Q2 GDP: 3.1% in 3rd estimate

By Thomas Cooley and Peter Rupert

The BEA released the 3rd estimate for Q2 real GDP and hiked it from 3% in the 2nd estimate to 3.1% in the third. Real GDP increased 1.2% in Q1, unchanged from the previous estimate. The 3.1% increase is the largest since Q1 of 2015.



Non-residential fixed investment remained strong for the second quarter in a row, 7.2% in Q1 and 6.7% Q2. These back-to-back increases were the largest over the past three years. Residential investment, on the other hand, dropped 7.3%, the largest decline since 2011.



Hurricane Harvey created a lot of uncertainty for the future. On the one hand it foretells a big short term hit to local GDP from lost economic activity and the hit to the oil and gas sector. Hurricanes Irma and Maria will not show up strongly in GDP except insofar as they affected Florida and the U.S. mainland. This is because the GDP from Puerto Rico and the U.S. Virgin Islands does not enter into calculations of U.S. Domestic GDP. Government expenditures on relief will show up.


Employment Continues To Grow – Wages Stay Behind

By Thomas Cooley and Peter Rupert

The June jobs report was stronger than many people expected given that other economic indicators for the second quarter have been soft.  The BLS data show an increase in payroll employment of 222,000 with upward revisions of 14,000 for May and 33,000 for April. The average number of jobs added in the private sector is 180,000 per month in 2017, just slightly less than the 187,00 per month added in 2016.  The service sector provided 162,000 additional jobs. The largest contributors in the service sector were Health Care and Social Assistance which added 59,000 jobs, and Professional and Business Services, up 35,000.

The volatile Mining sector continues to expand, up 8,000. Manufacturing and Construction employment are still nearly 10% below the level back in January, 2008.


The household data indicates average weekly hours remained at 34.4 and average hourly earnings ticked up by only 4 cents last month and is up 2.5% since June of last year. With inflation up 1.87% since June of last year, real average earnings are up only slightly.


The labor force jumped up 361,000, leading to a small increase in the labor force participation rate to 62.8 percent about where it has been for the past year. The labor force participation rate for teens has been ticking up slightly, now at 35.9 compared to a series low of 32.7 in February of 2014. The labor force participation rate for men, women and those over 55 all have pretty much flattened out over the past couple of years.


The number of persons unemployed was stable at 7 million. The employment to population ratio was also stable at 60.1 percent. The unemployment rate ticked up slightly, from 4.29% to 4.36%.

The Jobs Opening and Labor Turnover Survey shows that openings are at an all time high although the rate of hiring has slowed somewhat.


Where does this leave us? The Fed has mentioned at least one more rate increase for the year, yet the labor market is giving somewhat mixed signals. Employment continues to grow, sure, but wages continue to stagnate. There is much talk about the unemployment rate being at a record low but there is little reason to boast about this when labor force participation, and the employment population ratio remain at sucet.h low levels.  This together with the stagnant wages and unfilled vacancies gives some support to the notion that there is a serious degree of mis-match in the labor market.

Europe’s Lost Decade?

by Zach Bethune, Thomas Cooley, Espen Henriksen, and Peter Rupert

Is Europe about to repeat Japan’s lost decade? Six years after the Great Recession began, the Euro area has shown little sign of sustained growth.  Japan’s so called lost decade began in 1991 after several decades of rapid economic progress and sustained increases in asset prices that were suddenly reversed.  The average growth rate of real GDP per-capita declined from about 3.5% per year in the 1980s to about 0.5% per year in the 1990s and was accompanied by  rapidly decreasing equity and real-estate valuations.  But, when we compare the performance of Japan’s economy with the European economy since the beginning of the Great Recession it is clear that Europe is in far worse shape than Japan ever was.

The following Snapshot-style comparative charts show the paths of key economic variables in Japan after the peak of its equity and real-estate valuations and contrasts these with the paths of these variables in the U.S. and Europe in the years since the onset of the Great Recession. For Europe and the U.S. we set time “0” at the peak before the Great Recession.  Judging from this and the charts that follow, halfway into the decade following the onset of the Great Recession, the performance of the U.S. and, in particular, the European economy are substantially weaker than Japan’s economy was halfway through its lost decade.


Japan’s growth rate slowed dramatically at the beginning of their lost decade – GDP rose only 10% in the first six years and then flat-lined more or less completely.  Europe, by contrast fell by six percent in the first six quarters and then flat-lined at a level three percent below their peak.  The U.S. stands in contrast to both of these stories – after falling by nearly four percent in the first six quarters U.S. growth has been steady at a rate slightly less than before the collapse.

Consumption paints an even more dire picture for Europe. During the lost decade in Japan consumption expenditures never really slowed down. In the Great Recession, U.S. consumption fell initially for about 6 quarters and  has been rising ever since. Europe on the other hand started out similar to the U.S. for the first 6 quarters but then consumption growth stalled and has not improved since. It has not returned to its 2008 peak.


The labor market picture for Europe is even more discouraging and strongly reinforces the message of a lost decade.  The unemployment rate in individual countries like Spain and Italy has been widely noted. But, here we focus on aggregate employment and the data are for the EU-28 which includes some countries, like Germany, where the labor market has not really declined. Japan, Europe and the U.S. showed remarkably similar paths of employment up until the inflection point following which there was a sharp contraction in both the U.S. and Europe. In Japan, employment like output, simply stagnated.  In terms of a recovery, the U.S. labor market, after a sharp decline, is showing slow growth while Europe looks to be stuck at a permanently lower level.


While the declines in employment were steep in both the US and Europe, the path of labor productivity has been very different. In the US the recession had a negligible effect on labor productivity, which has only recently started to show signs of slowing down (see here for instance). Europe on the other hand experienced a sharp drop in productivity at the beginning of 2008, when it fell by nearly five percentage points. Data until 2010 suggest that European productivity hasn’t shown any signs of ‘catching up’ to its previous growth trend. Measuring labor productivity is particularly difficult for Europe because one needs a measure of total hours worked. Ohanian and Raffo (2011) do the heavy lifting by constructing this series for many European countries, although it is only available until 2010.


Why the Lost Decade?

Economists have offered a range of different explanations for Japan’s lost decade: (i) the government failed to deal with undercapitalized banks that were allowed to carry “zombie” loans on their books and did not have the capacity to finance new investment, (ii) a sharp drop in productivity caused desired investment to be low, (iii) frictions caused by labor law amendments in the late 1980s resulted in declining work weeks, (iv) the monetary policy response was too timid (something Abenomics is finally trying to remedy), and (v) Japan’s prospects for recovering were seriously hampered by persistent deflation.  While it is not clear that there is one compelling account, all of these elements undoubtedly played some role and all of them loom large in the current European experience.

As in Japan, European banks are most likely under-capitalized and carrying loads of overvalued (“Zombie”?) sovereign debt on their balance sheets as well as other assets of dubious quality. The European Central Bank has only gingerly approached the problem of looking at asset quality in European banks, promising to deliver results later this year. But then what? There is no plan for dealing with under-capitalized banks. In contrast to Japan and the U.S., there is no common bank regulation or resolution mechanism and there has been only tentative progress toward creating it.

As the picture below shows, investment / capital formation stagnated in Japan, both consistent with the slower growth in total factor productivity and insolvent banks that deterred lending.  The picture also shows that investment in both the United States and Europe fell relatively more at the onset of the Great Recession than investment in Japan did at the onset of the “lost decade”. In contrast to both Japan and Europe, U.S. capital formation has rebounded after an initial collapse.  Again, the European situation looks more alarming than the situation in the United States and Japan.


Whatever the reasons may have been for Japan’s ‘lost decade’, one thing is certain: more than halfway into the decade following the start of the global recession in 2008, the European economy is far worse and deteriorating. Even though economic growth in Japan stagnated in 1991, the economy continued to grow.  In contrast, the economy in Europe has contracted and is, according to all measures of economic activity surveyed in this post, at a lower level than they were five years ago.  Unless economic growth in Europe rebounds within the next couple of years, Europe is headed for a substantially worse decade than Japan’s. Surprisingly, there has been recent optimism about a European recovery, but the data do not seem to support it except for possibly Germany and the U.K.

Just as there were no quick fixes for Japan during its “lost decade”, most likely there are no quick fixes for Europe’s economy. The challenges lie in fostering economic institutions that create individual incentives and market structures that both discourage rent seeking and encourage and allow people to use their efforts to develop and produce goods and services other people value. On this score Europe has failed. They have not reformed institutions sufficiently to make their markets globally competitive and adaptable. Until they do, Europe will continue to face the possibility of an entire decade of lost income, consumption, and jobs.

Update: Second Estimate of Q4 GDP Shows Slight Improvement

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.


Warning Signs! First Quarter GDP Revisions and Disastrous May Jobs Report Show a Weakening Economy

The second estimate of GDP for the first quarter of 2012 and its components shows a much weaker economy than previously thought. After robust growth in real GDP at an annual rate of 3% in the fourth quarter of 2011 the economy slowed markedly to a 1.9% rate in the first quarter. Most of the change was due to downward revisions to state and local government spending and to personal consumption, particularly durables. These were somewhat offset by upward revisions to non-residential fixed investment and exports.

The somewhat negative report from the BEA was reinforced by the Institute for Supply Management’s release of the Purchasing Managers Index, a closely watched barometer of manufacturing activity. It showed a sharp decline to its lowest level since 2009.

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