U.S. Economic Snapshot

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.

By Thomas Cooley and Peter Rupert

The May jobs report was certainly on the weaker side. The BLS data show an increase in payroll employment of 138,000 with downward revisions totaling 66,000 (down 29,000 in March and 37,000 in April). The service sector provided 131,000 additional jobs. The largest contributors in the service sector were Education and Health services, up 47,000, and Professional and Business Services, up 38,000.

The volatile Mining sector continues to expand, up 6,000 and the 7th straight month adding employees. Manufacturing and Construction employment are still nearly 10% below the level back in January, 2008.

Average weekly hours remained at 34.4. Average hourly earnings ticked up slightly.

The household survey showed a large decrease in the labor force, down 429,000, leading to a decline in the participation rate, from 62.9 to 62.7.  The number of employed persons was down 233,000 and the number of persons unemployed was down 195,000. The employment to population ratio fell from 60.2 to 60.0. The unemployment rate fell slightly from 0.044 to 0.0429.

The  next two charts indicate there is something missing in the labor market picture.  Vacancies are at record levels and the unemployment rate is at a decade low and yet average hourly earnings have barely budged.  This, combined with low and falling participation rates, suggests that there is indeed something missing.  That something is human capital.  Jobs that can be routinized and require low levels of human capital are being replaced by technology. The education system is not producing the kinds of workers that are  needed in many parts of the economy.  The loss of jobs to robotics and AI is more likely to speed up than slow down and changing our human capital is a slow process.

Although there has been a lot of chatter about the Fed downplaying the previous GDP report and feeling confident the economy about the continued strength of the economy, there are certainly some signs the economy has deep seated weakness. Maybe not enough to dissuade the Fed from a June increase, but certainly to give some pause in their commentary.

By Thomas Cooley and Peter Rupert

Today’s release of the 2nd estimate for Q1 GDP from the BEA brought a large increase, nearly double, in real GDP, compared to the advance estimate. The revised real GDP growth is 1.2% in the first quarter while it was 0.7% in the advance estimate. The positive revision has been a feature of first quarter estimates for several years and has sparked a lot of attention to the  seasonal adjustment.   There were significant revisions to final sales and some modest downward revisions to inventories. In addition, real personal consumption expenditures only grew at 0.6% (but were revised up from 0.3%), the weakest growth in over 5 years. .

There were downward revision to Q4 income growth which pushed the savings rate lower. Most of the markets’ attention was focused on the April report on durable goods issued this morning as well. It was very soft and some of the details were disappointing.

Both residential and non-residential fixed investment showed strong growth in the quarter, gaining 13.8% and 11.4%, respectively.

At the moment, the revised estimates will not do much to change the current thinking as to the state of the economy. The revision was a bit higher than expectations by many forecasters. We are just going to have to wait a little longer to see how the economy evolves as we near mid year. The Atlanta Fed’s GDPNow has revised down its forecast for Q2, from 4.1% to 3.7% after some of the latest releases, including today’s GDP and durable goods…still, 3.7% would be a very welcome outcome!

 

By Thomas Cooley and Peter Rupert

The release of April’s employment report from the BLS showed an increase in payroll employment of 211,000, with 194,000 of that from the private sector. An upward revision of 13k for February and a downward revision for March of 19k nearly offset each other. There were only a couple of small declines throughout the major sectors. In the goods producing sector, durable goods fell 3k and in the service producing sector, employment in information fell 7k, the third consecutive decline in that area.

Mining and logging employment (mainly oil) has increased for the sixth month in a row although still about 6% below the level in 2008.

Average weekly hours of work rose from 34.3 to 34.4 and has been bouncing between the two since March, 2016. Average hourly earnings rose 0.3% from $26.12 to $26.19.

The household data showed little change in the labor force, up 12k, while then number of persons unemployed fell by 146k, leading to a decline in the unemployment rate from 4.496 to 4.404, the lowest in about a decade.

While the Fed seemed to brush off a weak Q1 GDP report, then stating, “Job gains were solid, on average, in recent months, and the unemployment rate declined,” kept the door open for a possible rate hike at the next meeting. However, while job gains are “solid” the trend over the past several months points to a slightly weakening labor market. The question for policy makers is: Was the recent Q1 weakness transitory or, in combination with the downward trend in employment, has the economy weakened?

 

By Thomas Cooley, Ben Griffy and Peter Rupert

The advance estimate from the Bureau of Economic Analysis shows the weakest GDP growth in three years…although 2015 Q4 (0.9%) and 2016 Q1 (0.8%) were nothing to write home about.

Consumption (lack of) played a large role in the decline, only up 0.3%, along with a $39.2 billion decline in inventories. This is clearly at odds with the surge in consumer and business sentiment following the election of Donald Trump. That optimism about the economy has yet to translate into real improvement. The deeper issue is whether the first quarter weakness will spill over into the second.  Most observers think not although we are probably not on track for growth greater than 2%.

On the positive side, investment expenditures came in strong, both non-residential and residential. Overall, fixed investment was up 10.4% with non-residential structures up 22.1%, equipment up 9.1% and intellectual property products up 2.0%. Residential investment was also quite strong, growing 13.7% in the first quarter.

Government consumption expenditures and gross investment was down 1.7%, the main contributor to the decline was national defense spending, down 4.0%. State and local government was also down 1.6%.

 

While the weak GDP report along with the earlier weak jobs report may lessen the resolve for the Fed to move aggressively on rate hikes, the recent surge in employment costs may be signaling a tight labor market.

By Thomas Cooley, Ben Griffy and Peter Rupert

The BLS announcement of a 98,000 increase in payroll employment for March was far below expectations. Moreover, both the January and February employment growth numbers were revised down, -22,000 and -16,000, respectively. Many forecasters estimated job growth between 180,000 to 200,000, especially given the 236,000 increase from the ADP report. The household employment numbers shot up 472,000.

There was a decline in the number of unemployed persons, down 326,00. while labor force participation held steady at 63% and the employment to population ratio increased slightly from 60.0 to 60.1. Combined, these changes led to the headline unemployment rate ticking down to 4.5%

 

 

Average hourly pay rose from $26.09 to $26.14 while weekly average hours of work remained at 34.3 for the second consecutive month.

Other indicators of economic health, like the composition of jobs, suggested improving conditions: part-time for economic reasons fell by 151,000, while the number of marginally attached workers fell by nearly 150,000. In combination, it seems that conditions have improved for those without strong ties to the labor market. The composition of the unemployed continued to show signs of improvement.

Where The Jobs Are

The employment gains were largely in the service producing sector, up 61,000 despite a 29,700 decline in retail trade. Professional and business services was the largest gainer in the services sector, up 56,000. Construction jobs increased by 9,000.

 

 

 

 

 

By Thomas Cooley, Ben Griffy and Peter Rupert

The third and final estimate of Q4 GDP growth reveals an upward revision from 1.9% in the advance and 2nd revisions to 2.1%. The increase came largely from a full one percentage point increase in PCE, from 2.5% in the advance estimate to 3.5% in the 3rd.

Fixed investment was revised down slightly, from 9.4% to 9.2% with a fairly large downward revision to intellectual property rights, falling from 4.5% in the 2nd estimate to 1.3% in the final. Non-residential fixed investment grew at 0.9% while residential grew at near double digits, 9.6%.

Exports fell by 4.5% while imports shot up 9.0%, leading to a large decline in net exports.

With the final estimate now in for real GDP, 2016 growth was the slowest since coming out of the Great Recession, 1.6% (tied with 2011).

 

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.

 

 

 

 

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.   

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.

 

 

 

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%.