A Dismal^2 Q1 Final GDP Report

by Zach Bethune, Thomas Cooley and Peter Rupert

Final Revision to Q1 GDP: UGH!

Yesterday the BEA announced another large downward revision to first quarter GDP growth from -1.0% to -2.9%. The final estimate was primarily attributed to downward revisions in consumption (3.1% to 1.0%) and exports (-6.0% to -8.9%). In addition, there was a major hit to the late-2013 inventory overbuild and construction.

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All of this, obviously, leaves the FOMC and the administration in a tough position. While many analysts recount weather-related setbacks and changes in depreciation allowances (such as I.R.C. 179), there is certainly real concern that the weakness is, well, weakness.  Before the downward revisions, the weak Q1 GDP figures were already on the Fed’s mind. From Janet Yellen’s congressional testimony on May 8 (emphasis added):

“Although real GDP growth is currently estimated to have paused in the first quarter of this year, I see that pause as mostly reflecting transitory factors, including the effects of the unusually cold and snowy winter weather. With the harsh winter behind us, many recent indicators suggest that a rebound in spending and production is already under way, putting the overall economy on track for solid growth in the current quarter. One cautionary note, though, is that readings on housing activity–a sector that has been recovering since 2011–have remained disappointing so far this year and will bear watching.”

Real private domestic investment, after having just reached its levels from December, 2007, has been stagnant of late.  Both nonresidential and residential investment are culprits, though both had upward revisions from -1.6% to -1.2% and -5.0% to -4.2%.  The numbers are nothing to cheer over, but there is also nothing in today’s report should change the Fed’s reading on the housing market from May.

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More recently from Janet Yellen’s June 18th press conference (again emphasis added):

Although real GDP declined in the first quarter, this decline appears to have resulted mainly from transitory factors. Private domestic final demand—that is, spending by domestic households and businesses—continued to expand in the first quarter, and the limited set of indicators of spending and production in the second quarter have picked up. The Committee thus believes that economic activity is rebounding in the current quarter and will continue to expand at a moderate pace thereafter.

With yesterday’s large downward revisions to consumption, private domestic final demand is now estimated to have fallen in the first quarter, though more recent data are still in line with higher spending in the second quarter.

It’s not at all clear how much the revision will alter the Fed’s economic outlook or their stance on policy accommodation. The focus is still largely on improvements in the labor market, but a -2.9% Q1 growth rate is far from the FOMC’s latest central tendency projections for 2014 of 2.1%-2.3% growth. So what exactly does the growth rate of real GDP have to average over the next three quarters to be in line with the FOMC’s projection? The answer is 3.77-4.03%. While those rates are not impossible, it remains highly unlikely given the average growth during the recovery, as the figure below makes apparent.

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More of the Same for Employment Growth? We Dig a Lot Deeper

by: Zach Bethune, Thomas Cooley, Peter Rupert

The establishment survey reports total non-farm employment increased by 217,000 in the month of May and revisions to the prior two months cut  employment by 6,000.   This seems like just another ho-hum increase in jobs in what has been a drawn out recovery.  But there is more to this story when one digs below the surface.  This is a long slow recovery from a sharp contraction and employment has just surpassed its pre-recession level. In the course of this recovery labor force participation has declined to a level not seen since the 1970’s, erasing many of the gains of the increase in female labor force participation.  One consequence of the long recovery is that the duration of unemployment has increased with nearly 35% of the unemployed, or 3.4 million workers, unemployed for 27 weeks or more. Weak labor market conditions and long duration unemployment discourage labor market participation. In this post, thanks to economists at the Bureau of Labor Statistics who shared their data with us, we can drill down  a little deeper and examine how the experience of workers who have been unemployed for long spells compares to the experience of those with shorter spells.

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How do employment prospects differ by duration?

The graph below shows the rate at which unemployed workers transition to employment, broken into groups according to how long a worker has spent in unemployment.  Think of this as a job finding rate by duration of unemployment. For example the black line in the figure gives the job finding probability for those workers that have been in unemployment for less than 5 weeks. First, it is always true that workers that spend longer in unemployment have a lower probability of getting a job. Second, the job finding probability is pro-cyclical, it is harder to find a job in recessions and easier in booms.

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Focusing on the current recovery, notice that these rates never fully recovered to the levels that prevailed before the 2001 recession – the first jobless recovery.  Not only did the labor market not regain its robustness after that contraction, the transition rate dropped dramatically in the great recession and has not recovered much for most durations of unemployment.

A positive sign is that the transitions to employment for short duration unemployed workers, particularly those that have been unemployed for less than 5 weeks, has ticked up in the most recent data – possibly significantly.  This is where the recovery of the labor market and increasing wage pressures will show up first since these workers are more likely to exit unemployment.  There are very slight increases for those unemployed for longer spells but almost no movement of those unemployed for greater than 27 weeks. When these transition probabilities show a marked upward movement the labor market recovery will be in full swing even though longer duration unemployed may be slow to benefit.

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The transitions from unemployment to out of the labor force also tell a more nuanced story.  Clearly the long duration unemployed face declining prospects and are more likely to exit the labor force and these transitions have been rising dramatically. But decisions to exit the labor force are also affected by the duration of unemployment benefits and that shows up in slower transitions as benefits have increased. UU-rate-duration-2014-06-06

We can also look at the transitions from unemployment to unemployment, meaning the rate at which workers stayed unemployed in any given month. This is a reflection of the persistence of the unemployment.  Notice the rate at which workers stayed in unemployment is higher for all durations than in previous recessions meaning that unemployment is much more of an absorbing state.median-duration-2014-06-06

Finally, we can breakdown the median number of weeks that workers spend in unemployment, or the unemployment duration, into the duration for those workers who eventually found jobs and those that exited the labor force. Both have increased dramatically compared to previous recessions and the duration of those transitioning to employment is only slowly coming down.

The figures above highlight the devastating impact of this recession on those unemployed for long spells.

 

What do we learn by digging deeper?

Looking at the detailed transitions by group lets us see where exactly the labor market is improving by explaining the components that comprise the well known path of unemployment and labor force participation (below).  The long duration unemployed cast a long shadow over the labor market as a whole. Most of the policy action and most of the recovery is going to show up in the improved transition probability of the short duration unemployed.  We see that is finally beginning to show a few green shoots.

For an even more finely detailed look at employment by industry and occupation check out the superb interactive graphics developed by the New York Times.

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A Dismal Q1 GDP Revision…

by Zach Bethune, Thomas Cooley and Peter Rupert

GDP Report

The BEA announced in the advance estimate last month that real GDP increased at a s.a.a.r. of 0.1% for 2014 Q1…and the second estimate released this morning revised that down to -1.0%.   Is this just a pregnant pause or are we in danger of sinking into another contraction?  A close look at the details suggest that more likely than not it is just a pause.  Much of the decline was due to a large downward revision to estimates of inventory accumulation in the first quarter.  Inventory accumulation has been a source of strength for the past couple of quarters and the decline of inventories in the first quarter is the counterpart to that.   The revisions to most of the other components of GDP were relatively minor.

Consumption was essentially unchanged compared to the first estimate.  Investment in equipment showed a smaller decline than in the first report and investment in  intellectual property increased significantly in this revision.  Investment in non-residential structures was revised downward significantly .

The interesting question is what does all of this mean for the progress of the recovery?  It is a dismal set of revisions compared to what was already a dismal estimate of first quarter progress.  Is the economy going to be in a prolonged pause or pull itself out?  The only positive indication from this revision is that with inventogdpreal-chg-q-break-2014-05-29ries reduced firms will not have a big hangover of inventories that could hold back production in the second quarter. Many forecasters at the FED and elsewhere are looking for growth rates to climb back toward 3% in the coming quarters following two quarters of dismal growth. The second quarter GDP estimates (not due until July 30th) are going to be the first indicator we have of whether this is just wishful thinking or not.

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On a more positive note, initial claims fell 27,000 to 300,000.

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April jobs report: More mixed signals.

by: Zach Bethune, Thomas Cooley, Peter Rupert

The establishment survey reports total non-farm employment increased 288,000 and the previous two months were also revised up a total of 36,000 over what was previously reported. Job growth over the year has averaged 190,000 per month. Moreover, the job gains were fairly widespread with service producing jobs leading the way with 220,000 jobs added. Goods producing and government employment showed little change.

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The unemployment rate fell from 6.7% to 6.3%.

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Some cold water on the report

But is the report really as good as it looks at first blush? Maybe not…average weekly hours of work were unchanged at 34.5 and average hourly and weekly earnings remained flat at $24.31 and $838.70, respectively.

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According to the household survey the labor force fell by 806,000 and the labor force participation rate declined from 63.2 to 62.8. Is this decline in the labor force participation rate (and the consequent decline in the unemployment rate) due to discouraged searchers leaving the labor market? Or, is it a longer run trend down in participation rates? According to the household survey employment fell by 73,000.

Some of the decline in labor force participation is attributed to the fact that the long duration unemployed have dropped out of the labor force.  The average duration of unemployment is little changed at 35 weeks and more than 35% of the unemployed are unemployed for 27 weeks or more. Many of the long duration unemployed eventually stop looking for work and thus drop out of the labor force.  This has been an important contributor to the declines in labor force participation.

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As often happens, it is possible to use this report to signal strong growth in the labor market or to underscore the real weaknesses in the economy. The takeaway is that the labor market still appears fragile.

Dismal Q1 GDP Report

by Zach Bethune, Thomas Cooley and Peter Rupert

GDP Report

The BEA announced in the advance estimate that real GDP increased at a s.a.a.r. of 0.1% for 2014 Q1. In addition, the final estimate for Q4 real GDP showed a 2.6% growth rate, unrevised from the second estimate. The Q1 growth rate was the lowest since 2012 Q4.

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Personal consumption expenditures increased at a 3.0% clip, with the services component at 4.4%, the highest rate since 2000. The big negatives came from fixed investment (mainly equipment and residential), inventories, and net exports.

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Such a dismal report certainly makes the decision of the FOMC more difficult, but they stayed the course and maintained the taper, as can be read in their release here. Is the dismal report from “weather related” disturbances? Or, is it a signal of an economy slowing down? As always in an FOMC statement the words are carefully chosen. For example,

The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases.

It is not clear what “…sufficient underlying strength in the broader economy…” means. The statement does mention “…adverse weather conditions…” but it seems like they are putting a lot of emphasis on the bad weather. As shown above, there were large declines in investment, both residential and non-residential. Moreover, measures of the labor market don’t seem that consistent with the statement. Here is a picture of the employment to population ratio from FRED; and here is one comparing the path after recessions:

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Initial jobless claims rose 14k to 344k (median 320k) for the week-ended April 26, more than reversing the recent drop. Continuing claims rose 97k to 2,772k for the week-ended April 19. The four-week average rose to 320k to mark the second consecutive weekly rise, though we’ve remained below 340k since the second week of January.

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The employment report comes out tomorrow…

March employment report: slow but steady improvement

by: Zach Bethune, Thomas Cooley, Peter Rupert

The establishment survey reports total non-farm employment increased 192,000 with all of it attributed to the private sector as the government sector showed no change over the month. Evidently, after two cold months depressed the labor market, employment gains look much as they have over the past twelve months or so, averaging 184,000 since February, 2013. empchgm-2014-04-04 Total employment is now near its level of December, 2007, just when the economy went into recession; and, private employment is slightly above its pre-recession peak. emp-2014-04-04
Average weekly hours in the private sector also jumped up from 34.3 to 34.5.

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On the household side, both the number of unemployed (10.5 million) and the unemployment rate  (6.7%) remained essentially unchanged and have both moved little during 2014. The progress of the labor markets now seems highly dependent on the prospects for the long-term unemployed. Average unemployment duration remains remarkably high while initial claims have returned to pre-recession levels. The long term effects of the large number of long-term unemployed is a story that is yet to be told.  But, all of the initial research point to large permanent losses in income and mobility.

The household survey also revealed that labor force participation has begun to inch up, a sign that prospective workers see more opportunities than they have.

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As can be seen in the Beveridge Curve below, the number of job openings has nearly returned to its level in January, 2008, though the success of the labor market in filling those vacancies has not kept pace…but is continuing its “counter-clockwise” loop as per usual.
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In the end, then, what is the take-home message? The overall picture, while not stellar, shows a broad array of data that is mostly positive, but is it enough to change the pace or magnitude of Fed policy…seems unlikely for now.

Final Estimate for Q4 GDP

by Zach Bethune, Thomas Cooley and Peter Rupert

GDP Report

The BEA announced that real GDP increased at a saar of 2.6% for 2013 Q4 (advance estimate was 3.2% and the second estimate was 2.4%). The overall picture for the U.S. economy remains largely the same. The increase from the last estimate comes largely from personal consumption expenditures (PCE) and nonresidential fixed investment. Moreover, the increase in PCE was the largest increase since the end of 2010. The deceleration  comes mainly from a decline in inventories, a bigger decrease in government spending and residential fixed investment.

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Initial claims for unemployment fell to 311k, its lowest level since last Thanksgiving and the 4-week moving average hit 318k.

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February employment report: nothing to write home about

by: Zach Bethune, Thomas Cooley, Peter Rupert

The February employment report from the BLS provides little material to sway anyone’s prior beliefs, although the headline jobs number was slightly higher than many prognosticators prognosticated. The establishment survey reports total nonfarm employment increased 175,000 with 162,000 attributed to the private sector and the remaining 13,000 to an increase in government workers.

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Total employment has nearly reached its December 2007 level…some six years after the beginning of the recession.

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The service sector added 140,000 jobs, with professional and business services adding 79,000 jobs, 24,400 of which are temporary services. Average weekly hours fell slightly to 34.2 from 34.3…and a year ago in February average hours were 34.5.

The household survey shows the number of employed (145,266,000) and unemployed (10,459,000) persons both increasing slightly. The unemployment rate ticked up slightly from 6.6% to 6.7%. Since February 2013, the unemployment rate has declined 1.0 percentage point. The employment to population ratio and the labor force participation rate were unchanged. Fortunately or unfortunately the headline story of the US remains much the same as it has been since the beginning of the recovery in mid-2009.

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Europe’s Lost Decade?

by Zach Bethune, Thomas Cooley, Espen Henriksen, and Peter Rupert

Is Europe about to repeat Japan’s lost decade? Six years after the Great Recession began, the Euro area has shown little sign of sustained growth.  Japan’s so called lost decade began in 1991 after several decades of rapid economic progress and sustained increases in asset prices that were suddenly reversed.  The average growth rate of real GDP per-capita declined from about 3.5% per year in the 1980s to about 0.5% per year in the 1990s and was accompanied by  rapidly decreasing equity and real-estate valuations.  But, when we compare the performance of Japan’s economy with the European economy since the beginning of the Great Recession it is clear that Europe is in far worse shape than Japan ever was.

The following Snapshot-style comparative charts show the paths of key economic variables in Japan after the peak of its equity and real-estate valuations and contrasts these with the paths of these variables in the U.S. and Europe in the years since the onset of the Great Recession. For Europe and the U.S. we set time “0” at the peak before the Great Recession.  Judging from this and the charts that follow, halfway into the decade following the onset of the Great Recession, the performance of the U.S. and, in particular, the European economy are substantially weaker than Japan’s economy was halfway through its lost decade.

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Japan’s growth rate slowed dramatically at the beginning of their lost decade – GDP rose only 10% in the first six years and then flat-lined more or less completely.  Europe, by contrast fell by six percent in the first six quarters and then flat-lined at a level three percent below their peak.  The U.S. stands in contrast to both of these stories – after falling by nearly four percent in the first six quarters U.S. growth has been steady at a rate slightly less than before the collapse.

Consumption paints an even more dire picture for Europe. During the lost decade in Japan consumption expenditures never really slowed down. In the Great Recession, U.S. consumption fell initially for about 6 quarters and  has been rising ever since. Europe on the other hand started out similar to the U.S. for the first 6 quarters but then consumption growth stalled and has not improved since. It has not returned to its 2008 peak.

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The labor market picture for Europe is even more discouraging and strongly reinforces the message of a lost decade.  The unemployment rate in individual countries like Spain and Italy has been widely noted. But, here we focus on aggregate employment and the data are for the EU-28 which includes some countries, like Germany, where the labor market has not really declined. Japan, Europe and the U.S. showed remarkably similar paths of employment up until the inflection point following which there was a sharp contraction in both the U.S. and Europe. In Japan, employment like output, simply stagnated.  In terms of a recovery, the U.S. labor market, after a sharp decline, is showing slow growth while Europe looks to be stuck at a permanently lower level.

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While the declines in employment were steep in both the US and Europe, the path of labor productivity has been very different. In the US the recession had a negligible effect on labor productivity, which has only recently started to show signs of slowing down (see here for instance). Europe on the other hand experienced a sharp drop in productivity at the beginning of 2008, when it fell by nearly five percentage points. Data until 2010 suggest that European productivity hasn’t shown any signs of ‘catching up’ to its previous growth trend. Measuring labor productivity is particularly difficult for Europe because one needs a measure of total hours worked. Ohanian and Raffo (2011) do the heavy lifting by constructing this series for many European countries, although it is only available until 2010.

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Why the Lost Decade?

Economists have offered a range of different explanations for Japan’s lost decade: (i) the government failed to deal with undercapitalized banks that were allowed to carry “zombie” loans on their books and did not have the capacity to finance new investment, (ii) a sharp drop in productivity caused desired investment to be low, (iii) frictions caused by labor law amendments in the late 1980s resulted in declining work weeks, (iv) the monetary policy response was too timid (something Abenomics is finally trying to remedy), and (v) Japan’s prospects for recovering were seriously hampered by persistent deflation.  While it is not clear that there is one compelling account, all of these elements undoubtedly played some role and all of them loom large in the current European experience.

As in Japan, European banks are most likely under-capitalized and carrying loads of overvalued (“Zombie”?) sovereign debt on their balance sheets as well as other assets of dubious quality. The European Central Bank has only gingerly approached the problem of looking at asset quality in European banks, promising to deliver results later this year. But then what? There is no plan for dealing with under-capitalized banks. In contrast to Japan and the U.S., there is no common bank regulation or resolution mechanism and there has been only tentative progress toward creating it.

As the picture below shows, investment / capital formation stagnated in Japan, both consistent with the slower growth in total factor productivity and insolvent banks that deterred lending.  The picture also shows that investment in both the United States and Europe fell relatively more at the onset of the Great Recession than investment in Japan did at the onset of the “lost decade”. In contrast to both Japan and Europe, U.S. capital formation has rebounded after an initial collapse.  Again, the European situation looks more alarming than the situation in the United States and Japan.

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Whatever the reasons may have been for Japan’s ‘lost decade’, one thing is certain: more than halfway into the decade following the start of the global recession in 2008, the European economy is far worse and deteriorating. Even though economic growth in Japan stagnated in 1991, the economy continued to grow.  In contrast, the economy in Europe has contracted and is, according to all measures of economic activity surveyed in this post, at a lower level than they were five years ago.  Unless economic growth in Europe rebounds within the next couple of years, Europe is headed for a substantially worse decade than Japan’s. Surprisingly, there has been recent optimism about a European recovery, but the data do not seem to support it except for possibly Germany and the U.K.

Just as there were no quick fixes for Japan during its “lost decade”, most likely there are no quick fixes for Europe’s economy. The challenges lie in fostering economic institutions that create individual incentives and market structures that both discourage rent seeking and encourage and allow people to use their efforts to develop and produce goods and services other people value. On this score Europe has failed. They have not reformed institutions sufficiently to make their markets globally competitive and adaptable. Until they do, Europe will continue to face the possibility of an entire decade of lost income, consumption, and jobs.

Clanging in the New Year

by: Zach Bethune, Thomas Cooley, Peter Rupert

Following an unexpectedly weak report in December (now revised up only slightly from 74,000 to 75,000) the monthly employment report from the BLS today reveals another tepid increase of only 113,000 jobs in January.  The unemployment rate declined slightly from 6.7% to 6.6%, inching towards the Federal Reserve’s stated target of 6.5% in which they will consider changes in the federal funds rate. Since January 2013, the unemployment rate has declined 1.3 percentage points.  In all, the headline story of the US labor market remains much the same as it has been since the beginning of the recovery in mid-2009:

1.  slow, but positive job growth,

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 2. a steadily declining unemployment rate.

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You might think that even though the ‘recovery’ has taken longer than usual, the labor market seems to be finally reaching a healthy state. That story is consistent with the figures above. Both employment and unemployment are reaching pre-recession levels. However, there are many features of a healthy labor market that these two headline statistics cannot capture. For instance if the rate of job growth cannot keep up with population change or if  an unemployed worker becomes discouraged and leaves the labor market. Here are a few additional headlines of the current recovery:

3. A declining  labor force participation rate, currently at its 1980 level.lfp-level-2014-02-07

4. A persistently low (and unchanging) percentage of the population employed. 

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5. A consistently less efficient labor market

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6. Historically high unemployment duration

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Private employment was up 142,000 while the government sector shed another 29,000 jobs. Very little else stands out: average weekly hours remained the same at 34.4; average hourly earnings inched up to $24.21.

From the household survey the participation rate inched up to 63.0% from 62.8%, as did the employment to population ratio, 58.8 from 58.6.