate fell to 3.58%, the lowest since the end of 1969.

The BLS released productivity on May 2: output was up 4.1% and hours up 0.5% leading to a 3.6% gain in non-farm business sector productivity. Unit labor costs in the non-farm business sector declined 0.9 in the first quarter of 2019 and increased only 0.1% over the last four quarters. Manufacturing sector labor productivity increased 1.7%, however output decreased by 1.0%, but hours worked decreased even more, down 2.6%.

The big picture

The strength of the report, including continued wage gains, damps the likelihood the Fed will be talking about any rate cuts soon.

The BEA announced that real GDP increased 3.2% in the advance estimate for 2019 Q1. Over the past few years Q1 had come in quite weak, not so this time. Inventory accumulation played a major role, increasing $31.6 billion leading to a massive $128.4 billion level. The high, and mostly unexpected, level of current inventory will lead many to cut their forecast of Q2 GDP growth.

Personal consumption expenditures were quite weak, increasing only 1.2%, with durable goods decreasing 5.3%. The year-over-year change in the PCE has been basically flat since 2016. Gross private domestic investment increased 5.1% with a large intellectual property products increase of 8.6%. Residential investment continues to decline, down 2.8% and down 7 of the last 8 quarters with the last positive reading back in Q4 of 2017.

Exports were up 3.7% and imports down 3.7%. Government expenditures for consumption and gross investment was up 2.4%.

Overall this was a strong report yet probably will not elicit any large changes in the Fed’s current policy stance.

By Thomas Cooley and Peter Rupert

The BLS announced that March payroll employment increased +196,000 and had small upward revisions to January and February, +14,000 total. Economists surveyed by the WSJ were basically on the same page, though a bit short, having forecast 175,000 new jobs.

The bulk of the gains came in service producing sectors (+170,000) with a large jump in health care and social assistance (+61,200). Retail trade shed (-31,900) jobs over the past two months, -20,200 in February and another -11,700 in March. The manufacturing sector also has been quite weak, gaining only +12,000 jobs over the first quarter of 2019.

Average weekly hours were up slightly to 34.5 and continue to fluctuate between 34.4 and 34.5.

Perhaps the most encouraging sign is that Average Hourly earnings rose 0.14% over the month and have increased 3.2% y/y. This shows that the record number of job vacancies is continuing to exert modest upward pressure on wages as employers try to fill positions. But there is little reason to worry about this fueling inflation.

The household survey showed a decline in the unemployment rate from 3.82% to 3.81%. However, the labor force fell by 224,000 and the number of employed persons fell by 201,000 and the number unemployed fell 24,000. Both the employment to population ratio and the labor force participation rate fell slightly.

Retail trade employment has flattened over the last few years while leisure and hospitality employment has continued to rise and overtook the retail trade at the beginning of 2017.

The Big Picture

The recent numbers in the labor market do little to encourage or discourage future moves by the FOMC. Inflation remains subdued, wages have begun to rise of late but nothing appears exceptionally strong or weak. Given the political pressures on the Fed to keep interest rates stable or lower them it seems unlikely that the continued tightness in the labor market will concern the FOMC enough to resume tightening rates.

By Thomas Cooley and Peter Rupert

Employment Report

The Establishment Survey from the BLS showed non-farm payroll employment increasing a paltry 20,000, with small upward revisions over the past two months, totaling 12,000. Economists surveyed by the Wall Street Journal had forecast an increase of 180,000. No one said it was easy. Our economy is buffeted by many, many shocks, from weather (very cold last month in many parts of the US), political drama, other economies (Europe is mostly in recession, see this post), international trade uncertainties, and so on. Construction employment saw a decline of 31,000, the first decline since May of 2016. Other than the big decline in construction employment there were no other very large declines, but no large increases either. So, disappointing across the board.

Average weekly hours fell from 34.5 to 34.4 and average hourly earnings increased from $27.55 to $27.66, a 0.4% rise, however the year over year increase in average hourly earnings was 3.4%, the largest annual gain since 2009.

The household survey indicated a 45,000 decline in the labor force, no change in either the participation rate (63.2) or the employment to population ratio (60.7). The number of unemployed persons fell 300,000 and the unemployment rate, fell from 4.00% to 3.82%. Short term unemployment fell by 131,000 for those unemployed less than 5 weeks and fell 203,000 for those unemployed 5 to 14 weeks. However, those unemployed long term increased, up 40,000 for 15 to 26 weeks and up 19,000 for 27 weeks and over.

Q4 GDP Report

The BEA reported a 2.6% increase in Q4 real GDP on an annualized basis. Instead of an “advance” estimate they call this an “initial” estimate:

Due to the recent partial government shutdown, this initial report for the fourth quarter and annual GDP for 2018 replaces the release of the “advance” estimate originally scheduled for January 30th and
the “second” estimate originally scheduled for February 28th.

After taking a bit of a nose-dive in late 2015 and early 2016, GDP growth has been on an upward trajectory. Personal consumption expenditures grew at 2.8% and year over year, ticking down slightly. Goods consumption rose 3.9% with durable goods rising 5.9% and nondurables 2.8%. Services increased 2.4%

Investment was up 4.6% following a hefty 15.2% increase in Q3. Nonresidential up 6.2% but the structures component was down 4.2% and residential structures down 3.5%. Intellectual property products shot up by 13.1%. The share of intellectual property investment continues to rise and is now almost 5% of GDP.

Where is the Recession?

For months the pundits have been warning of a forthcoming recession. The December stock market swoon fueled the worry. It is certain that there will be one – business cycles are a recurrent phenomenon. But the question of when is more difficult to answer. The economy continues to show strong growth overall. The labor market just sputtered but had very large growth the month before! The decline in residential investment is somewhat troubling however…historically housing investment declines have preceded and were the biggest contributor to GDP declines. There are other big concerns: a widening trade deficit fueled by a strong dollar, a softening Chinese economy and sputtering European economies, not to mention an increasing U.S. debt. There is plenty to be concerned about. But somehow the U.S. economy keeps on trucking with record job vacancies, strong wage growth and improved productivity.

By Thomas Cooley and Peter Rupert

The BLS establishment report showed a healthy 304,000 increase in payroll employment in January with 296,000 jobs added in the private sector. December employment was revised down by 90,000 jobs, from 312,000 to 222,000 while November revised up by 20,000, leaving a total downward revision of 70,000.

Employment in the goods producing sector rose 72,000 with 52,000 coming from construction employment.

Average weekly hours remained at 34.5 and average hourly earnings moved up slightly and have increased 3.2% year over year. Given the low levels of inflation this means that real hourly earnings have been increasing as well for the last several years. The very tight labor market is functioning as expected and wages are rising to draw more workers into employment.

The BLS annually revises their employment numbers:

In accordance with annual practice, the establishment survey data released today have been benchmarked to reflect comprehensive counts of payroll jobs for March 2018. These counts are derived principally from the Quarterly Census of Employment and Wages (QCEW), which counts jobs covered by the Unemployment Insurance (UI) tax system.

The revisions did little to change the overall trend in employment. Adding the over-the-month changes results in an increase in 2018 of 2,674,000 new jobs.

The household survey shows an increase in the employment to population ratio, from 60.6 to 60.7. and an increase in the labor force participation rate from 63.1 to 63.2. There was an increase in the number of unemployed persons to 241,000. Overall, the unemployment rate increased from 3.86% to 4.00%.

Economic uncertainty has increased sharply in the past year. Trade wars, government shutdowns, economic slowdowns in Europe and China, nuclear threats and the rise of populist challenges to the “Davos World Order” have increased volatility in asset markets and driven much speculation about the onset of the next recession. In spite of all of this the U.S. labor market remains incredibly robust as it has been for the past ten years.

Nevertheless, the fact that wages have not risen faster has lead many progressives to focus on “fixes” for the labor market. The most popular is the minimum wage. Unfortunately, there are many misconceptions surrounding the apparent benefits from imposing a wage floor.

Minimum Wages

In a recent California on Your Mind|Analysis, politics and the economics of the Golden State, Lee Ohanian has written an excellent piece on minimum wages: Presidential Candidate Kamala Harris’s Minimum Wage And Education Policies Will Reduce Economic Opportunities. The upshot is that minimum wages can have dis-employment effects on those it is purporting to help.

First, the chart below shows who makes the minimum wage by occupation in the US.

Evidently 65% of those working in minimum wage jobs are in the services occupation, typically younger and lower educated workers. Recall that the majority of the 300,000+ jobs added in the past month were service sector job, as is true every month.

In California, as in other states, the minimum wage binds differentially across counties. A state minimum wage will have large effects on areas where many are working at or below the minimum wage.

What has and will be happening to the minimum wage? Minimum wages in California in real terms will rise by more than has ever occurred, close to doubling in real terms, reaching 15$ per hour in nominal terms in 2020.

As a sound bite, promoting a policy like minimum wages seems appealing. Who would not want to have higher wages? In reality, however, there are winners and losers as a new equilibrium in the market unfolds. And, more often than not, the losers are exactly the people the policy is supposed to help. Are there better alternatives? Of course, see the aforementioned article by Ohanian. They just don’t have the “sound bite” quality, namely, earned income tax credits.