Yesterday's GDP report received a lot of attention, but today's report on personal income and spending for December is likely to receive little attention. The information from the report was already incorporated into the GDP report, so in some ways it is old news (24 hours old). However, there are additional details that provide insight into the state of the economy. The headline numbers show that consumer spending (adjusted for inflation rose briskly in the fourth quarter, though at a more modest pace in December, as the quarter ended. Meanwhile, income adjusted for inflation was pretty flat in the quarter, declining slightly in December. If income is flat and spending increases, that means the savings rate fell. It now stands at 3.9%, which is the lowest since 2008 (other than January 2013, which was distorted by income adjustments in anticipation of the tax hikes in 2013). Optimists will say that consumers are gaining confidence and don't think they need to save as much while pessimists will claim that the recent increase in consumer spending is not being supported by gains in income. My take is somewhat in between. The overall pace of consumer spending is likely to increase somewhat compared to recent years, but not back to the rate of the good old days. For many households, access to credit is limited and future increases in spending are likely to be constrained by increases in income, which are likely to remain modest (though somewhat higher than in recent years).
On an unrelated note, one of the biggest concerns facing financial markets in recent weeks is the state of emerging markets. I may post some comments soon about it, but in the mean time I'll refer you to comments from economists from Wells Fargo, which I think are pretty much on target.
Friday, January 31, 2014
Thursday, January 30, 2014
Fourth Quarter GDP
The government released its first estimate of GDP for the fourth quarter of 2013 this morning, showing 3.2% growth for the quarter and 2.7% compared to the fourth quarter of 2012. The details were generally good, but some don't look sustainable. Good news included consumer spending rising by 3.3%, it's fastest rate since the end of 2010. On the flip side, residential investment fell at nearly a 10% rate, it's first decline since the summer of 2010. Though residential construction may not grow as quickly in the coming year (compared to the double-digit growth seen in recent years, this was probably an aberration due to weather). Business investment grew by just under 4%, somewhat slower than the middle of the year due to a decline in business construction). The private domestic economy (consumers and businesses) grew by 2.4% in the fourth quarter compared to 2.25% in the third and 2.2% in the second (i.e., growth has been relatively stable, but increasing slightly).
Exports added 1.5% to economic growth, the second strongest contribution since the end of the recession. Given the state of the global economy, this is unlikely to be repeated (exports may do fine, but are unlikely to grow as rapidly as at the end of 2013). Federal government purchases fell by 12.6% due to both cuts in defense spending as well as nondefense spending (as a result of the government shutdown). Given the recent passage of the budget covering the next couple of years, this is unlikely to be repeated. After adding about 1.7% to economic growth in the third quarter, inventories added 0.4% to growth in the fourth quarter. Though inventories have added to economic growth throughout 2013, that's unlikely to be repeated in 2014.
What does this report tell us about the economy? First, you'll note that the analysis keeps using the phrase. "this is unlikely to be repeated." Exports and inventories are unlikely to add as much to economic growth in 2014 while residential investment and government purchases are unlikely to subtract as much from growth as they did at the end of 2013. So what's the likely direction of economic growth? Though some consumers still face headwinds (student loan debt, modest growth in incomes, ...), it appears that much of the deleveraging as a result of the financial crisis is over. As such, consumer spending will pick up compared to recent years. Combine this with moderate growth in business investment and you get economic growth approaching 3% in 2014. If the US does grow by 3%, it'll be the fastest pace of economic growth since 2005.
Exports added 1.5% to economic growth, the second strongest contribution since the end of the recession. Given the state of the global economy, this is unlikely to be repeated (exports may do fine, but are unlikely to grow as rapidly as at the end of 2013). Federal government purchases fell by 12.6% due to both cuts in defense spending as well as nondefense spending (as a result of the government shutdown). Given the recent passage of the budget covering the next couple of years, this is unlikely to be repeated. After adding about 1.7% to economic growth in the third quarter, inventories added 0.4% to growth in the fourth quarter. Though inventories have added to economic growth throughout 2013, that's unlikely to be repeated in 2014.
What does this report tell us about the economy? First, you'll note that the analysis keeps using the phrase. "this is unlikely to be repeated." Exports and inventories are unlikely to add as much to economic growth in 2014 while residential investment and government purchases are unlikely to subtract as much from growth as they did at the end of 2013. So what's the likely direction of economic growth? Though some consumers still face headwinds (student loan debt, modest growth in incomes, ...), it appears that much of the deleveraging as a result of the financial crisis is over. As such, consumer spending will pick up compared to recent years. Combine this with moderate growth in business investment and you get economic growth approaching 3% in 2014. If the US does grow by 3%, it'll be the fastest pace of economic growth since 2005.
Friday, January 24, 2014
The Florida & Orlando Job Market
The latest information about the state and local job market was released this morning, showing rising employment and a declining unemployment rate for both Florida and metro Orlando. Though I normally comment on the data for the month, since this report wrapped up 2013, I think it's helpful to also reflect on the year.
The unemployment rate in Florida declined from 6.4% to 6.2%. If you've read this blog before, you know the next question - was it due to employment growth or fewer people participating in the job market? The participation rate was down fractionally, so this time it reflects an improvement in the labor market. For metro Orlando, the unemployment rate fell to 5.5% from 5.9%. Some of this was due to seasonal factors, but it also reflects a stronger job market.
Florida added over 14,000 jobs in December, 13,500 in the private sector led by retail trade, which added 9100 jobs (seasonally adjusted). Orlando added 6500 jobs in the private sector (6000 overall; not seasonally adjusted), with half of the jobs added in retail trade (2100) and food/accommodation places (1000). Looking at the monthly figures, it's easy to question the quality of jobs added both statewide (70% in retail) and locally (50% in retail & hotels/restaurants). However ...
For 2013 as a whole, Florida added nearly 195,000 jobs in the private sector (3.1%). The largest gains were in construction (+8.4%), retail trade (+5.5%), real estate, rental, & leasing (+4.9%). Digging a little deeper, leading categories included civil engineering construction (+12.9%), building material and supply stores (+10.3%), architectural, engineering and related services (+9.8%), and specialty trade contractors (+8.7%). In other words, the housing rebound contributed significantly to a rebound in the Florida job market.
Meanwhile, metro Orlando added 32,500 private sector jobs, a gain of 3.4%. Leading sectors included ambulatory health care services (+7.1%), arts & recreation (+6.5%), food/drinking places (+5.1%), and real estate, rental & leasing (+4.7%). Though construction was an outperformer, it didn't play as significant role locally as it did statewide.
What about the unemployment rate? The Florida unemployment rate declined from 7.9% in December 2012 to 6.2% in December 2013. However, much of the decline was due to a falling labor force participation rate, which fell from 60.5% to 59.6%. If the participation rate had remained stable, the current unemployment rate would have been 7.57%. Nationally, the falling participation rate was responsible for the entire decline in the unemployment rate (i.e., the unemployment rate for the US would have remained at 7.9% if the participation rate had remained constant).
What's the key takeaway from the report? Though retail was largely responsible for the job gains in Florida in December (remember, the data are seasonally adjusted, so that's not due to Christmas), the Florida job market outperformed that of the nation in 2013, both in terms of job gains and falling unemployment.
The unemployment rate in Florida declined from 6.4% to 6.2%. If you've read this blog before, you know the next question - was it due to employment growth or fewer people participating in the job market? The participation rate was down fractionally, so this time it reflects an improvement in the labor market. For metro Orlando, the unemployment rate fell to 5.5% from 5.9%. Some of this was due to seasonal factors, but it also reflects a stronger job market.
Florida added over 14,000 jobs in December, 13,500 in the private sector led by retail trade, which added 9100 jobs (seasonally adjusted). Orlando added 6500 jobs in the private sector (6000 overall; not seasonally adjusted), with half of the jobs added in retail trade (2100) and food/accommodation places (1000). Looking at the monthly figures, it's easy to question the quality of jobs added both statewide (70% in retail) and locally (50% in retail & hotels/restaurants). However ...
For 2013 as a whole, Florida added nearly 195,000 jobs in the private sector (3.1%). The largest gains were in construction (+8.4%), retail trade (+5.5%), real estate, rental, & leasing (+4.9%). Digging a little deeper, leading categories included civil engineering construction (+12.9%), building material and supply stores (+10.3%), architectural, engineering and related services (+9.8%), and specialty trade contractors (+8.7%). In other words, the housing rebound contributed significantly to a rebound in the Florida job market.
Meanwhile, metro Orlando added 32,500 private sector jobs, a gain of 3.4%. Leading sectors included ambulatory health care services (+7.1%), arts & recreation (+6.5%), food/drinking places (+5.1%), and real estate, rental & leasing (+4.7%). Though construction was an outperformer, it didn't play as significant role locally as it did statewide.
What about the unemployment rate? The Florida unemployment rate declined from 7.9% in December 2012 to 6.2% in December 2013. However, much of the decline was due to a falling labor force participation rate, which fell from 60.5% to 59.6%. If the participation rate had remained stable, the current unemployment rate would have been 7.57%. Nationally, the falling participation rate was responsible for the entire decline in the unemployment rate (i.e., the unemployment rate for the US would have remained at 7.9% if the participation rate had remained constant).
What's the key takeaway from the report? Though retail was largely responsible for the job gains in Florida in December (remember, the data are seasonally adjusted, so that's not due to Christmas), the Florida job market outperformed that of the nation in 2013, both in terms of job gains and falling unemployment.
Friday, January 10, 2014
December Job Market Report
The December job market report was disappointing, falling significantly short of expectations as the economy added just 74,000 jobs. Meanwhile, the unemployment rate fell to 6.7%, the lowest since 2008. What comes next is similar to what I've written quite often over the last year, but it has to be said.
Why did the unemployment rate decline from 7% to 6.7%? The main reason was that more people stopped looking for work, reducing the labor force participation rate to 62.8%, the lowest since early 1978. If the participation rate had not changed, the unemployment rate would have remained at 7%, Comparing December 2012 to December 2013, the participation rate declined from 63.6% to 62.8%. If the participation has remained constant, the unemployment rate would have also remained unchanged at 7.9% (so the entire decline in the unemployment rate in 2013 was due to a lower participation rate). During the last five years, the noninstitutional adult population has increased by about 11.7 million people while the labor force has increased by 60,000 (December 2008-December 2013, not seasonally adjusted since we're comparing the same month; given new seasonal adjustments, the seasonally-adjusted labor force has increased by 280,000). As a result, the participation rate has dropped from 65.8% in December 2008 to 62.8% in December 2013. If the participation rate had not changed, the unemployment rate would currently be 10.9%. As discussed elsewhere, some of the decline in the participation rate was expected due to the aging of baby boomers, but it is clear, based on the data, that the primary reason for declining unemployment in recent years is a smaller portion of people participating in the job market.
Let me stick with the negative before pointing out some bright spots. Job gains in December were led by retail trade (+55,000) and temp jobs (+40,000). Given a net increase of 74,000 jobs (87,000 in the private sector), that means the rest of the economy lost jobs. In addition, hours worked declined, confirming weakness in employment. What about the bright spots? Given that these are estimates, it's helpful to look at three-month trends. In the fourth quarter (Sep-Dec 2013), the economy added 515,000 jobs (530,000 in the private sector), for an average of 172,000 per month (177,000 in the private sector). Nearly 200,000 of these jobs were retail trade or temp jobs (nearly 40%); still a high proportion, but not over 100%!.
Here are some more interesting numbers regarding changes in employment by age. Which age group has experienced the largest employment gains in the last year? According to the household survey, those 55 and over achieved just over one-third of job gains; almost 30% went to those between 25 and 54; 27% to those between 20 and 24, and just under 10% went to teenagers.
Enough with the numbers. What are the key takeaways from this report? Despite the decline in the unemployment rate, the report was quite weak, led by weak job gains, primarily in low-paying sectors, and a decline in the participation rate. However, looking at the three-month trend and considering other reports about the economy, it's like that the report understates the strength of the job market. For the fourth quarter as a whole, the labor market continued it's modest healing, though noticeable weaknesses remain.
Why did the unemployment rate decline from 7% to 6.7%? The main reason was that more people stopped looking for work, reducing the labor force participation rate to 62.8%, the lowest since early 1978. If the participation rate had not changed, the unemployment rate would have remained at 7%, Comparing December 2012 to December 2013, the participation rate declined from 63.6% to 62.8%. If the participation has remained constant, the unemployment rate would have also remained unchanged at 7.9% (so the entire decline in the unemployment rate in 2013 was due to a lower participation rate). During the last five years, the noninstitutional adult population has increased by about 11.7 million people while the labor force has increased by 60,000 (December 2008-December 2013, not seasonally adjusted since we're comparing the same month; given new seasonal adjustments, the seasonally-adjusted labor force has increased by 280,000). As a result, the participation rate has dropped from 65.8% in December 2008 to 62.8% in December 2013. If the participation rate had not changed, the unemployment rate would currently be 10.9%. As discussed elsewhere, some of the decline in the participation rate was expected due to the aging of baby boomers, but it is clear, based on the data, that the primary reason for declining unemployment in recent years is a smaller portion of people participating in the job market.
Let me stick with the negative before pointing out some bright spots. Job gains in December were led by retail trade (+55,000) and temp jobs (+40,000). Given a net increase of 74,000 jobs (87,000 in the private sector), that means the rest of the economy lost jobs. In addition, hours worked declined, confirming weakness in employment. What about the bright spots? Given that these are estimates, it's helpful to look at three-month trends. In the fourth quarter (Sep-Dec 2013), the economy added 515,000 jobs (530,000 in the private sector), for an average of 172,000 per month (177,000 in the private sector). Nearly 200,000 of these jobs were retail trade or temp jobs (nearly 40%); still a high proportion, but not over 100%!.
Here are some more interesting numbers regarding changes in employment by age. Which age group has experienced the largest employment gains in the last year? According to the household survey, those 55 and over achieved just over one-third of job gains; almost 30% went to those between 25 and 54; 27% to those between 20 and 24, and just under 10% went to teenagers.
Enough with the numbers. What are the key takeaways from this report? Despite the decline in the unemployment rate, the report was quite weak, led by weak job gains, primarily in low-paying sectors, and a decline in the participation rate. However, looking at the three-month trend and considering other reports about the economy, it's like that the report understates the strength of the job market. For the fourth quarter as a whole, the labor market continued it's modest healing, though noticeable weaknesses remain.
Friday, December 20, 2013
Job Market: Florida and Orlando
The latest snapshot of the state and local job market was released this morning, showing unemployment declining to 6.4% in Florida (seasonally adjusted) and 5.8% in Metro Orlando (not seasonally adjusted). In both cases, the rates were the lowest since 2008. Does that mean that unemployment is no longer much of an issue in Florida? While the job market has improved, readers of this blog can probably guess what I'm going to say next. A major reason for the decline in the Florida unemployment rate over the last year has been the decline in the labor force participation rate, which fell from 60.5% in November 2012 to 59.6% in November 2013 (after already falling quite a bit in prior years). If the participation rate had remained steady over the last 12 months, the unemployment rate would be about 7.7%, a small decline from last November's 8%. Though employment growth was modest in November (net increase of 6100 jobs, nearly 60% of which were in retail trade), that's coming off of two strong months of job growth in which the state economy added nearly 69,000 jobs.
Metro Orlando's unemployment rate declined as well, but some of it reflects seasonal issues (the local data released today are not seasonally adjusted) and some of it is likely due to a lower participation rate. That said, there is real improvement in the local job market, but not as much as implied in the official figures. Employment growth in both Florida and Orlando exceeded the national average over the last 12 months (2.7% in Orlando, 2.5% in Florida, 1.7% in the US). Leading growth sectors statewide (since Nov 2012) were retail trade and professional/technical services while food/drinking places and ambulatory health care services were the top gainers for Orlando over the last 12 months (though retail trade was responsible for half of the employment gains in November, primarily due to seasonal issues, i.e., Christmas!).
What are the key takeaways from this morning's report about the state and local job market? Both continue to improve, but the improvement is somewhat overstated due to fewer people participating in the job market (if you're no longer participating in the job market, you're not counted as unemployed). A relative strengthening of the Florida and Orlando labor markets is evidenced by employment growth statewide and locally exceeding that of the nation (over the last few months as well as the last year).
Metro Orlando's unemployment rate declined as well, but some of it reflects seasonal issues (the local data released today are not seasonally adjusted) and some of it is likely due to a lower participation rate. That said, there is real improvement in the local job market, but not as much as implied in the official figures. Employment growth in both Florida and Orlando exceeded the national average over the last 12 months (2.7% in Orlando, 2.5% in Florida, 1.7% in the US). Leading growth sectors statewide (since Nov 2012) were retail trade and professional/technical services while food/drinking places and ambulatory health care services were the top gainers for Orlando over the last 12 months (though retail trade was responsible for half of the employment gains in November, primarily due to seasonal issues, i.e., Christmas!).
What are the key takeaways from this morning's report about the state and local job market? Both continue to improve, but the improvement is somewhat overstated due to fewer people participating in the job market (if you're no longer participating in the job market, you're not counted as unemployed). A relative strengthening of the Florida and Orlando labor markets is evidenced by employment growth statewide and locally exceeding that of the nation (over the last few months as well as the last year).
Wednesday, December 18, 2013
Fed Begins to Taper
The Fed announced that they will reduce their bond purchases by $10 billion (will now purchase $75 billion per month). It emphasized that future tapering depends on economic data; further tapering will take place if the labor market continues to improve and/or inflation rises from its current low rate. At the same time, it stated that the "Committee now anticipates, based on its assessment of these factors (labor market, inflation, financial developments), that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal" (words in italics added for clarification). This represents a change from previous statements in which it stated that 6.5% unemployment was its threshold (though not a trigger, as emphasized by Ben Bernanke). In other words, previous statements said that the federal funds rate wouldn't be raised until unemployment declined to at least 6.5%. However, the unemployment rate has fallen more quickly than expected, not because of a very strong job market, but due in part to a declining labor force participation rate. Thus, the unemployment rate by itself is not the best gauge of the labor market. In the statement released today, the Fed stated that it will consider various measures of the labor market, not just the unemployment rate. Prior to today, most economists expected the Fed to begin to raise the federal funds rate in 2015. What about now? According to projections released by the Fed today, most members of the Fed still anticipate that the federal funds rate will begin to increase in 2015.
What's the key takeaway? The Fed thinks that the economy is strong enough to begin to reduce the amount of stimulus, though it still needs significant stimulus. It thinks that the recent decline in inflation is temporary and that inflation will increase somewhat in the next year or two (so deflation is not a serious threat). Though it changed the wording of the unemployment threshold leading to an increase in the federal funds rate, this is expected to have little impact on the timing of the increase.
Tuesday, December 10, 2013
The Latest Economic Reports: GDP and Employment
The government released two economic reports last week which, on the surface, indicates that the economy was strengthening in the second half of 2013. Of course there's more to it than that. Economic growth for the third quarter was revised up to 3.6% (from an initial report of 2.8%). Does that mean growth and demand were picking up? Not quite. About half of the growth for the quarter was due to an increase in inventories; final sales rose by 1.9% (in line with the previous trend). In fact, both consumer spending and business investment increased at a slower rate in the third quarter compared to the second quarter. This was offset somewhat by somewhat faster growth in state/local government spending. Also, another measure of economic growth, gross domestic income, rose by 1.4% in the third quarter (after growing more quickly than GDP in recent quarters). What does this mean? More of the same. The recent trend in economic growth has been about 2%.
The other major economic news was the November Employment report, which showed an increase of 203,000 jobs with the unemployment rate falling to 7%. Is this good news? Yes, but not as good as it appears on the surface. If you have read this blog before, you probably know what's coming next. The main reason for the decline in the unemployment rate in recent months (and recent years) is the decline in the participation rate (a smaller portion of the population participating in the job market). The participation rate fell from 63.2% in September to 63% in November (was 62.8% in October). If it had remained at 63.2%, the unemployment rate would have been 7.3% in November (a slight increase rather than a decline of 0.2%). The quality of the jobs added appeared to improve somewhat in November compared to previous months, with a higher portion of jobs in relatively high-paying industries such as construction and manufacturing and a smaller share in relatively low-paying industries compared to previous months.
Together, the two reports suggest that the economy continues to grow at a modest pace: an underlying growth rate of 2% with about 200,000 jobs per month.
The other major economic news was the November Employment report, which showed an increase of 203,000 jobs with the unemployment rate falling to 7%. Is this good news? Yes, but not as good as it appears on the surface. If you have read this blog before, you probably know what's coming next. The main reason for the decline in the unemployment rate in recent months (and recent years) is the decline in the participation rate (a smaller portion of the population participating in the job market). The participation rate fell from 63.2% in September to 63% in November (was 62.8% in October). If it had remained at 63.2%, the unemployment rate would have been 7.3% in November (a slight increase rather than a decline of 0.2%). The quality of the jobs added appeared to improve somewhat in November compared to previous months, with a higher portion of jobs in relatively high-paying industries such as construction and manufacturing and a smaller share in relatively low-paying industries compared to previous months.
Together, the two reports suggest that the economy continues to grow at a modest pace: an underlying growth rate of 2% with about 200,000 jobs per month.
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