U.S. Economic Snapshot

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.

By Thomas Cooley and Peter Rupert

The establishment survey from the BLS announced a 312,000 increase in payroll employment for December. According to the NY Times, Wall Street analysts expected an increase of 180,000…off by 132,000! In addition there were upward revisions in October (+37,000) and November (+21,000); totaling +58,000.

The private sector posted gains of 301,000 and government jobs increased 11,000. Service producing jobs increased 227,000 with 57,900 added in health care. Gains were seen in all major sectors but one, information declined slightly, down 1,000. In fact the diffusion index (the percent of industries with employment increasing plus one-half of the industries with unchanged employment, where 50 percent indicates an equal balance between industries with increasing and decreasing employment) skyrocketed from 61.0 to 70.0.

Average weekly hours rose slightly from 34.4 to 34.5. Average (nominal) hourly earnings increased 0.4% from $27.37 to $27.48 and have increased 3.2% year over year. With the CPI increasing by about 2.2% over the year implies real earnings gains. The growth in earnings over the past few months is the highest since the middle of 2009.

The household survey showed an increase in the population of 180,000 and increase in the labor force of 419,000, leading to an increase in the labor force participation from 62.9 to 63.1. The number of unemployed persons increased by 276,000 leading to an increase in the unemployment rate, from 3.70% to 3.86%. An obvious issue with the unemployment rate is that it can rise and fall for various reasons and one has to know why it went up or down. For example, suppose people see a strong, growing labor market and leave their job to search for better opportunities. Ceteris paribus, the unemployment rate increases…but this seems like a good thing for individuals. Indeed, the number of unemployed persons rose by 276,000 in December. Roughly half of that number was due to job leavers. Another 89,000 of the additional unemployed came from reentrants and new entrants to the workforce.

The Atlanta Fed Jobs Calculator shows that given the current labor force participation rate of 63.1% to maintain the 3.86% unemployment rate the average monthly employment growth would have to be about 111,000. From December 2017 to December 2018 the labor market created about 2.6 million more jobs in the total nonfarm sector for an average monthly increase around 220,000.

Moreover, there are more jobs looking for workers than unemployed persons. The JOLTS data show more vacancies than unemployed persons in total as well as across the census regions.

The Big Picture

Financial tumult notwithstanding, the labor market continues its decade long overall growth. There is little in the labor market data that would deter the FED from its stated path.

By Thomas Cooley and Peter Rupert

The establishment survey from the BLS employment report revealed a  155,000 increase in the number of new employees, with small downward revisions over the previous two months. This was slightly below analysts expectations but was also consistent with other signs in the labor market that point to employers having trouble finding good matches in spite of record high vacancies.  There was an increase of 161,000 in the private sector while government employment fell 6,000. Private service producing added 132,000, of which 40,100 came from health care and social assistance jobs. The somewhat disappointing parenthetical insert reflects that many were forecasting gains near 190,000. However, the economy often is hit with shocks, fires in California, cold/snowy weather in the east and midwest, that can have effects on monthly numbers. 

Average weekly hours slipped from 34.5 to 34.4 while average hourly earnings increased from $27.29 to $27.35. Year over year average hourly earnings increased 3.1% leading to real wage gains as earnings have outpaced inflation. This is a very modest increase but it is consistent with a tight labor market in which wages are being bid up.

Labor force participation rates remained steady at their low levels and the employment population ratio also held steady. The current recovery has also delivered the lowest unemployment rate for African Americans (5.9%) and Asians (2.7%) since the BLS began tracking the series, 1972 and 2000 respectively. The unemployment rate for women (3.8%) is the lowest since the 1950’s. 

On Thursday the BLS announced a 2.3% productivity increase in November. Output rose 4.1% and hours worked rose 1.8%. Over the year productivity increased 1.3%.

Although this is not a strong report it is consistent with a labor market that is continuing to generate jobs at a healthy rate in spite of uncertainties about trade and increased financial market volatility.  It is hard to see from this report why the Fed would back off its planned December rate hike although future hikes seem more uncertain in light of the uncertainties.

By Thomas Cooley and Peter Rupert

The problem with being an economist when at a party or other social event is that certain questions are bound to be asked: “When will these good times come to an end?” “Is a recession around the corner?” The answers: No one knows. Yes, the business cycle is a recurrent phenomenon, we just don’t know when it will happen. Obviously those answers do not give economists a very good name. Of course there are economists who have “predicted” a down turn…and yes, someone wins a lottery when the chances of doing so are millions to one.

The strong employment report from the BLS keeps the debate alive. Nonfarm payroll employment from the establishment survey increased 250,000 (246,00 in the private sector). August employment was revised up 69,000 and September down 16,000. All of the major categories showed positive growth.

Average weekly hours crept up to 34.5 from 34.4 and has been bouncing between the two for some time.

Average earnings rose slightly. There has been substantial discussion over the issue of little or no growth in wages over the past many years. See, for example, NY Times, October 22, 2018, “Unemployment Looks Like 2000 Again. But Wage Growth Doesn’t.”  The main puzzle many suggest is that the labor market is very strong in almost all dimensions except wage growth.

First, what do people mean by the labor market being strong? The labor market is creating more and more job opportunities as the BLS announced recently from the JOLTS: The number of job openings currently stands at 7.1 million, the highest number since the series began in December of 2000.

Of course the population and number of firms are also growing, so it is helpful to look at the job vacancy rate, that is, the number of vacancies at the establishment divided by employment at the establishment. The chart below shows that that also is now the highest since the series began, about 4.6 vacancies per 100 employees.

The number of unemployed persons has also fallen substantially, from over 15 million in 2009 to about 6 million today. Economists define a “tight” labor market as one in which job vacancies are high relative to those unemployed, i.e., vacancies divided by unemployment. Market tightness is also the highest it has been since 2000.

The impressive labor market performance can be seen across the main census regions, in each region there are more vacancies than unemployed searchers, that is, labor market tightness is greater than 1. This is the first time all of the regions have more vacancies than unemployed searchers.

The unemployment rate remained constant as the BLS reported from the household survey. The unemployment rate is now 3.73%, which is actually slightly higher than than the 3.68% in September. Note, however, that the number of persons unemployed actually increased by 111,000; but, so did the participation rate, from 62.7 to 62.9. Of course, as is well known, the participation rate is well below where it was 20 or so years ago, as is the employment to population ratio.

One concern about the labor force participation rate is what would happen if it increases to say 65.3%, somewhere around its average since 1980. According to the Atlanta Fed’s Job Calculator, the labor market would have to create about 630,000 jobs per month to keep the unemployment rate where it is today! Said differently, it the LFPR increases to 65.3% and we create about 200,000 jobs per month, the unemployment rate would get close to 7%.

On the issue of the slow wage growth, here is a picture of average hourly earnings for production and nonsupervisory workers:

Note that the above graph is in nominal terms. It would be foolish to say workers were much better off in the 1970’s because their wages were rising around 8% per year because inflation was increasing more than wages.

The next graph takes year over year wage growth and subtracts off year over year growth in inflation, as measured either by the CPI or PCE.

So, what do we make this graph? Until the mid-90’s real wage growth was often negative. The 90’s were good times and since then with such low inflation, workers have actually done pretty well.

The Big(ger) Picture

Currently there are small real wage gains for production and nonsupervisory workers. That is, with year over year nominal wage growth of roughly 3.2% in October…as long as inflation rises less than 3.2% workers are making real wage gains. Obviously, if inflation rises faster than wages, as in the 70’s and late 80’s, real wages will be falling.

Now, to Fed Chairman Powell’s claim that, “We’re a long way from neutral at this point, probably.” And then President Trump, blaming the Fed for the market selloff and describing the central bank as “crazy” and “out of control.” A long way from neutral, in this context, likely means the Fed will be raising the fed funds rate, but to be neutral, that is, keep inflation under control so as to not eat away the real wage gains of workers.

 

By Thomas Cooley and Peter Rupert

September employment increased by 134,000 and there were significant upward revisions to July and August (18,000 in July and 69,000 in August) according to the establishment data from the BLS.

The retail trade and leisure and hospitality sectors experienced declines, -20,000 and -17,000, respectively, but those were the only two with declines to speak of. While retail trade employment has largely rebounded since the depths of the Great Recession, growth has stalled over the past year or so while leisure and hospitality has been climbing at a much faster pace. In 1990 retail trade employment was about 45% higher than leisure and hospitality but has since been surpassed by leisure and hospitality.

Average weekly hours remained at 34.5 for the third consecutive month. Average hourly earnings moved up slightly from $27.16 to $27.74.

The number of unemployed persons fell by 270,000, the labor force increased 150,000, leading to a fall in the unemployment rate from 3.85% to 3.68%. The labor force participation rate remains low at 62.7, for reasons we have speculated about before and the employment population ratio increased slightly from 60.3 to 60.4.

While many had predicted a weak employment outlook due to Florence, the overall outcome was relatively strong. The Fed will continue its planned course of action to raise the interest rate one more time this year.

By Thomas Cooley and Peter Rupert

The BLS announced payroll employment increased 201,000 in August with no real surprises…except 50,000 in downward revisions (-40 for June and -10 for July) that temper the strong report. Total private employment rose 204,000 while the government sector sank by 3,000. The service sector added 178,000 jobs, with 40,700 coming from health care and social assistance.

Average weekly hours remained at 34.5 while average hourly earnings increased from $27.06 in July to $27.16 in August and have increased 2.9% year-over-year. However, the CPI increased nearly 2.9% as well leading to almost no gain in real average hourly earnings over the year. The more comprehensive employment cost index also showed steady growth.

The household survey reveals almost no change in the unemployment rate: from 3.87% in July to 3.85% in August. However, the number employed fell by -423,000, the number unemployed fell by -46,000, leading to a decline in the labor force of -469,000. With population increasing 223,000 means the labor force participation rate fell from 62.9 to 62.7 and the employment to population ratio fell from 60.5 to 60.3.

The labor market remains very tight in the sense that there are now more vacancies than unemployed persons in two regions, the midwest and the south, and about the same number of vacancies as unemployed in the northeast and west.

The Big Picture

While the 201,000 increase was in line with many predictions, the 50,000 downward revision should temper optimism. The decline in participation and the employment to population ratio also added a slight negative spin. It is still a robust labor market with many job openings available.  Importantly, there is nothing in this report that would temper the Fed’s signaled intention to raise interest rates at the next meeting.

 

By Thomas Cooley and Peter Rupert

Today’s GDP release saw a 0.1 percentage point increase in real gdp to 4.2% for Q2. The change was driven by upward revisions to fixed investment (from 5.4% to 6.2%), inventory investment and government spending (from 2.1% to 2.3%). Downward revisions were seen in PCE (from 4.0% to 3.8%), residential fixed investment (-1.1% to -1.6%), and exports. Imports were also revised down.

 

The Bigger Picture

Today’s revisions did little to change the course of future policy. Year over year GDP growth has seen a marked trend up since 2016Q2. Whether this robust path will continue is subject to some doubt.  A big contributor to the upward tick was net exports. While it is too early to tell it seems likely that a lot of this will be reversed in the third and fourth quarters given the current volatility of trade policy.