Federal Reserve Policy statement: March 19, 2014

As expected, the Fed announced further tapering, reducing bond purchases to $55 billion per month.  Also as expected, the Fed removed its reference to the 6.5% threshold as an indicator of when it would consider raising the federal funds rate.  How did financial markets react?  Yields on short- and long-term bonds rose quite a bit.  Why?  One reason is hidden in its economic forecast.  If one compares the March 2014 forecast with the December 2013 forecast, the median forecast for the federal funds rate rose from 0.75% to 1% for the end of 2015 while the median forecast for the end of 2016 rose from 1.75% to 2.25%.  In other words, members of the FOMC now anticipate raising the federal funds rate a little earlier in 2015 and expect rates to rise more quickly than previously thought.

For further information about the Fed's latest economic forecast, see my economic forecast web page.

Small Business in the Aftermath of the Great Recession

The most popular post on my blog involves comparisons of economics growth of small business vs. big business.  In Fall 2013, I wrote an article for the Rollins Graduate Business School Alumni Newsletter that examined the issue in more detail ("Small Business in the Aftermath of the Great Recession").  Recently, I made a brief presentation to the Winter Park Chamber of Commerce on the same topic.  What were the key takeaways from the article and presentation?  As one would guess, the rate of new business creation declined significantly during the recession while the rate of business destruction soared.  In recent years, the rate of business destruction has declined to at or below where it was prior to the recession.  Meanwhile, new business creation has improved, but still lags where it was prior to the crisis.

As a result, net business creation is still quite small compared to before 2007 (the most recent figures indicate that net new business creation is about half of what it was in the mid-2000s). According to the Business Employment Dynamics survey, small business (those with fewer than 50 workers) shed 3.6 million jobs during the recession, but recovered 2.2 million through the second quarter of 2013 (latest data available) for a net loss of 1.4 million jobs.  Meanwhile, large businesses (those with more than 500 employees) lost 4.3 million workers during the recession, but added 3.6 million through the second quarter of 2013 for a net loss of 700,000 employees (medium-sized businesses have experienced a net gain of 100,000 workers - loss of 1.6 million followed by a gain of 1.7 million).  Thus, it appears most of the remaining shortfall in employment is due to the underperformance of new and small businesses. Given that there was a financial crisis, access to credit played an important role in the relative weakness of small business.  The following figure illustrates the difference in the net tightening of lending standards for small vs. large business:

Thus, though lending standards began to ease in 2011 for large business, access to credit continued to tighten for small business before stabilizing in 2012 (preliminary evidence indicates that it eased in 2013).  It gets more complex, but it appears that tight credit due to the financial crisis had a larger impact on small business, helping to explain their relatively weak economic performance.  For those interested in more detail, feel free to read the article and.or view the presentation.

February Employment Report

The February Employment report showed an increase of 175,000 jobs (162,000 in the private sector) while the unemployment rate rose slightly to 6.7%.  The initial response of many was that this was a good report. Though the report was pretty good, that's relative to expectations and recent trends (we used to want gains in excess of 200,000 for a report to be considered good).  Over the last 3 months, the economy has added an average of about 129,000 jobs.  Let's look at some of the details.

The leading growth sector was professional/business services, which added 79,000 jobs (121,000 so far in 2014, about 40% of all job gains).  Healthcare bounced back somewhat, adding 9500 jobs in February (averaging just under 6000 per month in the last 3 months - more on the health care sector later in this post).  While payrolls increased, aggregate hours worked declined in February and is down slightly in 2014.  So far this year, hours worked is down in construction, manufacturing, retail trade, information services, and education/health while it has risen in professional/business services, mining, financial activities, and leisure/hospitality.

The increase in the unemployment rate was slight, but still reflects a decline of 0.3% over the last three months while the participation rate remained stable over that period (so the recent decline in the unemployment rate was due to employment gains as opposed to fewer people looking for work).  Meanwhile, the employment-population rate remained at 58.8%, above it's cycle low of 58.2% (down from 63% before the recession).  Interestingly, the increase from the low was due to higher employment-population ratios for less educated workers.

• the ratio for those that did not finish high school has risen 3.2% from it's low (currently 41.7%; near the highest since Spring 2008) 
• high school grads rose to 54.7%, up 1.1% from it's low  
• those with some college declined to 62.8%
• college grads declined to 72.6%

The figures for those with some college as well as college grads are both near the lowest since records began in 1992 (October 2013 was lower in both cases).  still, the more education the better, as reflected by the higher employment-population ratio for those with more education.

What explains the slowdown in employment in health services?  The three-month gain in healthcare employment (17,700) is the lowest since records started being kept in 1990 while the 12-month gain fell to below 200,000 for the first time since 2000.  Which components of healthcare are responsible for the slowdown?  Hospitals have reduced employment by 2800 over the last year, the first year-over-year decline since early 1995 while nursing care facilities have shed nearly 10,000 jobs over the last 12 months, continuing a pattern begun in late 2011 after decades of adding a significant number of jobs.

What are the key takeaway from the report?  The economy remains on a modest-to-moderate growth track - not too hot and not too cold.  Some of the recent slowdown in employment growth may reflect structural changes taking place in health care, particularly among hospitals.