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.
Wednesday, March 19, 2014
Monday, March 17, 2014
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.
Friday, March 7, 2014
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.
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.
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.
Friday, February 7, 2014
January Employment Report
The January job market report showed that the unemployment rate declined to 6.6% (down from 6.7%) and the economy added 113,000 jobs (142,000 in the private sector). As usual, there were mixed messages in the report, but it was somewhat disappointing. One question that keeps coming up is how much weather is affecting the data (though the data is seasonally adjusted, this has not been a normal winter). However, one would expect that construction is more sensitive to the weather than most other industries and it added 48,000 jobs in January (accounting for more than one-third of the job gains in the private sector). If weather was a major issue in January, you would think construction would have lost jobs. What I think happened is that weather affected construction in December and there was a rebound in January; construction added 26,000 jobs over the last two months (13,000 per month), which is probably a more accurate gauge of construction employment.
While gains in construction employment was artificially high in January, retail trade employment was artificially low. Why do I say that? Employment in retail trade - sporting goods, hobby, book, and music stores fell by 22,300 in January after rising 21,500 in the previous quarter (resulting in little change since the late summer).
Which sector is responsible for slower employment growth in recent months? The private sector averaged about 200,000 new jobs per month from Nov 2012-Nov 2013, but only 115,000/month in the last two months. Professional & Businesses services had average gains of 58,000 jobs per month from Nov 2012-Nov 2013, but only 20,000 per month in the last two months; health care added 20,000/month from Nov 2012-Nov 2013, but only 1,000/month in the last 2 months. Together, they account for 57,000 out of the 85,000 fewer jobs per month (about two-thirds of the slowdown in employment gains). It'll be interesting to watch this trend in the coming months (hard to explain this slowdown on the weather).
The household survey showed a decline in the unemployment rate accompanied by a increase in the participation rate, which is a good combination. The household survey tends to be more volatile than the establishment survey (used to estimate employment gains). For example, the survey showed an increase in the labor force of more than half a million people in January after a similar decline in the fourth quarter, resulting in little change since September. Over the last year (Jan 13-Jan 14), the labor force declined by about 240,000 people, resulting in a decline in the participation rate from 63.6% to 63%. Yes, here it comes... If the participation rate had remained constant (at 63.6%), the unemployment rate would be 7.5% instead of 6.6% (note: it was 7.9% in Jan 2013).
What are the key takeaways from the report? The labor market continues to struggle, with employment gains slowing in recent months, independent of the weather. Two months do not make a trend, but possibly a start of a trend. It will be interesting to see if next month's report confirms the slowdown in employment in health care and professional/business services.
While gains in construction employment was artificially high in January, retail trade employment was artificially low. Why do I say that? Employment in retail trade - sporting goods, hobby, book, and music stores fell by 22,300 in January after rising 21,500 in the previous quarter (resulting in little change since the late summer).
Which sector is responsible for slower employment growth in recent months? The private sector averaged about 200,000 new jobs per month from Nov 2012-Nov 2013, but only 115,000/month in the last two months. Professional & Businesses services had average gains of 58,000 jobs per month from Nov 2012-Nov 2013, but only 20,000 per month in the last two months; health care added 20,000/month from Nov 2012-Nov 2013, but only 1,000/month in the last 2 months. Together, they account for 57,000 out of the 85,000 fewer jobs per month (about two-thirds of the slowdown in employment gains). It'll be interesting to watch this trend in the coming months (hard to explain this slowdown on the weather).
The household survey showed a decline in the unemployment rate accompanied by a increase in the participation rate, which is a good combination. The household survey tends to be more volatile than the establishment survey (used to estimate employment gains). For example, the survey showed an increase in the labor force of more than half a million people in January after a similar decline in the fourth quarter, resulting in little change since September. Over the last year (Jan 13-Jan 14), the labor force declined by about 240,000 people, resulting in a decline in the participation rate from 63.6% to 63%. Yes, here it comes... If the participation rate had remained constant (at 63.6%), the unemployment rate would be 7.5% instead of 6.6% (note: it was 7.9% in Jan 2013).
What are the key takeaways from the report? The labor market continues to struggle, with employment gains slowing in recent months, independent of the weather. Two months do not make a trend, but possibly a start of a trend. It will be interesting to see if next month's report confirms the slowdown in employment in health care and professional/business services.
Friday, January 31, 2014
Monthly Income and Spending Report
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.
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.
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.
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