Fed Raises Interest Rates On Strong Jobs Report

By Thomas Cooley, Ben Griffy and Peter Rupert

The Federal Reserve, as expected, increased the target Federal Funds rate by 25 basis points today in a sign the monetary policy is returning to normal after years of historically low interest rates. With inflation near the target level and continued strong employment growth the stage was set for the FOMC to continue pushing up the Federal Funds Rate and Fed officials for the past few weeks have been signaling strongly that a rate hike was imminent. Todays announcement set expectations for two more rate hikes this year conditional on the data.

The last compelling piece of evidence fell into place with the release of the establishment survey  last Friday by the BLS.  It showed continued strength in the labor market. Payroll employment increased 235,000, with gains spread across almost all sectors. Retail trade, however, was down 26,000 and employment in motor vehicles and parts declined by 8,000. The private sector added 227,000 and government added 8,000. The mining sector (oil and gas mainly) added 9,000. Payrolls were revised up 11,000 in January and down 2,000 in December.




Average weekly hours remained at 34.4, although the index of aggregate weekly hours increased 0.2%. Average hourly earnings moved up slightly, from $26.03 to $26.09.


The household survey admitted a surge in employment of 447,000.  The employment to population ratio also increased, from 59.9 to 60.0. The labor force participation rate increased, from 62.9 to 63.0 as a result of a 340,000  increase in the labor force. The number of persons unemployed dropped by 107,000, leading to a drop in the unemployment rate from 4.78% to 4.70%. In addition, the number of persons unemployed more than 15 weeks dropped by 184,000.



This is a remarkably healthy picture of the labor market, a contrast to the way it was depicted by the President Trump prior to his election.  But our analysis of the election results in November highlighted the importance of manufacturing job losses for Trump’s victory.  His primary message to voters was a promise to save and create traditional blue collar jobs. In this and subsequent posts we are going to track where the jobs are being added with the goal of providing a more nuanced picture of how the labor market evolves under this administration.

Where the Jobs Are

As a starting point it is useful to note that for several decades employment growth has been dominated by increases in service sector jobs. Manufacturing jobs have been in secular decline as a share of the labor force. That is the underlying reality of this economy.


Against this long term background, we can contrast recent employment growth in what are traditional blue collar jobs – manufacturing, construction, mining. Manufacturing has not recovered from the decline following the great recession, while construction has been steadily rebounding from it’s trough.  Mining, which includes the energy sector, rebounded rapidly from the recession, driven by high oil prices, and has since collapsed as prices fell.  The least volatile component of employment is services, rebounding steadily since 2009. Although much attention has been focused on manufacturing and other traditional blue collar jobs the blue collar jobs of this economy in the future are in the service sector – in health care, retail and the like. So it is misleading to focus only on the traditional blue collar jobs.



Ultimately, the test of this administration will be how many jobs it generates relative to the working population. There is no perfect indicator of this, but one useful benchmark is the employment to population ratio.  In the graph below we show how the employment to population has evolved over various presidential regimes. The clear champion job creator was Ronald Reagan followed by Bill Clinton. In subsequent posts we will track how the current administration compares as well as tracking where the jobs are created.






A Healthy Labor Market For The New Year

By Thomas Cooley, Ben Griffy and Peter Rupert

January employment numbers released by the BLS reveal a 227,000 increase in payroll employment, but a 40,000 decrease in November after the final revision and a 1,000 increase to December. Total private employment, however, was up 237,000 as the government shed 10,000 jobs. The service sector showed the largest increase with 192,000 more jobs. Mining and logging (oil largely) increased for the third consecutive month. Average job growth for the last three months is 183,000 similar to what it was in 2015. This is not spectacular, but it is steady.   empchgm-2017-02-03

Average weekly hours remained at 34.4 and average hourly earnings increased very slightly, from $25.97 to $26.00.



The household survey showed an increase in the labor force, the participation rate climbing to 62.9% and the employment to population ratio increased to 59.9. This is encouraging if it signals that workers who have been sitting on the sidelines are coming back into the labor force. However, the number employed fell somewhat and those unemployed rose, so that the unemployment rate increased slightly, from 4.72% to 4.78%. The number unemployed 27 weeks or longer ticked up slightly.






The productivity report on February 2 revealed a 1.3% increase in output per hour for the fourth quarter of 2016. Output increased 2.2% and hours increased 0.9%. Unit labor cost rose 1.7%, reflecting a 3.0% increase in hourly compensation alongside the 1.3% increase in productivity.



The overall labor market picture is one of steady progress but not much pressure on wages. This sets the table well for the Fed’s plan to gradually raise rates over the course of the year. There is no reason to hurry and no real reason to back away from their plan.




2016 Ends on a Quiet Note

By Thomas Cooley, Ben Griffy and Peter Rupert

Fourth quarter real GDP grew at a 1.9% seasonally adjusted annual rate, according to the advance estimate, as announced by the Bureau of Economic Analysis. Overall, for 2016 GDP increased at a 1.6% clip, one full percentage point lower than the 2.6% increase in 2015 and also lower than the 2.4% growth rate posted in 2014. Although, the year-over-year change has somewhat reversed its downward trend that began in 2015. Compared to other recoveries, our current one depicts slower growth coming out of the trough than previous recoveries going back to the 1960’s. Note, however, that several of the recoveries had slipped back into recession by this time, some eight years after the trough. According to the NBER business cycle dating committee there have been 11 cycles since 1945, the average duration during that time span from trough to peak is 58.4 months.




The principal contributors to the Q4 growth were personal consumption expenditures (contributing 1.70) and investment (contributing 1.67). The decline in exports and increase in imports were the largest drag on growth with net exports contributing -1.70. Over the year, real PCE grew 2.7%, only slightly lower than the 3.2% growth in 2015 and 2.9% in 2014.




Overall for 2016 investment fell 1.5%, nonresidential structures down 3.1%, equipment down 2.8 but intellectual property products up 5.0%.


December Employment Slightly Off Expectations

By Thomas Cooley, Ben Griffy and Peter Rupert

Happy New Year! Today’s employment report from the BLS revealed that establishments increased employment by 156,000 in December.  In addition, over-the-month revisions decreased October employment by 7,000 while adding 26,000 to November’s job gain. There were 144,000 more private sector jobs, 12,000 of those in goods producing and 132,000 in service sector jobs. 2016 saw an increase of 2.2 million new jobs, lower than the 2.7 million jobs added in 2015.


Health care and social assistance led the way with a 63,300 employment gain. Durable goods manufacturing employment increased 15,000. On the downside, temporary help services shed 15,500 jobs; construction down 3,000 and mining and logging down 2,000.

While employment gains were less than many anticipated (somewhere in the 180,000 range) hours of work were also a bit disappointing, remaining at 34.3 after a downward revision to November from 34.4. to 34.3. Most of 2014 and 2015 saw the workweek in the 34.5 to 34.6 range while 2016 started off with a 34.6 reading but has declined over the year. avghours-2017-01-06

Real earnings of all private workers has been trending up, finally showing signs of wage growth. In real terms, however, the CPI has eaten away some of the gains.


From the household survey the labor force increased 184,000, causing the participation rate to climb slightly to 62.7, while the number of employed increased 63,000, so that the unemployment rate increased from 4.65% to 4.72%.


The overall picture for 2016 shows a labor market that continues to expand, but lethargically, although at a pace higher than the recovery from the 2001 recession.


Looking at the 12 month moving average there is some evidence of a slowing down in employment growth. However, given the recent election and the mostly positive effects on confidence measures as well as the stock market, perhaps signals a brighter future for the labor market.



Mr. Trump will Inherit a Robust Economy

By Thomas Cooley, Ben Griffy, and Peter Rupert

The BEA presented an early gift to the incoming administration with the final estimate of Q3 GDP growth, revised from 3.2% to 3.5%, the highest growth rate since Q3 of 2014. The strong GDP growth combined with an unemployment rate of 4.4% justifies the Fed’s December interest rate boost.


The increase in real GDP in the third quarter was led by contributions from PCE (contributing 2.0 percentage point, see Table 2 in the link above), exports (1.6p.p.), private inventory investment (0.49p.p.), nonresidential structures (0.3p.p.), and federal government spending (0.16p.p.). Residential fixed investment was a drag on growth, falling for the second consecutive quarter, down 7.7% in Q2 and down 4.1% in Q3.



The U.S economy will continue to grow through the fourth quarter although it is unclear what impact the Trump election will have on Fourth Quarter results. Wholesale changes in trade policies, or merely expectations of changes in trade policy could begin impacting GDP as early as the next report.

gdp-cyc-trough2016-12-22There is some reason for pessimism on this score because Mr. Trump’s election has already pushed the dollar to new highs – currently nearly at par with the Euro.  This will hurt U.S. exports in the long run. And it may run counter to what Mr. Trump promised if the U.S. loses jobs in the Export industries.  Markets are pricing in a substantial gain in GDP and corporate profits on the basis of what is know so far and the yield curve has steepened significantly. But housing remains weak in the Fourth quarter so far and higher interest rates are not going to help that. The unfortunate fact is that the smoke really hasn’t cleared on Trump’s goals. It remains to be seen whether this optimism is warranted just as it remains to be seen what Mr. Trump’s policies actually turn out to be.