U.S. Economic Snapshot

By Paul Gomme and Peter Rupert

GDP

The BEA announced that the advance estimate for Q4 GDP came in at 2.9% after increasing 3.2% in Q3. Personal consumption expenditures remained pretty stable, increasing 2.1%, contributing about 1.4 percentage points of the total increase in GDP. The basic message being that recessionary fears are somewhat allayed, at least for now.

While real investment increased 1.4% overall, the components were mixed. Investment in nonresidential structures increased 0.4%, the first rise in 6 quarters. Residential investment, however, fell for the seventh straight quarter, falling 26.7%.

The BEA also announced Personal Income and Outlays for December. The report showed that real personal income increased 0.2% from November to December while real personal consumption expenditures declined by 0.3%. The PCE price index rose 0.1% over the month and core PCE rose 0.3%.

Labor Market

The BLS announced the employment situation showing payroll employment increased 517,000, and, as per usual, crushed the estimates that hovered around 190,000. The report, along with a strong December continued a robust labor market in 2022 after coming through pandemic-related turmoil. Pre-pandemic employment stood at 152,504,000 in February of 2020. The pandemic created a massive decline, down to 130,515,000 in April of 2020; a decline of 21,989,000 (17%) in just two months! The decline rapidly reversed, however, and by January, 2022 employment stood at 149,744,000, about 2% lower than its February 2020 level. Since January of 2022 employment has increased by about 4,000,000 and now stands at 153,743,000.

The bulk of the increase in the January data was in the service sector, rising 397,000. The information sector lost 5,000 jobs for the second straight month. Information employment saw a large fall in employment starting around the beginning of 2000 and another large dip during and after the Great Recession, in total, that sector lost about 1,000,000 jobs during that period. Since then, the information sector has gained back about 500,000 of those jobs and now has roughly 3.1 million workers.

Average weekly hours of work shot up from 34.4 to 34.7. This, accompanied by the 517,000 increase in employment, led to about a 15% increase in total hours of work in the US, far surpassing any increase over the last couple of years.

Also just released by the BLS was the preliminary estimate of Q4 non-farm productivity. Output per hour rose 3.0% with output rising 3.5% and hours of work rising 0.5%.

The recent JOLTS showed that the number of job openings increased in December, now standing at just over 11 million, that is, about 2 job vacancies per unemployed individual. It is certainly clear that this is one of the strongest labor markets ever seen, at least since the unemployment data began in 1948.

By Paul Gomme and Peter Rupert

The BLS establishment data showed that payroll employment increased 263,000 in November. Combined revisions over the previous two months totaled -23,000. Private sector employment grew 221,000, led largely by the service sector that increased 184,000. While these changes are pretty much in line with the past several months, other parts of the report, except for wage growth, were not so positive.

Usually, when the BLS data are revealed, an increase in employment is thought to translate into an increase in output. However, average weekly hours of work fell to 34.4 after a five month string of 34.5. Overall, total hours of work (multiply average hours by employment) fell slightly from October to November. If output per hour remained the same between October and November, the decline in total hours means there will be less output. The BLS announced their productivity estimates for Q3 this morning, showing output per hour increased 0.8% from the previous quarter on an annual basis. While average hours from the employment report fell in the previous month, the BLS reports that both output and hours increased in Q3, 3.3% and 2.5%, respectively.

Average hourly earnings rose 0.55% in November. On a monthly basis, this was a large increase. However, as shown below, year-over-year inflation continues to outstrip year-over-year nominal earnings which means that real earnings have declined. While overall CPI inflation (year-over-year) has fallen in recent months, the same cannot be said of the CPI excluding food and energy (CPIX). This means that the recent decreases in CPI inflation can be attributed to falling energy prices — anyone who goes to the grocery store knows that food prices are up over the past year.

For the second month in a row, the household survey showed a decline in the number of people employed. In addition, the labor force participation rate fell for the third straight month, to 62.1. These changes ended up lowering the unemployment rate from 3.68% to 3.65%.

The takeaway from the latest data shows that the labor market remains strong although the establishment and household surveys give conflicting messages. Monetary policy appears to have succeeded in reducing inflation, despite continued high prices of both food and energy.

By Paul Gomme and Peter Rupert

Many people have recently been debating whether, or to what extent, the US has fallen into recession territory. The latest GDP report shows strong overall growth…with some weak spots of course. Here is a detailed look at the report.

GDP and Components

On Thursday, October 27, the Bureau of Economic Analysis (BEA) released the advance estimate of Q3 GDP. After seasonal adjustment, real GDP increased 0.6% over from the previous quarter. “Real” means the quantity of goods and services, adjusting for the effects of price inflation. However, headlines touted a 2.6% growth rate for the U.S. economy in the third quarter. The difference is that the BEA (among others) expresses the 0.6% quarter-to-quarter growth rate as an annual rate, as if the economy grew 0.6% per quarter for four consecutive quarters. This solid real GDP growth comes on the heels of two consecutive quarters of decline – what some characterize as constituting a recession.

As many learned in their economics classes, there are several major components of output demand: consumption, investment, government spending and net exports, i.e., Y = C + I + G + (X-M). This identity is useful in identifying areas of strengths and weaknesses in the economy. To start, real consumption grew 1.4% (annualized) in the third quarter, down from a 2.0% growth rate in the second quarter.

Next, gross private domestic investment fell 8.5% – an improvement over the 14.1% decline in the second quarter. A well-known business cycle regularity is that investment is more volatile than consumption. This fact is borne out in the figures above and below, although the scaling of these figures, along with the extreme effects around the onset of the pandemic, partially masks this fact. Both residential and nonresidential structures investment have fallen for six consecutive quarters with the largest decline over that period coming in the third quarter, falling 26.4% and 15.3%, respectively.

Government spending grew 2.4% in the third quarter, after five consecutive quarters of decline. Keep in mind that government spending relates to expenditures on goods and services, and includes both “consumption” and “investment” components. Also, government spending excludes transfer payments that constitute a major component of government expenditures, but, for National Income and Product Accounts purposes, is spent by other entities, and so is not considered part of government spending.

Exports rose 14.4% with the export of goods rising 17.2% and services up 8.3%. Imports fell 6.9%. However, in the output identity above, imports are subtracted from output and so the decline in imports contributes positively to output. Since 2021, the U.S. dollar has strengthened against its trading partners. This strengthening of the dollar implies that imports have become cheaper for the U.S. while its exports are more expensive for its trading partners. In this light, the recent numbers for imports and exports presumably reflect considerations apart from relative price movements, such as changes in incomes. However, if foreigners wish to consume more US goods and services they must acquire US dollars and so both imports and the dollar can rise together. Over longer periods the relationship would more likely yield a negative correlation.

The output identity is also useful because it shows how output growth can be decomposed into contributions made by its major expenditure components. For example, the contribution of consumption is given by the growth of consumption weighted by consumption’s share of output. This calculation tells us that consumption contributed 1.0 percentage point towards the overall 2.6% growth in output. Large positive contributions were also recorded by exports (1.8 percentage points) and imports (1.4 percentage points). Meanwhile, investment dragged output down by -1.6 percentage points.

Final sales of domestically produced goods rose 3.3%. Disposable personal income grew 1.7%.

In terms of prices, the GDP deflator rose 4.1% in Q3 following a Q2 increase of 9.0% and Q1 of 8.3%. The personal consumption expenditures price index (PCEPI) increased 4.2% in Q3 following a 7.3% rise in Q2 and a 7.5% increase in Q1. While the consumer price index (CPI) is the price index most people are familiar with, the Fed mainly dwells on the PCE price index. The differences between the CPI and PCEPI are explained here…feel free to read if you like to know things like the CPI is a Laspeyres index while the PCEPI uses a Fisher-ideal index, among other things.

Employment Situation: Establishment Survey

The Bureau of Labor Statistics (BLS) announced that October employment rose 261,000 according to the Establishment Survey. August was revised down 23,000 while September was revised up 52,000. Employment gains were widespread with no major sectors showing any decline in employment. The private sector increased 233,000 and the largest single sector increase came in Services, rising 200,000. However, the 261k increase was the smallest since December of 2020.

Average weekly hours of work remained at 34.5 and average hourly earnings increased from $32.46 to $32.58. The year over year increase in nominal earnings is 4.72% so that inflation is still eating away at it and real earnings have actually fallen.

Employment Situation: Household Survey

The household survey showed that the number of employed individuals decreased 328,000, in stark contrast to the 261,000 increase in payroll employment. The employment to population ratio fell from 60.1 to 60.0.

The number of unemployed persons rose to 6,059,000 having increased by 306,000 over the past month, but there are still many more vacant jobs than those searching. The labor force fell by 22,000 with the participation rate declining from 62.3 to 62.2 and is still below the pre-pandemic reading. These changes led to an uptick in the unemployment rate from 3.49% to 3.68%.

By Paul Gomme and Peter Rupert

For those who have been concerned that the U.S. has entered a recession, The Bureau of Economic Analysis’s October 27 release of its advance estimate for Quarter 3 real GDP brought good news: Output grew at an annual rate of 2.6%. This increase comes on the heels of negative output growth in the previous two quarters.

While two consecutive quarters of negative GDP growth are colloquially said to constitute a recession, there is no formal definition of a recession. The National Bureau of Economic Research (NBER) has a business cycle dating committee that (retroactively) determines the dates of entering and exiting a recession. The gray bars in the following figure are the recession dates as determined by the committee.

Recessions are recurring events that last for varying lengths of time. It appears that recessions were more frequent and lasted longer before the Great Depression in 1930’s than after. But what, exactly, determines entry and exit? The NBER states,

The NBER’s definition emphasizes that a recession involves a significant decline in economic activity that is spread across the economy and lasts more than a few months. In our interpretation of this definition, we treat the three criteria—depth, diffusion, and duration—as somewhat interchangeable.

NBER Business Cycle Dating Committee

More concretely, the NBER looks at some key variables,

Because a recession must influence the economy broadly and not be confined to one sector, the committee emphasizes economy-wide measures of economic activity. The determination of the months of peaks and troughs is based on a range of monthly measures of aggregate real economic activity published by the federal statistical agencies. These include real personal income less transfers, nonfarm payroll employment, employment as measured by the household survey, real personal consumption expenditures, wholesale-retail sales adjusted for price changes, and industrial production. There is no fixed rule about what measures contribute information to the process or how they are weighted in our decisions. In recent decades, the two measures we have put the most weight on are real personal income less transfers and nonfarm payroll employment.

NBER Business Cycle Dating Committee

Based on recent behavior of the six variables, cited by the NBER, it seems difficult to build a case for a recession. In the figure below, data for 2022 is colored red to focus attention on recent history. To be sure, real personal income (excluding transfer payments) has been flat through 2022, but it has not fallen as it did in the 2001 and 2007-09 recessions. Employment as measured by both the Employment and Household surveys is at or above its pre-pandemic levels. While real personal consumption expenditures fell sharply during the pandemic, they have since returned to a trend line starting in the mid-2010s. Although real retail sales have been flat through 2022, they are nonetheless running above their pre-pandemic trend. Finally, since 2012, industrial production has fluctuated around a flat line, and is currently above its 2012-2019 average. In summary, there are no obvious red flags, and it seems difficult to imagine that the NBER will decide that the U.S. was in recession at any time in 2022 based on the data at hand.

Interestingly, the media and other analysts talk quite a bit about some things left out of the above two measures. Stocks, housing and the yield curve among others. Forbes, for example, on October 19 says: The Yield Curve, A Reliable Recession Indicator, Just Sounded An Alarm. The Conference Board’s Leading Economic Index (LEI) includes these and other measures.

The ten components of The Conference Board Leading Economic Index® for the U.S. include: Average weekly hours in manufacturing; Average weekly initial claims for unemployment insurance; Manufacturers’ new orders for consumer goods and materials; ISM^® Index of New Orders; Manufacturers’ new orders for nondefense capital goods excluding aircraft orders; Building permits for new private housing units; S&P 500^® Index of Stock Prices; Leading Credit Index^™; Interest rate spread (10-year Treasury bonds less federal funds rate); Average consumer expectations for business conditions.

Conference Board

Regarding the current outlook, the Conference Board states:

The US LEI fell again in September and its persistent downward trajectory in recent months suggests a recession is increasingly likely before yearend. The six-month growth rate of the LEI fell deeper into negative territory in September, and weaknesses among the leading indicators were widespread.

Ataman Ozyildirim, Senior Director, Economics, The Conference Board

The figure below presents many of the series that comprise the Leading Economic Index. We could not locate a publicly-available source for the ISM Index of New Orders; hopefully new orders for consumer goods captures similar information. Likewise, absent data for the Leading Credit Index, we used the Chicago Fed’s Financial Conditions Credit Index. In 2022, the stock market is down as are housing starts and consumer sentiment. The increase in the financial conditions credit index indicate a tightening of credit conditions, a worrying development, but its level is still relatively low. The spread between the 10-year treasury yield and the Fed funds rate has narrowed, but does not reflect an inverted yield curve. Although average hours in manufacturing are down relative to the pre-pandemic period, they have been quite stable for the past year and a half. Further, initial unemployment insurance claims have come down since the onset of the pandemic, and have stayed low; in past recessions, claims tend to rise during a recession. Finally, new orders for both consumer and capital goods have risen through 2022, and are at historically high levels. In total, the individual series underlying the Leading Economic Index give a decidedly muddled answer to whether the U.S. is either on the verge of recession, or already in the midst of one.

Conventional wisdom holds that the yield curve inverts — short rates exceed long rates — prior to recessions. Above, the LCI looks at one particular measure of inversion: the 10-year treasury yield less the Federal funds rate (an overnight rate). The LCI’s approach is useful when looking at the behavior of the yield curve over time. However, the yield curve includes a variety of maturities, and the LCI misses this dimension. Below, we plot yield curves for U.S. treasuries for select days in 2022. Early in 2022, the yield curve had the usual upward slope, although the short end of the curve was quite flat. Over the year, the yield curve has risen, reflecting a rise in yields across maturities. However, the short end has risen by more than the long end. While the yield curve was still positively sloped in early July, by early August the one year rate exceeded those out to 10 years, and the 20 year rate exceeded the 30 year rate. The August pattern prevailed through September and October. To reconcile these observations with the yield curve summary measure in the LCI, notice that the shortest maturity in the yield curves figure is one month while the LCI uses an overnight rate, the Federal funds rate.

Historical empirical regularities — such as, the yield curve inverts ahead of recessions — are likely to fall apart when relevant conditions change. In the case of the yield curve, what changed was the Fed’s Quantitative Easing program, and now unwinding. Exceptionally, Quantitative Easing saw large scale purchases of long term treasuries by the Fed. The figure below serves as a reminder that until the 2007-08 Financial Crisis, treasuries with maturities over five years constituted a small fraction of overall Fed treasury holdings; by 2013, they were the majority. While the share of longer term treasuries has since declined, they are still a much larger proportion of the Fed’s treasuries portfolio.

Looking at the changes in the Fed’s treasury holdings by maturity gives some idea of the magnitude of the Fed’s interventions in treasuries markets. The figure below reports monthly changes in the Fed’s portfolio of treasuries, calculated from the reported weekly changes. And we group the changes in the Fed’s portfolio into short (under 1 years maturity), medium (1-5 years maturity) and long maturities (over 5 years). The increases in overall Fed holdings of treasuries in 2009, 2011, 2013 and 2020 can be seen as increases in both short and long maturity treasuries. While it seems curious that between 2014 and 2018, large increases in the Fed’s holdings of short maturity treasuries were largely offset by decreases in its holdings of long maturity treasuries, this is not our current focus.

By reducing the supply of long maturity treasuries available to the public, the Fed pushed up the price, thereby lowering the yields on long maturity treasuries. In other words, Quantitative Easing likely flattened the yield curve when the Fed was actively accumulating long maturity treasuries.

The figure below zooms in on 2022. Starting in April, the Fed reduced its holdings of medium term treasuries. For reasons just discussed, these actions tend to increase medium term treasury yields. In the first half of 2022, the Fed accumulated both short and long maturity treasuries, thereby lowering their yields. The net effect of these changes in Fed treasury positions is to push up the `middle’ of the yield curve while pulling down the shot and long ends. In September and October of 2022, the Fed has reduced its holdings of short, medium and long maturity treasuries which serve to raise rates at all maturities, thereby raising the yield curve. The Fed may have good reasons for the observed changes in its portfolio of treasuries. The point is simply that these actions have likely introduced noise into whatever signal is coming from the shape of the yield curve.

At this point, readers may sympathize with U.S. President Harry Truman’s wish for a one-handed economist. There are, of course, many who attempt to boil the state of the economy down to a single number. For example, Jeremy Piger at the University of Oregon uses a dynamic-factor Markov-switching model first developed by Marcelle Chauvet at the University of California at Riverside, to determine the probability of being in a recession. Piger writes:

Monthly smoothed recession probabilities are calculated from a dynamic-factor Markov-switching (DFMS) model applied to four monthly coincident variables: non-farm payroll employment, the index of industrial production, real personal income excluding transfer payments, and real manufacturing and trade sales.

Jeremy Piger

To determine whether the model is good at predicting a recession, Piger then says:

Historically, three consecutive months of smoothed probabilities above 80% has been a reliable signal of the start of a new recession, while three consecutive months of smoothed probabilities below 20% has been a reliable signal of the start of a new expansion.

Jeremy Piger

Piger’s model produces the following graph, showing that as of August, 2022, the probability of a recession is just 1.22%.

Piger’s model lines up pretty well with the NBER recessions save for a couple notable exceptions. The NBER called a recession in March of 2001 but according to Piger’s model the recession probability never reached 50%. Indeed, during that recession, real GDP did not decline in 2 consecutive quarters but did have 2 quarters of decline during 2001. The 1990-1991 recession also never made it to 80% and again did not have 2 consecutive quarters of real GDP decline, but did have 2 quarters declining during the recession.

The message from the data seems pretty clear. The data that many people use to determine if we are in recession territory tell us that it seems unlikely. It is possible that the NBER, a few months from now, will deem that we were indeed in a recession at some point in the past, but the data today is not speaking the same language.

By Paul Gomme and Peter Rupert

The BLS announced that payroll employment increased 263,000 in September with an additional 11,000 revision to July’s numbers. Employment gains were widespread with only retail (-1,100), transportation and warehousing (-7,900) and government sectors declining (-25,000). The service sector added 244,000 jobs, of which health care (75,000) and leisure and hospitality (83,000) the prime movers.

Employment in retail has traditionally been higher than that in the leisure and hospitality sector. After the Great Recession leisure and hospitality employment grew much faster than retail and overtook retail employment in 2018. The pandemic had a devastating effect on employment in both sectors with leisure and hospitality taking a much larger hit. Recovery was pretty swift and the two sectors are now equal in terms of employment. It remains to be seen if leisure and hospitality employment will again outpace retail employment.

Average hours of work remained at 34.5 and with the employment increase lead to a 0.17% increase in total hours worked. Average hourly earnings increased from $32.36 to $32.46. Year over year CPI inflation is hovering around 8% and average hourly earnings over the year have risen 5%, leading to a 3% decline in real earnings as shown in Figure 6.

Figure 7 takes a longer view of the average real wage in the US. In this figure, we have normalized average hourly earnings, the CPI, and PCE deflator, setting each equal to 100 in March 2006 — the first available date for average hourly earnings. We have used a logarithmic scale for the vertical (y) axis so that a straight line represents a constant growth rate. The average real wage is given by the difference between average hourly earnings and a price index, represented by the gap between the average hourly earnings line, and that of a price index. In fact, since we have used a logarithmic scale, a constant gap implies a constant percentage gain in the average real wage, measured since March 2006. For the most part, there is a positive gap between average hourly earnings and either the CPI or PCE deflator. This means that, relative to March 2006, the average real wage has, for the most part, increased. The exception to this pattern of real wage gains is in the midst of the Great Recession (2007-09) when the CPI line lies above that of average hourly earnings which means that real wages declined relative to March 2003.

Figure 8 redoes the analysis underlying Figure 7, but focusing on the COVID-19 pandemic and its aftermath. To this end, we normalize average hourly earnings and the price indices to equal 100 in February 2020. As with Figure 7, the average real wage is the difference between average hourly earnings and either the CPI or PCE deflator. Once more, real wage gains are visually represented by the gap between the average hourly earnings line and that of a price index. Measured again by the CPI, the average wage was higher than its pre-pandemic level through 2020 and 2021. However, starting in early 2022, the CPI line rises above that of average hourly earnings which means that the average real wage has fallen, again relative to February 2020. An advantage of Figure 8 over a plot of the real wage is that it gives some perspective on the source of real wage movements. In particular, since mid-2020, nominal wages have grown at roughly a constant rate (the average hourly earnings line is almost a straight line). It’s the increase in the CPI, starting in 2021, that has eventually led to a decline in real wages. However, using the Fed’s preferred measure of the price level, the PCE deflator, shows that the average real wage has increased relative to February 2020, although these gains have eroded somewhat in 2022.

The household survey showed a 57,000 decline in the labor force. The number of unemployed persons fell 261,000, the number employed increased 204,000, leading to a decline in the unemployment rate from 3.66% to 3.49%. Note that the labor force participation rate remains lower than it was pre-pandemic.

Initial and continued unemployment claims were released last week and there was a hefty uptick in initial claims, climbing to 219,000 and a moderate increase in continued claims, rising to 1,361,000.

Although there has been a bit of a slowdown in some parts of the economy, the labor market continues to look pretty strong. Job vacancies have declined somewhat in recent months but there are still about 2 vacancies for each unemployed person.

By Paul Gomme and Peter Rupert

The BLS announced that total nonfarm payroll employment increased 315,000 in August. Note, however, that the previous two months numbers were revised down: June by 105,000 and July by 2,000.

The employment gains were widespread with only motor vehicle and parts showing a decline, down 1,900. The private service sector added 263,000 jobs with professional and business services (+68,000), health care and social assistance (+61,500), retail trade (+44,000) and leisure and hospitality (+31,000) leading the way. The heavily pandemic-damaged retail trade and leisure and hospitality sectors have been clawing their way back. Retail trade employment has nearly returned to its pre-pandemic level while leisure and hospitality still has a way to go as there are about 1.2 million (7%) fewer employees today than in February, 2020. As many have noted, however, retail trade employment started to decline before the onset of the pandemic.

Hours of work declined from 34.6 to 34.5 and the June workweek was also revised down from 34.6 to 34.5. Average hourly earnings rose from $32.26 to $32.36.

The household survey revealed a 786,000 increase in the labor force, perhaps a reflection of the record levels of job openings. Employment increased 442,000 and the number of unemployed increased 344,000. These changes led to an increase in the unemployment rate from 3.46% to 3.66%. Note to reporters: this is not necessarily bad! The fact that more people are flowing into the labor force (employed plus unemployed) could be attributed to a strengthening in the labor market, since the unemployment rate is calculated as the number of unemployed divided by the labor force. Looking at this in a different way, nearly 2 million people came from not in the labor force and entered the ranks of the unemployed. If instead, they remained out of the labor force, the unemployment rate would have fallen to 2.52%.

How people end up unemployed also provides useful insight to the state of the labor market. In recent months, there has been an uptick in the fraction of those unemployed because of either job loss, or leaving their jobs. At the same time, the fraction of the unemployed who are either new entrants to the labor force, or re-entrants has fallen.

Data from the Job Openings and Labor Turnover Survey (JOLTS) indicates that the labor market is `tight’: there are many vacancies relative to the number unemployed. In July, this ratio stood at 1.98 meaning that there were nearly two vacancies posted for each unemployed person.

Initial and continued claims for unemployment were released this past week, showing a third straight weekly decline in initial claims but a rise in continued claims.

There is continued discussion in the press of the possibility that the US has slid into recession. Real GDP growth for the second quarter was revised up, from -0.9% to -0.6%. We can use the GDP identity to decompose the growth rate of GDP into the contributions of its major components. By way of example, investment fell 13.2% in the second quarter. Since the share of output going to investment is roughly 20%, investment contributed -2.6% (-13.2 multiplied by 0.2) to the -0.6% growth in GDP. Negative contributions were also made by imports (-0.6%) and government spending (-0.3%). On the plus side, consumption contributed 1.0% while exports contributed 2.1%. (Owing to annualization of quarterly growth rates, and that the components do not quite add up to GDP, the contributions given in this paragraph do not add up to the -0.6% growth rate for GDP.)

The productivity and costs report released September 1 put a bit of a damper on the week’s announcements. Output per hour in the nonfarm business sector declined 4.1% in the second quarter on a seasonally adjusted annual basis. This change came from a 1.4% decline in output and a 2.7% increase in hours. Moreover, the year over year decline of 2.4% was the largest decline since the data began in 1948.

Nevertheless, the Chauvet-Piger calculated recession probability for July is a very modest 0.2%.

The recession probability is obtained from a Markov switching estimation procedure using data on non-farm employment, industrial production, real personal income excluding government transfers, and real manufacturing and trade industries sales. Typically, during a recession, all four series decline. While manufacturing and trade industries sales show negative growth in recent months (perhaps a counterpart to negative GDP growth), the other three series have grown at positive rates. As emphasized by the NBER Business Cycle Dating Committee, a recession is a broadly-based phenomenon; negative output growth is but one component. At present, the overall outlook is still positive and the answer to the title question is: yes.

By Paul Gomme and Peter Rupert

Recession fears have been ignited and businesses, consumers and governments have begun to put up their anti-recession shields. But what do the data say? First, due to the pandemic and mandatory shutdowns, it is very difficult to compare the changes in the data today to that of one or two years ago when trying to assess overall economic activity. Second, in many respects, a lot of the current data do not appear to be in recession territory.

So what are the data telling us about a recession? Jeremy Piger uses a dynamic-factor Markov-switching (DFMS) model, originally developed by Marcelle Chauvet, to calculate the probability that the US economy is in a “recession” using four monthly variables: non-farm payroll employment, the index of industrial production, real personal income excluding transfer payments, and real manufacturing and trade sales. For the most part, periods when the NBER has determined that the US economy is in recession coincide with periods that the model assigns a high probability to being in a recession. As of August 1, 2022, the model assigns a probability of 1.72% of being in a recession.

Several bellwether measures have been released over the past week or so. The first was real GDP, released Thursday, July 28. The report showed a second consecutive decline. While two consecutive quarters of negative GDP growth are often taken to mean that the economy is in recession, it’s the NBER’s Business Cycle Dating Committee that officially make this determination. One problem is that this committee often waits several months before making its determinations. As a result, the committee offers no help in assessing the current state of affairs.

While overall real GDP fell for the second straight quarter, the components showed mixed signals. Personal consumption expenditures, the largest component (about 70% of GDP), increased 1% and has not fallen since April of 2020. Real investment declined by 13% due both to a large decline in structures, both nonresidential (-11.7%) and residential (-14.0%). Government expenditures and investment contracted for the third straight quarter.

The second key piece of information, payroll employment, was released Friday morning and showed a very large increase in the number of jobs created in the U.S. economy, rising 528,000. This was much higher than many experts expected. In the Wall Street Journal survey, economists predicted an increase of about 258,000. Service-producing jobs grew 402,000.

Average hours of work remained at 34.6 for the third consecutive month. Average hourly earnings rose from $32.12 in June to $32.27. While average hourly earnings growth has been quite strong, real earnings have been eaten away by the larger increase in the CPI.

The Job Openings and Labor Turnover survey reported a slight decrease in job openings while the number of people unemployed fell 242,000. There are still nearly two job openings for every active job seeker. Moreover, the unemployment rate is pretty much as low as it has ever been since the 1950’s.

Initial claims for unemployment insurance rose slightly and have been trending up over the past month or so, and are now somewhat higher than pre-pandemic levels that were averaging closer to 220,000 per week.

So, where does all this leave us? It remains unclear whether the NBER will tell us in several months that we are in the throes of a recession. Yes, GDP has fallen in two consecutive quarters, however, the labor market continues to be quite strong.

By Peter Rupert

The BLS establishment data released this morning showed a payroll employment gain of 210,000. This from the WSJ before the announcement, “Economists surveyed by The Wall Street Journal estimate that employers added 573,000 jobs in November, on par with October, and unemployment ticked down to 4.5% from 4.6%.” That is a big miss but, as has been remarked on several times in this blog, this forecasting thing is not ez. There were, however, upward revisions for September (up 67,000) and October (up 15,000) to take a little sting off the November headline number. While the private sector increased 235,000 the government sector declined 25,000. Maybe Omicron fears drove the decline in retail employment of 20,400 and the small gain in leisure and hospitality of 23,000. As many people have noticed, there are no cars for sale it seems. Employment in motor vehicles and parts fell 10,100.

Average hours of work inched up from 34.7 to 34.8, giving a little more oomph to today’s report. One way to think about production of goods and services is to measure the inputs into producing those goods and services. The “headline” employment number, seen as disappointing by many,” is only one measure of the productive capacity…and a partial one at that. To get a more complete measure, multiply the number of those working in the private sector by their average weekly hours of private workers times the number of weeks in a month. And no, there are not 4 weeks in a month. For months with 31 days there are 4.4286 weeks; for months with 30 days there are 4.2857 weeks; for 28 days it is 4.0 weeks and for 29 days it is 4.1429 weeks. Going from September to October total hours of worked climbed about 3.5% and from October to November total hours fell about 3%. Average hourly earnings climbed 8 cents to $31.03; however, year over year inflation has outpaced the growth in average hourly earnings.

The household survey showed an increase in the civilian labor force of 594,000 and an increase in those employed by 1,136,000. With population increasing 121,000 this lead to a big increase in the employment to population ratio, from 58.8 to 59.2. The number of people unemployed fell 542,000 and the unemployment rate dipped to 4.2% from 4.6%. It is remarkable to see how quickly the number of unemployed and the unemployment rate have fallen compared to other economic recoveries.

Initial claims popped up 28,000 to 222,000 in the week of November 27 after the claims hit the lowest in 52 years last week at 194,000. Continued claims fell

Overall, the labor market continues to strengthen even given the shortfall in employment compared to what was expected. Of course there is still plenty of mismatch it appears as there are still more job openings that unemployed persons. One place this is showing up is in the number of self employed persons. In April of 2020, just as the pandemic was starting, there were 8,221,000 self employed. That number is now 9,997,000.