Wednesday, 22 of May of 2019

Economics. Explained.  

Category » Employment

GDP, Inflation, and Interest Rate Forecasts

May 17, 2019

The initial estimate of GDP growth in the first quarter was 3.2% compared to fourth quarter growth of 2.2%.  The increase was considerably larger than the 2.5% growth rate that was expected primarily because of a larger-then-expected increase in inventories.  Thee stock market selloff late last year and the government shutdown early this year almost certainly pulled down both consumer spending and investment spending in the first quarter.  Both of these categories should rebound in the second quarter given that the the stock market is at a record high level and the government shutdown now over, but the bloated level of inventories will shrink considerably in Q2.  As a result, we expect GDP growth in the second quarter of 1.9% after having risen 3.2% in the first.  For the year as a whole we anticipate 2.7% GDP growth after having risen 3.0% in 2018.

Consumer spending slipped to 1.2% in the first quarter because of the stock market drop combined with the government shutdown.  However, stock price are now at a record high level and the shutdown is over.  Thus, we expect consumer spending to jump 3.3% in the second quarter.  Over the longer term the gains in employment are generating income which gives consumers the ability to spend.  Consumer debt is very low in relation to income.  Interest rates  should be steady through the end of this year.  For 2019 we anticipate growth in consumer spending of 2.2%.

Investment spending slowed in the first quarter to 2.7% after having risen 5.4% in the fourth quarter of last year.  Growth in this category slowed in the first quarter for the same reasons that consumer spending slowed — the stock market drop and the shutdown.  We expect nonresidential investment to jump 7.3% in the second quarter and increase 5.7% for the year.  Investment spending was essentially unchanged for 2014-2016.  It appears that the corporate tax cuts, repatriation of earnings at a favorable tax rate, and a reduction in the regulatory burden are giving business leaders confidence to open their wallets and spend on new equipment and technology.  Not only will this boost GDP growth in the short term, if investment continues to climb it will boost productivity growth which will, in turn, raise the economic speed limit from about 1.8% previously to 2.8% or so by the end of this decade.

The trade gap narrowed by $56.4 billion in the first quarter to $899.3 billion.  This means that the trade component added 1.1% to  GDP growth in the first quarter.  We expect trade to add 0.3% to GDP growth in 2019.

Non-farm inventories jumped by $128.4 billion in the first quarter and added 0.7% to GDP growth in that quarter.  Going forward we expect inventories to rise $60.0 billion in the second quarter and climb by about $75 billion per quarter thereafter.

Expect GDP growth of 2.7% in 2019 versus 3.0% last year.

The inflation rate should be fairly steady in 2019.  There is a shortage of available homes and apartments in the housing sector which is raising rents.  That will put upward pressure on the inflation rate.  Also, higher prices from China in the wake of the newly-imposed tariffs will boost inflation.  However, the pickup in inflation will be limited as internet price shopping will keep goods prices steady in 2019.  At the same time, rising productivity growth will offset much of the increase in wages.  As a result, we expect the core CPI to be steady at  2.1% in 2019.

With GDP growth at 2.7% and inflation steady at 2.1%, the Fed will leave rates unchanged at 2.4% through the end of the year.

With no further increase in the funds rate this year and inflation steady at 2.1%, long-term interest rates should rise slightly in 2019 with the 10-year climbing from  2.4% currently to 2.75% by the end of this year.  Mortgage rates should edge upwards from 4.1% currently to 4.5% by the end of 2019.

Stephen Slifer

NumberNomics

Charleston, SC

 


Initial Unemployment Claims

May 16, 2019

Initial unemployment claims fell 16 thousand in the week ending May 11 to 212 thousand after having declined 2 thousand in the previous week.  The four-week average of claims rose 5 thousand to 225 thousand.  The 4-week average for the week of April 13 of 202 thousand was the lowest for the current business cycle and  the lowest 4-week average level of claims since November, 1969 when it was 200 thousand.  The current low level of claims indicates clearly that the trend rate of increase in employment of about 190 thousand remains intact.

As one might expect there is a fairly close inverse relationship between initial unemployment claims and payroll employment.  With initial claims (the red line on the chart below, using the inverted scale on the right) at 226 thousand  we would expect monthly  payroll employment gains to exceed 300 thousand.  However, employers today are having difficulty finding qualified workers.  As a result, job gains are significantly smaller than this long-term relationship suggests and are currently about 190 thousand.

With the economy essentially at full employment, employers will have steadily increasing difficulty getting the number of workers that they need.  As a result, they might choose to offer some of their part time workers full time positions.  But this series is close to where it was going into the recession so they will have limited success in finding necessary workers from this source.

They will also have to think about hiring  some of our youth (ages 16-24 years) .  But the youth unemployment rate today is close to the lowest on record (for a series that goes back to 1970) so there are not many younger workers available for hire.

Finally, employers may also consider some workers who have been unemployed for an extended period of time.  But these workers do not seem to have the skills necessary for today’s work place.  Employers may have to offer some on-the-job training programs for  those whose skills may have gotten a bit rusty.  But even if they do, the reality is that the number of discouraged workers today is quite low — it is essentially where it was going into the recession.

The number of people receiving unemployment benefits declined 8 thousand  in the week ending May 4 to 1,660 thousand.  The 4-week moving average rose 1 thousand to 1,668 thousand.  This series hit a low of 1,654 thousand in late October of last year.

The only way the unemployment rate can decline is if actual GDP growth exceeds potential.  Right now the economy is climbing by about 2.8%; potential growth has probably picked up from 1.8% a couple of years ago to perhaps 2.5% today given faster growth in productivity.  Thus, going forward  the unemployment rate should continue to decline slowly.

Stephen Slifer

NumberNomics

Charleston, SC


Unemployment vs. Job Openings

May 7, 2019

The  Labor Department reported that job openings rebounded by 4.8% in March to 7,488 thousand after having fallen 6.3% in February .  There are far more job openings today than there were prior to the recession (4,123 thousand in December 2007).   There were 6.2 million people unemployed in March.

As shown in the chart below, there are currently 0.8 unemployed workers for every available job.   Think of that — there are more job openings today than there are unemployed workers.  Prior to the recession this ratio stood at 1.7 so the labor market is clearly in far better shape now than it was prior to the recession.  Further, at the end of the recession there were 6.6 times as many unemployed workers as there were job offers so, clearly, the job market has come a long ways in the past 9-1/2 years.

In  this same report the Labor Department indicated that the quit rate in March was  at 2.3 which is the highest level since January 2001.   It has been at that level since June of last year.  This is a measure of the number of people that voluntarily quit their jobs in that  month.  During the height of the recession very few people were voluntarily quitting because jobs were scarce.  So the more this series rises, the more comfortable workers are in leaving their current job to seek another one.  The quit rate today is 2.3.  At the beginning of the recession it was at 2.0 and the record high level for this series was 2.6 back in January 2001.

There is one other point that should be made about this report.  Janet Yellen used to  claim that there were a large number of unemployed workers just waiting for jobs if only the economy were to grow fast enough.  She is assuming that these people have the skills and are qualified for employment.  We tend to disagree.  There are plenty of job openings out there.  What is not happening as quickly is hiring.  Take a look at the chart below.  Job openings (the green line) have been rising rapidly (and are far higher now than they were prior to the recession); hires (the red line) have been rising less rapidly.

Indeed, if one looks at the ratio of openings to hires the reality is that this ratio  has not been higher at any point in time since this series began in 2000.  There are plenty of jobs out there, but employers are having a hard time filling them.  Why is that?

A couple of thoughts come to mind.  First and foremost, many unemployed workers simply do not have the skills required for the jobs available.  If they did, why aren’t they being hired?  Why aren’t some current part time workers stepping into the void for those full time positions? Why haven’t discouraged workers begun to seek employment with so many jobs available?  Why haven’t long-term unemployed workers bothered to go back to school and acquire the skills that are necessary to land a  job?

Or perhaps many of these people flunk the drug tests.  They might not be qualified for employment for a variety of possible reasons.

Perhaps also some people in this group find the combination of unemployment benefits and/or welfare benefits sufficiently attractive that there is little incentive to take a full time job when you can sit at home do nothing and make almost as much.

Jobs are plentiful and the only reason the unemployment rate is not falling faster is because the remaining unemployed/discouraged/part time workers do not have the skills required by employers today, flunk the drug tests, or are unwilling to take the jobs that are available.

Stephen Slifer

NumberNomics

Charleston, SC


Private Employment

May 3 2019

Private sector employment for April rose 236 thousand after having risen 179 thousand in March.   A better reading of what is truly going on is typically represented by the  3-month moving average of private employment which is now 154 thousand, but that includes the minuscule 46 thousand increase in February.  Thus, it too is a bit misleading.  To us, employment continues to rise almost 200 thousand per month.  That compares to an average increase of 172 thousand in 2017 and 215 thousand last year.  Thus, employment continues to chug along despite the monthly wiggles.  Labor force growth rose 100 thousand in the past year.  With employment gains continuing to exceed growth in the labor force, the unemployment rate should continue to decline slowly.

Amongst the various employment categories construction employment rose 33 thousand in April after having risen 20 thousand in March.  The trend increase in construction employment appears to be about 20 thousand per month.

Manufacturing employment rose 4 thousand in April after having been unchanged in March.    Factory employment is now rising by about 17 thousand per month.  It is struggling as the recently imposed tariffs take a toll on growth in the goods sector.

Elsewhere, health care  climbed by 27 thousand.  Social assistance jobs gained 26 thousand.  Professional and business services increased 76 thousand in April.   Transportation and warehousing rose 11 thousand.  Employment in leisure and hospitality establishments climbed 34 thousand.  Financial services gained 12 thousand workers.  Retail jobs declined 12 thousand.

In any given month employers can boost output by either additional hiring or by lengthening the number of  hours that their employees work.  The nonfarm workweek fell 0.1 hour in April to 34.4 hours after having risen 0.1 hour in March .  It has been bouncing around between 34.4 and 34.5 hours for the past year.  The  elevated level of the workweek  implies that employers are in need of workers and will continue to hire at a meaningful pace in the months ahead.

The increases in  employment and hours worked are reflected in the aggregate hours index which fell 0.1% in April after having risen 0.5% in March.  This index climbed by 1.8% in the first quarter.  We expect a gain of similar magnitude in Q2.

There is no doubt that the consumer sector of the economy is expanding at roughly a 2.5% pace.   The stock market had a tough couple of months late last year but has completely recovered.  Consumer confidence fell somewhat given the government shutdown but it, too, has recovered.

The sector of the economy that had previously been weak was the various production industries.  That is climbing but very slowly.  As noted earlier, factory employment is barely increasing.  Construction employment has been rising steadily.  And mining employment has been rising by about 5 thousand per month.  The service sector, however, is booming.

Looking ahead, steady consumer spending and continued rapid growth rate in investment should cause  GDP to grow 2.7% this year.

Stephen Slifer

NumberNomics

Charleston, SC


Payroll Employment

May 3, 2019

Payroll employment for April rose 263 thousand after having risen 189 thousand in March.   A better reading of what is truly going on is typically represented by the  3-month moving average of private employment which is now 169 thousand, but that includes the minuscule 56 thousand increase in February.  Thus, it too is a bit misleading.  To us, employment continues to rise almost 200 thousand per month.  That compares to an average increase of 179 thousand in 2017 and 223 thousand last year.  Thus, employment continues to chug along despite the monthly wiggles.  Labor force growth rose 100 thousand in the past year.  With employment gains continuing to exceed growth in the labor force, the unemployment rate should continue to decline slowly.

Amongst the various employment categories construction employment rose 33 thousand in April after having risen 20 thousand in March.  The trend increase in construction employment appears to be about 20 thousand per month.

Manufacturing employment rose 4 thousand in April after having been unchanged in March.    Factory employment is now rising by about 17 thousand per month.  It is struggling as the recently imposed tariffs take a toll on growth in the goods sector.

Elsewhere, health care  climbed by 27 thousand.  Social assistance jobs gained 26 thousand.  Professional and business services increased 76 thousand in April.   Transportation and warehousing rose 11 thousand.  Employment in leisure and hospitality establishments climbed 34 thousand.  Financial services gained 12 thousand workers.  Retail jobs declined 12 thousand.

In any given month employers can boost output by either additional hiring or by lengthening the number of  hours that their employees work.  The nonfarm workweek fell 0.1 hour in April to 34.4 hours after having risen 0.1 hour in March .  It has been bouncing around between 34.4 and 34.5 hours for the past year.  The  elevated level of the workweek  implies that employers are in need of workers and will continue to hire at a meaningful pace in the months ahead.

The increases in  employment and hours worked are reflected in the aggregate hours index which fell 0.1% in April after having risen 0.5% in March.  This index climbed by 1.8% in the first quarter.  We expect a gain of similar magnitude in Q2.

There is no doubt that the consumer sector of the economy is expanding at roughly a 2.5% pace.   The stock market had a tough couple of months late last year but has completely recovered.  Consumer confidence fell somewhat given the government shutdown but it, too, has recovered.

The sector of the economy that had previously been weak was the various production industries.  That is climbing but very slowly.  As noted earlier, factory employment is barely increasing.  Construction employment has been rising steadily.  And mining employment has been rising by about 5 thousand per month.  The service sector, however, is booming.

Looking ahead, steady consumer spending and continued rapid growth rate in investment should cause  GDP to grow 2.7% this year.

Stephen Slifer

NumberNomics

Charleston, SC


Unemployment Rate

May 3, 2019

The unemployment rate fell 0.2% in April to 3.6% after having been unchanged in March%.   At 3.6% the unemployment is at its lowest level since December 1969  — almost 50 years ago.  The labor force fell 490 thousand in April.  Employment fell 103 thousand.  As a result, the number of unemployed workers declined 387 thousand in April.  Thus, the unemployment rate declined 0.2% to 3.6%.  While employment used in calculating the unemployment rate fell 103 thousand, payroll employment increased by 263 thousand.  How can this be?  First, the two are figures are derived from separate data streams.  The payroll number is calculated from employment numbers reported by a large number of employers across all industries.  Employment for the unemployment rate calculation is derived from knocking on doors and asking people if they have a job.  It is known as the  household survey.  One conceptual difference is that the household survey includes people who are self-employed which would not be captured in the establishment survey. It could be that self-employed workers fell sharply in April which seems unlikely.  The other reality is that there is just statistical noise between the two surveys.  The trend rate of growth is similar, but with wide variation from month to month — the household survey being the more volatile of the two.

Labor force growth in the past year is now 0.6% which is exactly the same as growth in the population which was also 0.6%.  Thus, the labor force participation rate was unchanged during that period of time.  It is now 62.8%.  A year ago it was 62.8%.  In 2018 the labor force rose 1.6% in 2018 versus 0.6% in 2017.  It would appear that the relatively rapid pace of GDP growth last year attracted some previously unemployed workers into the labor force, but in the first few months of 2019 that process has largely come to a halt.

At 3.6% the unemployment rate is far below the 4.5% level that the Fed considers to be full employment.  However,  the official rate can be misleading because it does not include “underemployed” workers which is true.  There are two types of “underemployed” workers.  First, there are people who have unsuccessfully sought employment for so long that they have given up looking for a job.  Second, are those workers  that currently have a part time position but indicate that they would like full time employment.  The total of these two types of underemployed workers are  “marginally attached” to the labor force.  The number of marginally attached workers has is essentially  where it was going into the recession.

We should probably be focusing more on the broadest measure of unemployment because it includes these underemployed individuals.  The broad rate was unchanged in April at 7.3%.  At 7.3% it is lower than where it was going into the recession.  It is hard to argue that there is slack remaining in the labor market.  The broad rate of  7.3% compares to 3.6% for the official rate.

As the economy continues to expand the pace of hiring will remain steady and  both rates are going to fall.  As firms look a bit harder to find the workers they need they may have to turn to other sectors of the labor market rather than just currently unemployed workers.  They may seek younger workers, but they may have a difficult time because our youth unemployment rate is the lowest it has been in more than 48 years.

They may also look at some of their part-time workers who are reliable and have a good work ethic and offer them full-time positions.  But the number of part time workers who say they want full time employment is roughly in line with where it was going into the recession.

In short, both rates should continue to fall slowly in the months ahead and are already below their full-employment threshold.  In that world labor shortages are likely to become even more evident in the months ahead.  That will put upward pressure on wage rates.  Thus far the increase in wages is being completely offset by gains in productivity such that “unit labor costs” or labor costs adjusted for the increase in productivity have risen just 0.1% in the past year.  Thus, the seemingly tight labor market is not generating any upward pressure on the inflation rate.

Stephen Slifer

NumberNomics

Charleston, SC


Nonfarm Workweek

May 3 2019

In any given month employers can boost output by either additional hiring or by lengthening the number of  hours that their employees work.  Payroll employment for March rose 196 thousand after having risen just 33 thousand in February and having surged by 312 thousand in January.  These numbers tend to bounce around on a month-to-month basis, especially at this time of the year, as the seasonal workers are hired and then let go.  The 3-month average increase in employment of 190 thousand is probably more representative of the average growth rate for jobs.

The nonfarm workweek fell 0.1 hour in April to 34.4 hours after having risen 0.1 hour in March.  This series has been bouncing around between 34.4 and 34.5 hours for the past year.  The elevated level of the workweek  implies that employers are in need of workers and will continue to hire at a meaningful pace in the months ahead.

The increases in  employment and hours worked are reflected in the aggregate hours index which fell 0.1% in April after having risen 0.5 point in March.  This index rose 1.8% in the first quarter.  We expect a similar growth rate in Q2.

The factory workweek was unchanged in April at 40.7 hours after having also been unchanged in March.  This series is a bit lower than it has been, but it remains at a relatively elevated level and will lead to additional factory hiring in the months ahead.  With individual and corporate tax cuts continuing to impact growth this year and U.S. firms able to repatriate overseas earnings to the U.S. at a favorable tax rate, the factory sector should continue to climb at a moderate pace this year, but the recently imposed tariffs are taking a toll on growth in this sector.

Overtime hours were unchanged in April at 3.4 hours after having been declined 0.1 hour in March.  Like the factory workweek this series, too, is relatively long.  The manufacturing sector is trying hard to find the workers it needs — hiring as best it can given the shortage of qualified workers, working existing employees longer hours, and asking people on the line to work more overtime hours.  There is no sign of slower growth in any of these data.

The economy continues to expand at a respectable pace.  We currently expect GDP to increase 2.7% this year after having risen 3.0% in 2018 given the continuing impact of individual and corporate income tax cuts and repatriation of corporate earnings currently locked overseas.  The economy is currently being supported by robust growth in consumer spending and continuing rapid growth in investment.

Stephen Slifer

NumberNomics

Charleston, SC


Average Hourly Earnings

May 3, 2018

Average  hourly earnings rose 0.2% in April to $27.77 after having risen 0.2% in March.  Hourly earnings are gradually accelerating.  During the past year hourly earnings have risen 3.2%.  This almost matches the fastest 12-month increase in a decade and it would be growing more quickly except for the impact from retiring baby boomers.  When you lose a number of people who have been working for 40 years who are making high wages, and replace them by younger workers who are making much less, this series will have a downward bias.  The Atlanta Fed has a series called “wage tracker” in which it tries to adjust for this bias and it believes that wages are currently rising at a 3.4% pace.  This series has been growing somewhat more quickly than the official hourly earnings data for some time and, therefore, seems more consistent with the apparent tightness in the labor market.

In addition to their hourly wages workers can also work longer hours and/or overtime.  Increases in their total income are captured by the increase in weekly earnings.  Weekly earnings fell 0.1% in April to $955.29 after having risen 0.5% in March.  Average weekly earnings have risen 2.9% during the course of the past year.

Wages  appear to be rising at a moderate pace consistent with a sustained 2.5% pace of consumer spending.

The potential impact on inflation from the tight labor market is best demonstrated by looking at unit labor costs which are labor costs adjusted for the changes in productivity.  In the past year these unit labor costs have risen 0.1% with a 2.5% increase in compensation largely offset by a 2.4% increase in productivity.  Keep in mind that the Fed has a 2.0% inflation target.  If labor costs adjusted for productivity — which account for about two-thirds of a firms overall costs —  are rising by just 0.1%, the tight labor market is clearly not putting upward pressure on the inflation rate and, perhaps, could be pushing it lower.  Almost all of the increase in wages is being offset by an increase in productivity.

Stephen Slifer

NumberNomics

Charleston, SC

 

 


Average Duration of Unemployment

May 3, 2019

The average duration of unemployment rose 0.7 week in April to 22.9 weeks after having risen 0.5 week in March.  This series bounces around from month to month, but it does seem to have increased somewhat in the past couple of months.  The January level of 20.5 was the shortest average length of time workers remain unemployed since February 2009.

While the unemployment rate has fallen by 6.4% since reaching a peak of 10.0% in October 2009, the average duration of unemployment has declined far more slowly.  It is clear that  few of the new hires have been from the ranks of the long-term unemployed.  There is a mismatch between the skills that employers need, and the skill set that these long-term unemployed workers seem to have.  Employers in today’s world demand their new hires to be tech savvy, and these long-term unemployed workers tend not to have that ability.

The Bureau of Labor Statistics indicates that 1.23 million workers have been jobless for 27 weeks or longer, and that represents 21.1% of all unemployed workers.

The average duration of unemployment should

decline slowly in the months ahead as the labor market gets progressively tighter.  Firms will have to look just a bit harder to find the workers that they need, and that includes looking at long term unemployed workers and perhaps offering them some sort of training program to improve their skills.

Stephen Slifer

NumberNomics

Charleston, SC


ADP Employment

May 1, 2019

As shown above the ADP survey shows an impressive correlation with the private sector portion of the payroll employment data to be released a couple of days later.  And well it should.  ADP, or Automatic Data Processing, Inc. is a provider of payroll-related services. Currently, ADP processes over 500,000 payrolls, for approximately 430,000 separate business entities, covering over 23 million employees.  The survey has been in existence since January 2001, and its average error has been 65 thousand.  So while it is not perfect, it does have a respectable track record.

The ADP survey said that employment jumped 275 thousand in April after having risen 151 thousand in March after having climbed by 220 thousand in February.  In the most recent 3-month period employment has risen 215 thousand.   On Friday we expect the BLS to report that private sector employment rose  about 190 thousand in April.

Jobs in goods-producing industries  rose 56 thousand in April after having fallen 1 thousand in April   —  construction employment rose 49 thousand, mining fell by 2 thousand,  and manufacturing rose 5 thousand.   Service providers boosted payrolls by 223 thousand in April after having climbed 152 thousand in March.  The April increase was led by an increase of 59 thousand in professional and business jobs,  46 thousand in health care,  25 thousand in administration and support, 9 thousand in education, 53 thousand jobs in leisure and hospitality, 37 thousand jobs in trade, transportation, and utility workers, and 6 thousand in financial services.

With the labor force rising very slowly, employment gains of 200 thousand or so will continue to slowly push the unemployment rate lower.  The unemployment rate currently is 3.8% which is well below the full employment threshold.  As a result we are beginning to see more and more shortages of available workers.  However, at this point most of the upward pressure on wages is being countered by a corresponding increase in productivity.   Over the past year unit labor costs, or labor costs adjusted for the increase in productivity rose 1.0%.  Despite the seemingly tight labor market there is little upward pressure on the inflation rate.

The stock market has rebounded and is now at a record high level.   Interest rates will remain steady through the end of the year.  Consumers remain confident.  Corporate earnings are solid.  The economy is still receiving some stimulus in the form of both individual and corporate income taxes.  Thus, our conclusion is that the economy will expand by  2.7% in 2019 after having risen 3.0% last year.

Stephen Slifer

NumberNomics

Charleston, SC