U.S. Economic Snapshot

By Thomas Cooley and Peter Rupert

The BEA announced that Q2 real GDP declined 32.9%, pretty much as expected, but still hard to fathom. In fact, due to the government shutdown, these numbers are very difficult to interpret. To what extent has the new surge in COVID-19 cases, prompting more shutdowns in some areas, raised uncertainty of the future path of GDP for Q3 and Q4? It is certainly not out of the realm of possibility to see a 30% increase for Q3! These massive gyrations have made it even more problematic to gauge the underlying health of the economy.

To be clear the 32.9% number is quarter on quarter growth annualized. The quarter on quarter growth is -9.5%. Whichever you prefer, this is the largest drop ever recorded!

The Great Recession seems to have had an impact on the trend rate of growth of real GDP and the current pandemic has moved us even farther from the historical long run trend.

Our view is that the government shutdowns, CARES/PPP and the change in the due date for taxes have made the data impossible to put in historical context. For example, the graph below shows the percent change in real GDP along with the percent change in real disposable income. In general the two move more or less together. The recent shutdowns combined with the recent transfer payments have thrown a monkey wrench into the behavior of these series. While real GDP fell 32.9% real disposable income increased 44.9%. Of course the disposable income numbers also reflect the fact that tax deadlines were moved from April 15 to July 15.

Monthly disposable income and personal consumption expenditures was released by the BEA today (July 31) again showing large zig-zag patterns. Real disposable income in June decreased 1.8% following a 5.2% decline in May, while real personal consumption expenditures increased 5.2% in June following an 8.4% increase in May.

The quarterly declines were seen in virtually every component. Personal consumption expenditures down 34.6%, real investment fell nearly 50% with fixed investment down 30%, exports down 64.1% and imports down 53.4%. Non-defense government spending was up 39.7%.

Initial claims were also announced today and, like in our recent post on initial claims, the seasonally adjusted claims increased while the not seasonally adjusted decreased as they did last month.

The stock market appears to have shrugged off the early signs of illness and has been climbing, with the Nasdaq setting records almost daily.

Equity markets seem to be pricing in a V shaped recovery. We have argued for a short V-shaped response followed by a long slow slog back to potential. A lot of this depends on the consumer and how they respond as the bills come due, how employment recovers, and how the government resolves its current impasse over unemployment benefits and further stimulus.

The Federal Reserve is doing all it can think of to do and it remains to be seen how effective is the accommodation they have made so far. This drama has many episodes and we are only a few months in.

by Thomas Cooley and Peter Rupert

Data on initial claims for unemployment insurance and continued claims (aka insured unemployment) were released today. Many of the headlines took the announcement and provided articles titled Rise in Weekly Unemployment Claims Points to Faltering Jobs Recovery (WSJ) or Weekly Unemployment Claims Rose to 1.4 Million in U.S.: Live Updates (NYT). While technically true these articles are misleading. The reason is that the headline numbers that come out are almost always seasonally adjusted. Here is a graph of the seasonally adjusted data for initial claims starting at the peak on March 28:

As mentioned by the media, indeed claims increased from 1,307,000 to 1,416,000, an increase of 109,000 people. However, seasonal adjustment alters the raw data by applying seasonal adjustment factors. When times are crazy, when something very odd happens, seasonal adjustment can give misleading information. Here is a graph of not seasonally adjusted initial claims:

The actual number of people applying for initial claims actually fell from 1,512,763 to 1,370,947, a decline of 141,816! Moreover there was an increase in initial claims from July 4 to July 11.

So, what is going on? Think about what happens when, say, Christmas is approaching. We know every year that Christmas is on December 25. Knowing that there will be increased shopping in the preceding months, producers and stores ramp up employment to deal with it. The following graph plots payroll employment both seasonally adjusted and not. Note how the not seasonally adjusted (red) data is so regular. October and November build up employment and every January and February it falls. The seasonally adjusted data (blue), on the other hand is quite smooth. Why? Essentially the statistical adjustment accounts for the fact that every November employment goes up in anticipation of Christmas. What the seasonal adjustment does is to compare, say, this November with last November.

Imagine now the government mandated that Christmas would be on November 25 instead of December 25. In anticipation of that change the employment build up would most likely be shifted by a month. However, the seasonal adjustment factor would apply the old seasonal.

This pandemic has altered the traditional employment unemployment cycles. Stores were closed, schools were closed, auto retooling changed months, and so on. To understand where we are then we should really be looking at the not seasonally adjusted data. This begs the question as to why we look at seasonally adjusted data at all. Back to the Christmas example. Is the holiday season a boom or a bust? The only way to think about that is to compare this season to last season and not this December to this November. That is essentially what seasonal adjustment does.

To be sure, given all of the caveats above, we still ain’t doing so hot.

By Thomas Cooley and Peter Rupert

The BLS announced that nonfarm payroll employment increased 4,800,000 in June. The largest increase was in private service producing, increasing 4,263,000. It should be noted however that COVID-19 has had a large impact on the measurement of labor market variables. In particular, the raw counts should be used with caution as there are potentially large misclassification issues. For example, the BLS writes:

In the establishment survey, workers who are paid by their employer for all or any part of the pay period including the 12th of the month are counted as employed, even if they were not actually at their jobs. Workers who are temporarily or permanently absent from their jobs and are not being paid are not counted as employed, even if they are continuing to receive benefits.

Initial claims have come down steadily although the continuing claims have not.

The bulk of the added jobs were in leisure and hospitality (2.1 million) as bars, restaurants and related business began to reopen. Many of these jobs may disappear again as some authorities begin to respond to the dramatic surge in Covid cases by shutting bars, restaurants and other services down again. Retail trade added 758,000 jobs. Education and health services accounted for 568,00 jobs and other services added 357,000 jobs. Many of these service sector jobs reflect re-allocation across firms – jobs lost in retail replaced by increased hiring at Amazon and Walmart. Some of them reflect recall from furlough to employment.

Manufacturing added 356,000 jobs after losing 757,00 since February. Most of these were in durable manufacture and the automotive sector.

Average hourly earning decreased by 1.2% reflecting the fact that the service sector jobs added or reactivated are the lower paid employees.

According to the household survey the labor force increased by about 1.7 million so that the labor force participation rate increased from 60.8 to 61.5. The number of persons unemployed fell by 3.2 million. However, again the BLS warns of data issues in terms of misclassification:

If the workers who were recorded as employed but absent from work due to “other reasons” (over and above the number absent for other reasons in a typical June) had been classified as unemployed on temporary layoff, the overall unemployment rate would have been about 1 percentage point higher than reported (on a not seasonally adjusted basis). However, this represents the upper bound of our estimate of misclassification and probably overstates the size of the misclassification error.

Moreover, the data are as recorded by the interviewers as per usual and the BLS has not altered the data to account for such misclassification…and rightly so.

The increase in employment and the fall in the unemployment rate will give optimists further hope for a V-shaped recovery. But the measured unemployment rate is a still staggering 11.1% as measured and is more likely higher. The unemployment rate including all marginally attached person, plus total employed part time for economic reasons declined from 22.8% in April to 21.2% in May and now sits at 18%.

By Thomas Cooley and Peter Rupert

The BLS announced nonfarm payroll employment increased by 2,509,000 in May. We won’t even mention what the expectations were heading into this report since no one really foresaw a rebound this quickly. The increase was the largest one-month increase in the history of the series after the largest one-month decline. The graphs below are, admittedly, quite bizarre. Most likely there are measurement issues and issues with seasonality. However, there can be no doubt that what we are observing today is far beyond the scope of anything we have seen in economic data…ever!

It isn’t time yet to declare a “V” shaped recovery, of course, but it is encouraging that the economy shows signs of adaptability as we begin to return to normal activity. It is still the case that most economists forecast that roughly 40% of jobs that were shut down will not come back.

Many of the jobs that were lost in April were ready to return once the government removed the restrictions. For example, service producing jobs increased 2,245,000 with leisure and hospitality rising 1,239,000. A friend of ours termed this a “synthetic” recession due to the fact that our economy did not put us in this mess…it was mandated by government in the interest of public health.

The rebound in employment was pretty broad based – jobs increased in most sectors.

Some of the increase in employment was the result of labor reallocation. Surveys indicate that for every 10 jobs destroyed since the onset of the pandemic, 3 new jobs were created. Retail jobs lost at Macy’s become new jobs at Walmart and Amazon. Reallocation is normal in recessions but we need way more than a three to one replacement rate to think about this as a recovery.

Average weekly hours soared from 34.2 to 34.7. With the return of many service sector workers, average hourly earnings fell from $30.04 to $29.75 due to the fact that these workers tend to be lower on the pay scale.

The household survey showed an increase in employment of 3,839,000 and an increase in the labor force of 1,746,000. The number of unemployed persons fell 2,093,000 leading to a decrease in the unemployment rate to 13.26 from 14.75.

Yesterday, initial claims showed lower, but still elevated, claims. It is useful to note that the actual number of claims are given by the not seasonally adjusted data, ICNSA, in the chart below. Given the clamp down in the labor market, many of the seasonally adjusted series will be somewhat misleading since the “seasonal” component is likely not useful in this current context. Nonetheless, both series show the same patterns.

The flow from employed to unemployed in April was staggering and the turnaround was also staggering. The not seasonally adjusted data is shown given the affects of seasonal adjustment on the current data.

Labor market “churn” is a distinguishing feature of the U.S. economy and the recent data bear this out. The surprising speed of this reallocation should not lull us into thinking that the economy will snap right back however. The retail sector was already on life support as were parts of leisure and hospitality. The pandemic is simply pushing them along faster. It also reveals weaknesses in other sectors like commercial real estate and higher education. As people discover new ways to organize work and learning the old business models are likely to be replaced.

These parts of labor force reallocation are going to take a long time to be realized and this suggests that recovery may seem swift initially but will have a very long tail.

By Thomas Cooley and Peter Rupert

As expected, the US economy experienced a devastating collapse in the labor market. Payroll employment fell 20.2 million according to the BLS. It is nearly impossible to compare the magnitude to anything in the past. As seen below, it now makes it nearly impossible to discern differences in graphs. Looking at a long history, as in the employment differences graph beginning before WWII shows only small wiggles as the scale has to be changed to accommodate recent events. All major sectors felt the shock. What is most striking from this sudden collapse is the speed at which the labor market has plunged.

A surprising feature of this report is that average hourly earnings increased by 7.9% Y/Y, but this was simply an artifact of the fact the so many low wage workers lost their jobs. It was pure carnage for those in the most vulnerable occupations and also led to the unemployment rate of teens 16-19 rising to its highest level ever recorded. The same forces affected the average weekly hours.

The household survey from the BLS also shows unprecedented changes. The number of unemployed persons now is over 23 million. However, looking at the initial claims data there has been about 33 million individuals claiming unemployment insurance since March 21. The report also includes a disclaimer saying that the response rate for the household survey plunged last month and the payroll survey required an adjustment. This suggests we should should expect big revisions to all these numbers in the coming reports as the BLS tries to fill in the blanks. They won’t be happy revisions!

The BLS is candid in it’s report about the shortcomings of the data for this month:

“….. there was also a large increase in the number of workers who were classified as employed but absent from work. As was the case in March, special instructions sent to household survey interviewers called for all employed persons absent from work due to coronavirus-related business closures to be classified as unemployed on temporary layoff. However, it is apparent that not all such workers were so classified. If the workers who were recorded as employed but absent from work due to “other reasons” (over and above the number absent for other reasons in a typical April) had been classified as unemployed on temporary layoff, the overall unemployment rate would have been almost 5 percentage points higher than reported (on a not seasonally adjusted basis). However, according to usual practice, the data from the household survey are accepted as recorded. To maintain data integrity, no ad hoc actions are taken to reclassify survey responses.”

The coming months will bring the full extent of the carnage into sharper focus. Until then we can only hope that the CARES Act and other programs will slip a safety net under these unfortunate workers.

By Thomas Cooley and Peter Rupert

The BEA announced that 2020 Q1 real GDP fell 4.8% at a seasonally adjusted annual rate. This is the first decline in 6 years after the longest expansion in US history.

As a comparison to the Great Recession declines, the following graph shows GDP changes since 2007.

Personal consumption expenditures took a major hit, falling 7.6% as people are on a forced “staycation”. Durable goods consumption fell 16.1% while nondurable consumption rose 6.9%. The consumption of services fell 10.1%.

Gross private investment fell 5.6% with nonresidential structures declining 9.7% and equipment investment 15.2%. Note that nonresidential investment has declined every quarter over the past year. Residential investment, on the other hand, increased 21.0% this quarter and saw increases over the past three quarters as well. That pattern will reverse itself as the housing market has begun to follow the rest of the economy.

The Q1 data only partially reflect the large shutdowns of business, much of which happened around the ides of March. The data likely overstates consumer spending and understates the decline in other services. We expect the next release to contain substanital revisions to what is in this report.

Unfortunately, the news will only get worse for the next quarter. Signs of opening are starting, but are months off for many states. Estimates of the size of the second quarter decline vary widely but all signs point to Great Depression magnitudes. What the rebound will look like like is the subject of much speculation but a lot depends on the effectiveness of the massive stimulus and the aggressive stance of the Federal Reserve, who reiterated they will use everything in their arsenal to help smooth the hardships experienced by firms and households.

Although governments can shut down an economy as we have just witnessed throughout the world, it won’t be the government who will open it…that lies in the hands of the consumers. How fast consumers will feel safe in returning to stores, restaurants and travel is unknown.

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.