U.S. Economic Snapshot

By Thomas Cooley, Ben Griffy, and Peter Rupert

There has been a rash of recent data showing the U.S. economy growing stronger. Rising incomes,  stronger domestic demand, and rising net exports are signaling a more robust economy. The upward revisions to second quarter GDP support that view and the hope and reasonable expectation is that the third quarter will be stronger still setting the table for a Fed rate hike later this year. The third estimate for second quarter GDP growth, released this morning by the BLS (link) estimates that the US economy grew at an annualized rate of 1.4% in the second quarter, up from a previous estimate of 1.1%, and up from the first quarter, in which the rate was 0.8%.

These gains were largely accrued from increases in personal consumption expenditures, which increased at an annualized rate of 4.3%, exports, which grew at a rate of 1.8%, and fixed nonresidential investment, which grew at a rate of 1.0%. Offsetting these gains were declines in residential investment, of 7.7%, government spending (national fell 0.4%, while state and local fell 2.5%), and imports, which rose 0.2%. It should be noted that the levels of the categories that grew dwarf the levels of those that declined, leading to the overall increase in headline numbers.

As noted, personal consumption expenditures (PCE) played the largest role in GDP growth last quarter. This bucked a trend over the previous four quarters in which percent growth in the component had fallen, while still remaining positive. Growth in the component more than doubled over the Q1 figure, and was nearly at its highest rate of growth since the Great Recession. This is a strong indication that US consumers are confident in the direction of the US economy. For comparison, many European economies have not seen consumption growth of 4.3% in total since the beginning of the Great Recession:

Which shows the importance that the US economy has as a global driver of growth. In total, changes in PCE would have caused a 2.88% increase in GDP, all else equal.

Residential and non-residential investment swapped growth trends, with non-residential investment ticking positive for the first time in three quarters, and residential investment turning negative for the first time since 2013Q4. Nonresidential investment was driven up by increases in expenditures on industrial equipment, and intellectual property products, with the latter increasing by 9.0% at an annualized rate. Overall, Gross Private Domestic Investment caused a decline in GDP of 1.34%, if all other components were held constant.

The report should be taken with cautious optimism that the US has absorbed some of the global economic uncertainty in stride. Even more cause for optimism is that GDP growth would have been 1.7% annualized if the contribution of government spending had been removed, a highly variable series that has limited forecasting ability on the health of the economy, particularly in an election year. These figures are perhaps inauspicious in comparison to the halcyon heights of US economic history, but in the context of our times, they continue to reflect the strength of the US economy in period of great uncertainty.

By Thomas Cooley, Ben Griffy and Peter Rupert

Employment from the establishment survey reported by the BLS increased 151,000, nearly all of which was in the private service sectors, increasing 150,000. The goods producing sector decreased 24,000, roughly offset by government employment, up 25,000.
Manufacturing employment has shown considerable weakness since 2015, while the service sector has continued to show strength. Education and health services along with leisure and hospitality posted the largest gains of the subsectors. Revisions were pretty much a wash: down 21,000 for June and up 20,000 for July.

Average weekly hours fell to 34.3 after six straight months at 34.4. Labor force participation and the employment population ration were essentially unchanged.

The household survey wasn’t encouraging either. Employment, according to the household survey, increased only 97,000 and the unemployment rate ticked up slightly from 4.88% to 4.92%. The number of unemployed persons increased as did those not in the labor force. The number of people working part-time for economic reasons increased for the second straight month, but the number of people marginally attached to the labor force trickled down.

The problem the markets now face is that this report only increases uncertainty. The FOMC has been suggesting of late they seem to be favoring a rate increase sooner rather than later. Over the past three months employment increases have average 232,000 jobs a month but the most recent numbers are softer. If this had been a stronger report a rate increase would have certainly been likely this year. It may still be but it is likely that the Fed will wait for more indications. The CPI for July was unchanged and for the previous year up only 0.8.  If the economy keeps going sideways the Fed has a quandary: clearly they would like to get on more normal path, but the sluggish economy and global uncertainty have forced tepid policy responses until the storm quiets.

By Thomas Cooley, Ben Griffy and Peter Rupert

Today’s revised estimate of Q2 GDP from the BEA saw only a small downward revision that did little to change the economic outlook. The advance estimated growth of 1.2% was revised down to 1.1%. Personal consumption expenditures continues to be the main driver it appears, contributing 2.94%, while there was also a smaller decrease in private fixed investment. Although, investment overall has continued to look weak.

The general weakness, PCE aside, will almost certainly keep the Fed sitting on their hand this September.

Yellen’s Jackson Hole Remarks:

Federal Reserve Chairwoman Janet Yellen spoke at the annual meeting in Jackson Hole this morning (link to transcript). Entitled “The Federal Reserve’s Monetary Policy Toolkit: Past, Present, and Future,” she focused on whether the current monetary tools are adequate for future downturns. Most specifically, she points to the ability of the Federal Reserve to affect the quantity of reserves held by banks. After the government pumped extra liquidity into the market following the Great Recession, the previous policy tool (changing the volume of reserves offered by the Fed in the overnight market) would have been dwarfed by the reserves available from banks. To prevent this from happening, the Congress implemented a policy in October 2008 to allow interest to be paid on reserved held by banks. The results have been nothing short of astonishing:

Yellen made the case for a gradually rising Federal Funds rate conditional on economic conditions continuing to strengthen.  This strengthened the prospect that we will see further rises this calendar year.  All told, the prospect seems to be for gradual improvement of the economy as reflected in the steady improvement in employment and wages, but no major moves in the Fed’s policy stance or targets.

By Thomas Cooley, Ben Griffy and Peter Rupert

The Bureau of Labor Statistics announced that non-farm payroll employment for July increased 255,000, beating the “expected” job gains of 180,000. In addition, both May and June were revised up, 13,000 and 5,000, respectively. The bulk of the gains came from service sector jobs, up 201,000 with the majority of those in business and professional services.Employment in manufacturing (+9,000) and construction (+14,000) rose while  mining continued its decline (-7,000), consistent with continued weakness in the energy sector and oil prices.

 

The continued strength in the labor market also showed up in an increase in average weekly hours and average hourly earnings.  Earnings are now increasing at a rate of over 2.5% year over year.

Labor market dynamics from the household survey revealed an encouraging increase in labor force participation and employment and a decline in the number of persons unemployed, resulting in essentially no change in the unemployment rate at 4.89%. This means that fewer people are sitting on the sidelines. While the news is, on the whole, positive, the number of persons unemployed more than 27 weeks increased for the third straight month.

The big puzzle is how to reconcile the continued strength in the labor market  with the very weak GDP growth reported last week and how the parse the impact of this on the decision making of the Fed.  Most likely the reason for these diverging signals will be become clearer over the next few months. The widespread view is that the continued strength of the labor market makes it likely that there will be a rate increase in 2016, although the weak GDP numbers will keep the market guessing.

 

By Thomas Cooley, Ben Griffy and Peter Rupert

The U.S. economy grew at a paltry 1.2% rate in the second quarter continuing a pattern of anemic growth for the past three quarters. The expectations had been fairly high, somewhere around 2.6% growth. The Fed had “left the door open” for a September rate hike. The FOMC announcement on Wednesday suggested a brighter picture than the June announcement. Here the WSJ compares the two statements. Unfortunately the economy didn’t listen! Not only did the  Q2 GDP report  show a 1.2% growth rate for real GDP, the revision for Q1 was revised down from 1.1% to 0.8%. The annual revision to the National Income and Product Accounts (NIPA) was also announced with this release. While there were some upward and downward revisions over the last few years, the upshot was the average annual growth from 2012 through 2015 was 2.2% compared to the previous estimate of 2.1%. The past three quarters have been quite weak, 0.9%, 0.8%, and 1.2% making a September rate hike unlikely.

Today’s report also showed continued strength in consumer spending (PCE 4.2%),
and an increase in exports (1.4%) but weakness in private inventory investment, nonresidential fixed investment (-2.2%), residential fixed investment (-6.1%), and state and local government spending (-1.3%). Imports also decreased (-0.4%).

Also this morning the Bureau of Labor Statistics reported the latest Employment Cost Index. Overall, the 3-month seasonally adjusted index for total compensation for all cilvilian workers climbed 0.6% (2.3% yoy) following a 0.6% climb for the three months ending in March. The wage and salary component was up 0.6% (2.5% yoy) for the three months and the benefits component up 0.4% (2.0% yoy). Compared to the last couple of years the ECI has shown a bit of a hike, again pointing to the strengthening of the labor market.

The dismal performance of GDP combined with a strongish labor market keeps one guessing as to the next move by the Fed. The most-watched signals (GDP, employment, unemployment and  wages) seem not to be in sync, keeping the Fed at bay.  But weakness in both Europe and Asia combined with stagnant U.S. GDP growth may be the dominant factors urging caution. Nevertheless the Taylor rule continues to call for a significant rise.

By Thomas Cooley, Ben Griffy and Peter Rupert

After several months of weakening employment growth the establishment survey from the BLS showed that June payroll employment increased 287,000. The employment number for April was revised up 21,000 for a final reading of 144,000. The weak May employment number was revised down 27,000, however, to a mere 11,000.

Private sector employment was up 265,000 and government up 22,ooo. Almost all of the increase was in private service producing, however, up 256,000. Manufactuing employment rose only slightly, up 14,000 and construction employment was unchanged. Mining and logging employment continued to contract, losing another 5,000.

Mike Feroli observes that, “The swing between the May and June headline payroll numbers only looks extreme by modern standards. Over the past five years the standard deviation of monthly jobs adds was the lowest in the history of a series going back to the 1930s.” Here is a picture of the monthly changes going back as far as the data permit:

Of course that is a lot of data to see, here it goes back to only 1986:

And one more from 2010 on:

The data do show there appears to be decline in volatility and somewhat of a slowing down in employment growth over the past year and half or so and has likely given the FOMC reasons to not act.

The workweek held steady at 34.4 for the fifth straight month and average hourly earnings showed only a slight increase, from $25.59 to $25.61.

The household survey saw an increase in employment of only 67,000 however. With an increase in the civilian labor force of 414,000, the participation rate climbed 0.1 to 62.7 , the employment to population ratio fell from 59.7 to 59.6 and the unemployment rate moved up from 4.692% to 4.899%.

Productivity for the first quarter fell 0.6% at an annual rate, with output increasing 0.9% and hours up 1.5%. This is the second consecutive quarter of a productivity decline, with 2015 QIV falling 1.7%. Compared to other cycles, while productivity has appeared fairly weak, it had been growing at a pace similar to other cycles for the first several years coming out of the recession but then tapered off to a much more moderate growth rate.

The strength of this employment report keeps hopes alive for a rate increase by the FOMC before year end, although later rather than sooner.

By Thomas Cooley, Ben Griffy and Peter Rupert

Today’s announcement of a 1.1% increase for the final estimate for Q1 real GDP from the BEA produced a small upward revision from the second estimate (was 0.8%), but more than doubled the advance estimate (was 0.5%). While the upward revision was certainly welcome, the overall picture is still one of weak growth overall. 

Consumption spending drove most of the increase in growth,  personal consumption expenditures grew +1.5% and the services component at +2.1%. Gross private domestic investment declined -1.8% and has declined for three consecutive quarters. Nonresidential structures and equipment fell substantially, -7.9% and -8.7%. Residential structures, on the other hand, grew at its highest rate in over two years, +15.6%.

The weak-ish growth and the Brexit have contributed to the overall global uncertainty concerning future growth–and future policy. The dollar-pound exchange rate fell to its lowest level in about 30 years, as of this writing on July 1, it is 1.33 dollars per pound. Not to mention England lost to Iceland 2-1 (which we term “Brexit II”)!

The real effects of Brexit will take some time to sort out. How the EU reacts remains to be seen. In the short run, however, uncertainty can have real effects. Investment is likely to decline in both the UK and EU given the uncertainty surrounding future policy, such as tariffs and labor mobility. But note that tariffs and immigration controls are policy choices. If free and open trade and open borders benefit the citizens of the two areas then the choices by government should reflect that. However, as Chancellor Angela Merkel remarked, “Whoever decides to leave that family cannot expect all obligations to be omitted while keeping its privileges.”

Within the US, Brexit has been influential in causing the Fed to taper its stated goals of two interest increases during the year. Given the uncertainty surrounding Brexit and the EU, as well as the upcoming presidential election, this seems prudent. As the economy has been displaying tepid progress over the past few months in the United States, we can only hope that Brexit is not the final push for a teetering US and global economy.

By Thomas Cooley, Ben Griffy and Peter Rupert

In recent weeks there has been increasing optimism about the strengthening U.S. economy based on increases in consumption and improvements in the housing sector.  This was accompanied by increasing chatter about a possible June or mid-summer rate increase by the Fed. The latest jobs report throws cold water on that optimism. The Bureau of Labor Statistics announced that payroll employment increased only 38,000 in May, the smallest increase since June of 2011. Of the 38,000 increase 25,000 was in the private sector. In addition, there were downward revisions to the previous two months totalling 59,000; down 22,000 in March and 37,000 in April.

 

 

The service sector was the driver of the increase, up 61,000, and almost all of that in health care, up 55,400. Mining employment continued its decline, down 11,000 after falling 26,000 over the previous two months.

Average weekly hours has been stuck at 34.4 for the past three months and average hourly earnings showed almost no change over the month, $25.54 in April and $25.59 in May.

The household survey from the BLS shows a 458,000 decline in the labor force (employed plus unemployed), and the number of persons unemployed fell by 484,000, leading to an  unemployment rate decline from 4.98% to 4.69%. The employment to population ratio held steady at 59.7.

These tepid results may be a delayed reflection of the slow growth in the first quarter and it may be the Q2 will continue to look stronger.  It does suggest that the Fed may scale back its intentions to continue to raise interest rates above the zero lower bound. In addition, slowing wage growth implies that inflation may flag as well, further depressing the nominal interest rate. There will undoubtedly be calls for more direct fiscal stimulus in the form of infrastructure investment to counter the low rate of investment and job growth. But that is unlikely to be forthcoming in an election year and given the increasing debt/gdp of the U.S..

As the rest of the world has stagnated, the United States has been the largest source of growth over the past few years. With poor employment reports over the past few months, it is unclear whether the US economy is strong enough to continue to be the global driver of growth.

 

By Thomas Cooley, Ben Griffy and Peter Rupert

The Bureau of Labor Statistics provided some additional bad news with employment increasing only 160,000 for the month of April. The private sector gained 171,000 however, with government shedding 11,000. Moreover, previous estimates were also revised down,  March 208,000 from 215,000 and February from 245,000 to 233,000. Mining employment continued its decline, down 8,000. 

Average weekly hours were up from 34.4 to 34.5 and average hourly wages ticked up.

The household survey also provided evidence of weakness: the unemployment rate remained essentially unchanged at 4.99%, the labor force fell 362,000 and the participation rate fell by 0.2%.

The household survey and establishment survey moved in decidedly different directions, with employment from the household survey falling 316,000.

by Thomas Cooley, Ben Griffy and Peter Rupert

The BEA reported today that real GDP for the first quarter (advance estimate) grew at an annual rate of only 0.5%. This continues the pattern of deeply disappointing first quarter results.  This, however, is not just a seasonal anomaly. GDP growth has been slowing steadily since the strong second quarter of last year. These results were expected but they are worrisome in several respects. While personal consumption expenditures were fairly strong, growing at 1.9%, the previous three quarters grew at a more robust 3.0%. Non-residential fixed investment fell 5.9% from the previous quarter and equipment investment fell by a whopping 8.6% – these do not bode well for future growth.

 

Residential fixed investment increased by 14.8%, a strong performance compared to previous quarters.  The core PCE index increased at a 2.1% annual rate suggesting that inflation may be getting near its target level. Exports fell by 2.6% holding back growth.

The steady downward march these last three quarters is cause for concern. But for the past several years dismal first quarters have been followed by rebounds. Will that pattern continue?

FOMC statement, April 27

The most recent statement from the FOMC delivered a weaker outlook than their previous statement. In addition, they removed the “headwinds” from global and financial concerns. Still, much of Europe and Japan remain weak.

 

When the Fed decided to hold off on rate increases they were clearly concerned about weak domestic fundamentals and waiting to see if the economy is going to continue to stagnate.  For the time being we must all play the waiting game and look for signs of renewed vigor in the monthly numbers. But what if the subsequent numbers show continued slow growth?  It isn’t clear that the Fed has much more that they can do. They are likely not ready to go to negative interest rates as other central banks have done. That leaves fiscal policy.

What Would Donald or Hillary Do?

This of course will be the great guessing game and subsequent reveal of the next many months. But so far the only revelation is an antipathy to trade on both their parts, which if brought to the fore could seriously hamper economic growth for decades to come.  But, it is time to start looking for – demanding – clues to their economic savvy beyond the campaign bloviating.