U.S. Economic Snapshot

by Zach Bethune, Tom Cooley and Peter Rupert

Today’s employment report for April from the BLS showed a solid gain in employment +223,000. However, a downward revision of -41,000 leaves March at a disappointing 85,000 with one more revision to go. Probably the best thing about the report is that it was not bad. The numbers roughly hit the consensus forecast of 230,000. But the recent performance underscore how noisy this estimate is.  Nevertheless, the numbers signal an economy that is growing slowly, but definitely growing in spite of many challenges in the global environment.

The gains, however, were pretty much across the board, although, mining and logging saw a third straight month of decline as the oil industry continues to struggle with the low oil prices. There has been a slight uptick in those prices of late.

Average hours of work have remained pretty flat over the last few months, around 34.5.

Nominal earnings growth remains flat, but in real terms, labor income is up.

On the household side of the ledger, there was a fairly restrained increase in employment, 166,000. The unemployment rate declined slightly to 5.4%…that is from 0.05465056 to 0.05442727.

And the long term unemployed (27 weeks and over) fell slightly but remains elevated, obviously a concern as these workers may lose skills and become even more difficult to hire.

The employment to population ratio is also quite sluggish…stuck at 59.3% since February.

The other slightly negative news is that productivity declined for the second straight month…it is the first time this has happened since 2006!

Putting this together, it appears as if the good news is that it wasn’t bad news…meaning that it does not appear that it will change anyone’s view of when the Fed will begin liftoff. Many commentators have feared that future revisions of Q1 GDP could show that it actually shrank.  These number do not seem consistent with that, although as noted above, they could be revised downward as well.

by Zach Bethune, Thomas Cooley and Peter Rupert

Today’s release of first quarter real GDP by the Bureau of Economic Analysis saw another weak 1st quarter, gaining only 0.2% at an annual rate.  It was expected that first quarter growth would be weak but this was below most analysts estimates. They were off by about a full percentage point as the median forecast was around 1%. The first quarter of last year was forecast to be around 1.1% and the eventual revisions left it at -2.1%!  It may well be that the first quarter numbers for 2015 will eventually come in negative.

While there is much discussion of the impact of a severe winter on GDP…that is only a small part of the story. The bigger issues facing the economy are declining commodity prices – particularly oil prices and the much stronger U.S. dollar as other countries try to stimulate their domestic economies. The U.S. is a big oil producing economy so the impact of lower oil prices, while helping consumers, hurts producers and has a decidedly chilling impact on investment. In the first quarter alone, twenty five central banks around the world eased their monetary policies in an attempt to stimulate their economies. The effects of these could be long lasting. The decline in investment is likely to be a long lasting drag on growth. The decline in exports is only the first wave of the impact of a strengthening dollar.

The biggest detractors from GDP growth in the first quarter were non-residential fixed investment and exports.

Nevertheless, the U.S. has an interest in other countries stimulating their economies. The U.S. is still the strongest game in town. Europe and Japan have continued to lag far behind in the recovery from the financial crisis – a fact the following graph makes very clear. But this tolerant stance will become more difficult to maintain when the Fed begins the cycle of raising interest rates later this year. That will undoubtedly strengthen the dollar further and raise questions about the unsynchronized nature of monetary stimulus among developed economies. So what does all this mean for the Fed and the future of policy? With such a weak reading for GDP and with the Atlanta Fed’s GDPNow forecast of just 0.9% growth for the second quarter likely means liftoff is likely not in the cards for the next couple of meetings at least.

by: Zach Bethune, Thomas Cooley, Peter Rupert

Today’s Employment Situation  revealed a gloomy picture of the labor market for the first quarter of 2015. Non-farm employment increased by 126,000 in March, well below expectations. Job growth in January and February was revised down by 13%. Ovearall the picture is one of a stagnant labor market in the first quarter.  The unemployment rate remained unchanged, wages increased slightly and hours worked declined slightly.  The transition rate from unemployment to employment remained unchanged.

What are the implications of these developments for the future?  Some of the decline in job growth is due to declining oil and commodity prices.  Employment in the mining sector and construction fell as drilling declined sharply. Some of it was due to particularly severe winter which slowed economic activity.  These are both short term effects. Oil prices will not likely fall much more and the positive effects of consumers having more disposable income will show up gradually over time. If that is all we are dealing with we might expect the damping effect on labor markets to be short-lived.  More troubling for the longer term outlook is the dramatic rise in the value of the dollar.  Since the beginning of 2015 25 central banks have eased monetary policy. The list includes China, the ECB, and Canada, major trading partners of the U.S.  This has pushed up the value of the dollar precipitously and the effects of that on our export industries are only beginning to be felt. Exports declined in the most recent trade report and the effects on employment will, most likely, be increasing and ongoing.

A sluggish labor market and sluggish GDP growth all suggest that Fed will have plenty of reason to be patient at its June meeting and has plenty of breathing room for deciding on the timing of liftoff.

Unemployment

Part time for economic reasons

by: Zach Bethune, Thomas Cooley, Peter Rupert

The third and final estimate of GDP released today by the Bureau of Economic Analysis provides no substantial new information on the growth of the economy…and therefore little to guide us to the future of interest rate changes by the FOMC. The final number for real GDP growth for Q4 is 2.2%, seasonally adjusted at an annual rate.

Since the negative growth rates in 2008 and 2009, real GDP growth has been weak, but fairly steady year to year, 2010: 2.5%, 2011: 1.6%, 2012: 2.3%, 2013: 2.2%, and 2014: 2.4%; but, as noted here and elsewhere, quite slow relative to previous expansions.

Consumption growth received a small boost, as did net exports, but inventories took a hit.

Real investment took about 25 quarters to get back to it 2007 peak, typically taking only about 10 quarters. Residential fixed investment has yet to get back to its peak in 2007, it is still about 14% below that level.

There is still real debate within the FOMC, however. From KC President George’s remarks: “While the FOMC has made no decisions about the timing of this action, I continue to support liftoff towards the middle of this year due to improvement in the labor market, expectations of firmer inflation, and the balance of risks over the medium and longer run. Liftoff in the middle of this year, in my view, would be fully consistent with the FOMC’s Statement on Goals and Monetary Policy Strategy, which reminds the public that monetary policy actions tend to influence economic activity and prices with a lag.” But, Chicago President Evans from a speech in London: “What is my personal view of the appropriate path for Fed policy? I think economic conditions are likely to evolve in a way such that it will be appropriate to hold off on raising short-term rates until 2016.”

In their own words, the future of lift-off will be “data-driven.” When isn’t it?

by Thomas Cooley, Peter Rupert, and Zach Bethune

The problem of deflation is not just a concern for fans of American Football. It has been troubling economists and financial market observers since Japan slipped into deflation in their lost decade of the 1990’s and the concern has become more pronounced as the European Economy, particularly the Eurozone, has struggled to escape from a lost decade of its own following the financial crisis of 2007-2009 and has been on the brink of deflation – a sustained fall in the price level – for the past few years. Now, with commodity prices falling and the European Economy in continued stagnation, the ECB has finally decided to undertake some serious monetary stimulus in the form of large scale purchases of sovereign debt, as has been done in most of the other major economies of the world over the past few years. Their goal is to stimulate their stagnant economy, improve their competitiveness by lowering the value of the Euro relative to the dollar, and stave off deflation. In a global economy domestic policy actions have ripple effects, sometimes large ones, on other economies. If countries were all trying to improve their competitiveness at once it can look like a currency war or at least be confusing.

The U.S. Bureau of Labor Statistics recent release showed the U.S. CPI declining at the end of 2014 raising the issue of downward price pressures in the U.S. Not all of this was a reflection of declining energy prices – they have been falling rapidly in the past year – because core inflation, excluding food and energy, has been falling as well. What is going on with world prices and how does it impact the U.S. economy? Since the economy is recovering well as we have documented in previous posts, the pressure on the Federal Reserve to normalize monetary policy and begin raising interest rates should come about largely because of concerns about inflation. But, the current environment is one in which the struggles of some our most important trading partners has incentivized them to push the value of their currencies down, lowering import prices in the U.S. but also stimulating capital inflows to the strong U.S. economy.

First, lets look at prices in a collection of important economies. The picture below shows the broad CPI or equivalent for Japan, the U.S. and some key European economies.

Prices have turned down, more dramatically in some countries than others, and as the following picture shows it is not just energy prices that is driving them.

These price levels reflect a complex set of drivers and ultimately what is going to be most important is the relative price of currencies. The countries that have been most stagnant are the Euro area nations and Japan. (An earlier post also contrasted these areas to the BRICs). The picture below shows the relative performance of these economies in the aftermath of financial crises. Real GDP growth is stagnant in Japan and the Eurozone economies as we have documented before. The U.S. and U.K. in contrast are recovering well and showing steady growth.

More important than the price level, however, is the relative price of the currencies. The picture below shows the real effective exchange rates for the Euro, Yen, Pound and Dollar. What they show is that the dollar and pound have appreciated sharply and the Yen has depreciated sharply.  The Euro, adjusted for domestic inflation, has not moved much.  The Euro zone countries need the real value of their exchange rate to decline sharply with the ECB’s policy in order to restore their competitiveness.  But they are hampered in the end by the fact it is one currency that links very disparate economies.  It remains to be seen how effective they are.

by Zach Bethune, Thomas Cooley and Peter Rupert

The labor market added 252,000 jobs in December according to the Employment Situation released today. In addition, there were substantial positive revisions to last two months: 243k to 261k in October and 321k to 353k in November.

The unemployment rate declined to 5.6%, which marks the lowest it has been since mid 2008. While the number of unemployed workers hasn’t fallen to its pre-recession level, the remaining ‘slack’ left in the labor market is largely due to the longer-term unemployed or those with jobs but who are underutilized, like the part-time workers for economic reasons. The story in terms of how (and in which dimensions) the labor market is recovering remains the same: slow but continued progress after a historically deep recession.

Our usual goal in these posts is to describe where the US is in its now 7-year recovery from the recent recession. However, we ask a different question in this post (one that has been the central focus of many economists since the crisis started): why was the downturn in the labor market so deep?

The Labor Market Downturn

Compared to past recessions, the increase in unemployment during the Great Recession was the worst since the Great Depression. The unemployment rate more than doubled from mid 2007 to late 2009. Even compared to recent recessions, this crisis was particularly severe. What factors led to such a severe recession? In my job market paper, “Consumer Credit, Unemployment, and Aggregate Labor Market Dynamics”,  I study the role of  households’ ability to access and use consumer credit when they become unemployed and ask if this relationship, at the household level, can help us explain the depth of the recent recession.

The Role of Consumer Credit

The Great Recession was unique in many respects, but a feature that continually stands out has been the response of household debt and borrowing. The credit boom of the late 1990s led many households to increase their reliance on debt to finance consumption and investment. The ratio of debt-to-income increased from around 0.6 in the 1980s to nearly 1.2 at the peak of the boom in 2007. During the crash, both debt and borrowing fell at rates never seen before as the unemployment rate doubled. Debt-to-income currently stands around 0.95.

Not only was the pattern in unemployment and borrowing similar in the aggregate, we also see them linked if we look across regions of the US. For instance, counties that had the largest increase, and subsequent fall, in borrowing during the Great Recession also tended to be the counties that experienced the largest declines in employment or increases in unemployment (see an excellent non-technical summary of this work here). These facts have led to a new emphasis on research into how problems in household financial markets might exacerbate recessions.

One area of household debt that was a strong predictor of the response of unemployment was borrowing on consumer credit lines, mostly comprised of credit cards(Mian and Sufi, 2009). The fall in consumer credit borrowing between 2007 and 2009 was nearly twice as large as in the previous 4 recessions.

Not only were households borrowing less, it was also more difficult to access the consumer credit market. Evidence from the Federal Reserve Board’s Senior Loan Officer’s Survey suggests that lenders were tightening credit card standards and also decreasing limits on outstanding accounts. Consumer credit became more difficult to access during the Great Recession at the same time that the labor market was deteriorating.

This leads to the question of what was happening at the household level between a consumer’s access to credit and their labor market status. Evidence from the 2007-2009 Panel Survey of Consumer Finances suggests that not only was credit being tightened for all consumers over this time period, but that it was being tightened more strongly for consumers that lost their jobs. These households applied for credit more frequently and were denied at a higher rate. The difference in the rate of denials was driven by denials that were employment and income related, being told by lenders that their income was too low. In the end, the rate of monthly borrowing fell 60% more for an average consumer that lost their job than an average consumer that maintained employment. Put simply, a job loss over the Great Recession corresponded to a significant reduction in a household’s ability to borrow on consumer credit.

Accounting for this relationship in a macroeconomic model leads to recessions that are around 70% deeper than what a standard model would predict. A shock to the economy, say a fall in productivity or house prices, gets amplified if the unemployed face tighter credit constraints. As the unemployment rate increases, a higher fraction of households are credit constrained, borrowing falls, and subsequently the demand for firms’ products. The decrease in ‘aggregate demand’ lowers firms’ demand for labor which induces more unemployment. This cycle repeats itself, causing the recession to become deeper.

Conclusions

The evidence above highlights two aspects of why the fall in household borrowing between 2007 and 2009 corresponded closely with the increase in unemployment. First, the complementarities between the household credit market and the labor market run down to the household level. It became more difficult to borrow precisely for households that demanded it the most, the unemployed. Second, this relationship affected the incentives for firms to hire, which exacerbated the initial causes of the recession.  Accounting for the relationship between borrowing and unemployment at the household level is important in understanding the trends we see aggregate data.

 

Sources

Bethune, Zachary (2014), “Consumer Credit, Unemployment, and Aggregate Labor Market Dynamics” in mimeo. 

Mian, Atif and Amir Sufi (2010), “Household Leverage and the Recession of 2007 to 2009” IMF Economic Review, Palgrave Macmillan, vol. 58(1), pages 74-117, August.