U.S. Economic Snapshot

There was little news in an altogether moderate  jobs report for December. Non-farm payrolls added 155,000 jobs in December, coming close to the average monthly net change in 2012 of 153,000. The gains largely came from health care (+45K) and food services and drinking places (+38K). Retail trade and temporary help services both contracted (-11K and -.6K respectively).

61 months after the start of the recessions and most labor market indicators are still well below their peak level. Non-farm employment remains close to 3% below while hours remains 5.4% below and showing signs of slowing down. 
The unemployment rate remained at 7.8% showing that the labor market has made little progress since the end of the summer.  Participation also remained steady at 63.9% as well as the employment population ratio at 58.6%. There are a few positive signs in the report that suggest improvements in the labor market may be ahead for 2013. The mean duration of unemployment fell from 39.7 weeks to 38.1, marking the biggest monthly decline since the recession began. It is still a far cry from an average of 16.6 weeks at the peak of the cycle, but it is the first signs that the whole distribution of unemployment duration is shifting lower.

The BEA released the third estimate of GDP and its components, showing real GDP increasing 3.1% for the third quarter–the second estimate came in at 2.7% and the advance estimate at 2.0%. The increase was higher than consensus expectations. As we stated in an earlier post though, you may want to keep the celebration in check. Although final sales perked up, 2.4% in Q3 compared to 1.7% in Q2, and residential investment increased 13.5%, nonresidential structures investment was flat, 0%, and equipment and software investment was down -2.6%. In fact, the overall trend in nonresidential investment over the last year is a significant cause for concern. It also coincides with the slowdown in employment growth.

Federal Government spending was revised up to 3.9%,  from a previous  3.5% in the second estimate. The major part of the increase was driven by a large 9.5% increase in Federal Government spending and a big part of that was defense spending: National defense spending rose 12.9%. Overall, the increased Federal spending accounted for .75 percentage points of the 3.1% growth in real GDP, and Personal Consumption expenditures accounted for about 1/3 of the increase, 1.12 percentage points .  Note that the government spending increase was the first increase in 8 quarters. The last time government spending fell for 8 consecutive quarters was the unwinding of the Korean War, from 1953:Q3 to 1955:Q2.

Overall, it appears that consumption growth remains sluggish and fixed investment can not get its act together–especially business fixed investment. Concerns throughout the rest of the world appear to have generated a decline in trade overall, although exports were up 1.9%, imports fell, -0.6%.

Continue reading “Q3 GDP Revised UP, Some Troubling Areas Remain” →

The effects of hurricane Sandy on the labor market obviously make interpreting the data more difficult. However, the BLS issued a statement in today’s  Employment Situation report stating:

...our survey response rates in the affected states were within 
normal ranges. Our analysis suggests that Hurricane Sandy did 
not substantively impact the national employment and unemployment 
estimates for November.

This morning’s report shows non-farm payrolls increasing 146,000 in November with total private employment rising 147,000.  The increase is slightly lower than the average monthly employment gain in 2012 of 151,000 and of 2011 of 153,000. As seen in the graph below, both the pace and the level of the recovery of the labor market are still well below the average from the previous four cycles. Employment gains were found in retail trade, professional and business services, and health care.

While the report does show that employment was up, there is also some down: goods producing industries declined over the month, with construction falling 20,000. The report also included downward back-revisions for the previous two months of 49,000. As is well-known, the BLS procedures for employment involve an initial estimate that gets revised in each of the next two months to arrive at the “final” estimate. The chart below shows these revisions since June, 2011. The red dots represent the initial headline estimates, while the green dots and bars represent the two revisions.

The graph makes evident how much noise is in the estimation process. On average, since the start of the recovery in July 2009, the average revision from the first to the final estimate has been +30K. One can argue that this error is quite large, especially when the economy is adding only 150K jobs a month. Another interesting observation is if there is any predictable under or over estimation occurring, especially over the business cycle. It is difficult to observe any systematic behavior from the graph below, but it does seem that the first revisions are relatively persistent to the previous data point. During times when the employment change is increasing, the BLS tends to underestimate the true value. In times when the employment change is decreasing the opposite is happening and the BLS tends to overestimate.

The national unemployment rate decreased over the month to 7.7%. However, there was little change in the number of unemployed persons, approximately 12 million. The decline in the unemployment rate was a result of a decline in the labor force.  The participation rate fell from 63.8% to 63.6%. Moreover, the employment to population ratio also declined slightly, from 58.8 to 58.7.

Continue reading “Labor market ups and downs” →

The second estimate of Q3 Real GDP, released today indicates that output grew slightly faster at 2.7% than previously estimated at 2%. On the face of it this seems like good news because it implies a more robust recovery than the earlier estimate. Unfortunately there are reasons to temper that optimism.  Much of the increase was due to an upward revision in the Q3  change in inventories which increased from$34 billion to $61 billion.  Unfortunately, these inventories could dampen growth in the fourth Quarter as firms work them off.  Net Exports were also revised upwards and added significantly to the increase in estimated GDP growth.

The fundamentals that we look to  for evidence of a robust recovery were not encouraging. Real consumption growth was revised downwards from 2% to 1.4% and real private non-residential investment declined 2.2% in the third quarter in contrast to the 3.6% increase in the second. There has been a lot of concern about the drop off in capital spending and many observers attribute it uncertainty about Europe and fiscal policy.  Whatever the reason, the consequences for future output growth cause for concern.

In a departure from our usual format we present many of the series in both per-capita terms and levels in the following graphs.

Continue reading “Update: Second Estimate of Q3 GDP Shows More Growth” →

The Employment Situation released today from the BLS is being hailed by many as encouraging and  a positive sign the economy is picking up steam yet, as seen in the graph below, both the pace and the level of the recovery of the labor market are still well below the average from the previous four cycles. The report today shows non-farm payrolls increased 171,000 in October. The report also included upward back-revisions for August (192k from 142k…note that the revision was nearly 100k higher than the advance estimate!) and September (148k from 114k).  Employment gains were primarily attributed to service industries (+163K), led by retail trade (+36.4K) and health care (+32.5K). Goods producing industries increased over the month (+21K) after two consecutive months of decline. The market has responded relatively positive the past three employment reports despite the slow growth. For instance, last month the Dow increased .3% based on a reported employment gain of 114K. Comparatively, last October the market decreased 5% based on a similar increase of 112K jobs. What was once seen as weak, is now encouraging. From the same WSJ article above, John Silvia of Wells Fargo Securities says “Over the past three months, private-sector job gains have averaged 149,000, suggesting sustained growth even though the trend remains subpar”. As the graph below shows, the trend was the same last October as it is now. The difference is maybe the market as a whole is starting to believe 149K  is now the new long term trend. If this is the case, a 171K jobs number is certainly positive.

Continue reading “Employment Snapshot – The New Positive” →

Is this good news? The advance estimate of Q3 Real GDP, released on October 26 indicates a 2.0% rise in real GDP: Still pretty tepid but higher than the 1.3% growth in the second quarter. But, you may want to keep the celebration in check – the major part of the increase was driven by a large 9.6% increase in Federal Government spending and a big part of that was defense spending: National defense spending rose 13.0%. Overall, the increased Federal spending accounted for .7% of the 2% growth in real GDP essentially all of the increase since the second quarter.  Note that government spending rose 3.7% overall, the first increase in 8 quarters. The last time government spending fell for 8 consecutive quarters was the unwinding of the Korean War, from 1953:Q3 to 1955:Q2.

There is a legitimate question about whether increased growth fueled by government spending that is financed by borrowing has welfare implications that we should be happy about. This is a hotly debated issue and is particularly pertinent since other aspects of the economic picture were quite weak. Gross private domestic investment was weak, growing at just 0.5%, with investment in non-residential structures declining at 4.4% and equipment and software investment flat at 0.0%. This counters somewhat the revival of residential investment that has been the subject of much publicity. The upcoming jobs report for October will help to sharpen views about the recovery.

Continue reading “Advance Q3 Estimate: Defense Spending Surge Drives Slightly Higher GDP Growth” →

Recently there has been much attention surrounding the behavior of labor’s share of income. Although it seems like it should be completely straightforward, the measurement of labor’s share is a bit tricky. As was pointed out by Tim Worstall, a contributor to Forbes, this problem is “geeky.”

The issue has been raised again in a recent article out of the Federal Reserve Bank of Cleveland’s Economic Commentary series, Labor’s Declining Share of Income and Rising Inequality, by Jacobson and Occhino. Evidently, some of their underlying calculations were taken from a paper Paul Gomme and I wrote years back, Measuring Labor’s Share of Income, also from the Cleveland Fed. In that paper we carefully described the calculations for measuring labor’s share and compared that to the measure employed by the Bureau of Labor Statistics.

Jacobson and Occhino mention that their calculations were based on the work Gomme and I did but they neglect important components in the calculation. Below we show four different measures including the Occhino-Jacobson and Gomme-Rupert measures.

So, what is the cause of the discrepancy? Here is the geeky part. There are some things that are obviously returns to labor income, for example, wage and salary income, call this unambiguous labor income. Similarly, there is unambiguous capital income, like the returns to owning an office building. Therefore, we can determine how much of this unambiguous income goes to labor and how much to capital. One geeky problem arises due to “ambiguous” income. For example, think of a sole proprietor. Some of the income of this proprietor is a return to labor (the hours spent working) and some will be a return to the capital owned by the proprietor (computer, store scanner, etc). In the data these are not broken out separately. Accepted practice  is to allocate shares of ambiguous income to labor and capital in the same proportion as derived from the unambiguous incomes. In the end, labor’s share is obtained by dividing unambiguous labor income by total unambiguous income (that is, unambiguous labor income and unambiguous capital income).

Here’s where things get really geeky. The problem with the Jacobson and Occhino calculation is that they neglected to make adjustments for the government and the housing sectors. In the data there is no capital income series for the government. All income for that sector appears as wage income to government workers. While the housing sector does break out the two, it also includes a source of capital income (imputed rent to owner-occupied housing) for which there is no corresponding labor income.. Paul Gomme and I recently  redid the calculations and the results are shown in the Figure below. The “Raw NIPA data” line in the graph turns is the line that Jacobson and Occhino report, the last data point being 63.8%. Once the adjustment to the housing and government sectors are taken into account, it is evident that labor’s share moves around its long run average – there does not appear to be a downward trend. Note that all of the measures show that labor’s share is currently below its long run average, as it will be from time to time. In the graph below we plot the data starting in 1929 (Jacobson and Occhino started in 1947) because that is the earliest data available from the National Income and Product Accounts (NIPA).

the fall in labor’s share since 1970 identified by Jacobson-Occhino is precisely because they didn’t do the adjustments for the government and housing sectors that we implicitly told them they should do. From 1970 to 2011, the gap between the Gomme-Rupert measure of  labor’s share of income and Jacobson-Occhino’s rises from around 3 percentage points to 4.5 percentage points, or a rise of 1.5 percentage points. If you add the government wages and salaries into the Gomme-Rupert calculation, the gap rises from 10.5 percentage points to 11.5 percentage points for a rise of 1 percentage point. This increase reflects the well-known (?) fall in the share of government wages and salaries in income. If instead, you add housing income flows to the Gomme-Rupert calculation, the rise is from 5.5 percentage points to 6.6 percentage points, or a rise of 1.1 percentage points. This latter increase is due to a less well known increase in housing sector capital income’s share of GDP. Whether this latter increase can be attributed to rising housing prices– 2009 represents a high for housing capital income as a share of GDP; it falls in 2010 and falls further in 2011–is not that clear. These observations make me suspicious that movements in this series are driven in large part by housing prices.

The principle difference is that for Jacobson and Occhino, labor’s share is below its long run average almost every year since 1980 (there are a handful of years where the share is essentially at its mean) whereas the Gomme-Rupert series still looks like it’s fluctuating around its long term average. It may be premature to declare a long term decline in labors share.

Continue reading “Is Labor’s Share of Income Declining?” →

The Employment Situation released today from the BLS, shows non-farm payrolls increased 114,000 in September. The report included upward back-revisions for August (142k from 96k) and July (181k from 141k). The increase was still below the average monthly employment gain in 2012 of 146,000, and below the revised employment gains from July and August of 181,000 and 142,000, respectively. As seen in the graph below, both the pace and the level of the recovery of the labor market are still well below the average from the previous four cycles. Employment gains were primarily attributed to service industries, led by health care (+44K) and transportation and warehousing (+17K). Goods producing industries declined over the month. Particularly discouraging was the decline in manufacturing payrolls (-16K) coming on the heels of the positive report from the ISM that overall manufacturing activity increased in September.

The national unemployment rate decreased over the month from 8.1% to 7.8% and for the first time since the recovery began, the decline wasn’t affected by a reduction in participation. The labor force participation rate increased slightly to 63.6%. While still far below the participation rate of 66% at the peak, the dual increase in participation and reduction in unemployment is a sign for cautious optimism.

The BLS also recently released the preliminary estimate for the benchmark revision for March 2012. The estimate revises employment upward for March 2012 by 386,000; moreover, private employment revised up 453,000.

There has also been much ado about the massive increase in the seasonally adjusted one month change in household employment numbers from the CPS–the increase reported is a whopping 873,000. Was there such clamor back in January 2012 when that same statistic was reported as 847,000 (establishment survey reported +275,000)? Or the 991,000 (establishment survey reported +95,000) increase in January 2003? Or the 2,036,000 (+248,000 for the establishment survey) in January 2000? The household numbers also show that of the 873,000 increase in employed persons, 582,000 were part time.

Continue reading “Snapshot – Cautious Optimism for the Labor Market” →

The third estimate of Q2 Real GDP, released on September 27 shows that previously reported slow growth was even slower. The previous estimate of 1.7% was revised down to an anemic 1.3%. Note, however that the annual benchmark revisions in July increased both 2011 Q4 (was  3.0% now 4.1%) and 2012 Q1 (was 1.9% now 2.0%). Personal consumption was revised down somewhat, 1.5% from 1.7%, after increasing 2.4% in Q1. Secvojnd quarter growth is approaching stall speed and early indications about the third quarter are not encouraging.

Continue reading “Slow growth just got slower: third estimate of Q2 Real GDP” →

According to the establishment survey from the Bureau of Labor Statistics, nonfarm payroll employment increased by 96,000 in August, undershooting expectations by a large margin. Private payrolls increased by 103,000 while government continued to shed jobs, declining by 7,000. Service sector employment rose by 119,000 while the goods-producing sector declined by 16,000, led by a big decline in durable goods manufacturing, falling 17,000. The report undershot expectations by a large margin, many had predicted the labor market would add about 125,000 jobs or so. Moreover, downward back revisions of 41,000 over the previous two months show a much weaker labor market. While there had been some upbeat, hopeful, data released toward the end of this week, the labor market did not listen. The labor market has developed a bit of a bump in the recovery road, according to the BLS, “Since the beginning of this year, employment growth has averaged 139,000 per month, compared with an average monthly gain of 153,000 in 2011.” It has also become evident in the labor market that we continue to drown our sorrows…employment in food and drinking establishments has risen 298,000 over the past 12 months.

The household survey from the BLS revealed a slight decline in the unemployment rate, edging  down to 8.1%. However, the number of unemployed persons remained about the same at 12.5 million and of those, about 40% are categorized as long-term unemployed, having been unemployed 27 weeks or longer. More discouraging perhaps is the fact that both the labor force (154.6 million) and the labor force participation rate (63.5%) fell. The last time the participation rate was this low was in June of 1979. It should be noted however that labor force participation began to decline around the year 2000 after rising steadily since the early 1960’s; but since the Great Recession has declined at a faster pace.

Continue reading “Snapshot – The Dismal Labor Market: Slim Prospects for the Unemployed” →