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The Worst Best 1st Quarter GDP Report

May 2, 2019

It may be revised downward in the two revisions that will be made to last week’s first quarter U.S. GDP growth report but even if not, this was still a low-quality GDP report. Several one-time factors – lower imports, inventory buildup and higher Pentagon spending were key contributors to the surprising (well above consensus estimate) of first quarter GDP growth. Based on the one-offs, current quarter output is poised to slow. Arguably the single most important sub-component of GDP was soft in the 1st quarter and more consistent with 1 to 1.5% GDP growth. As the accompanying chart shows, final sales to private domestic purchasers rose only 1.3% on an annualized basis, the lowest in nearly a decade. Investment by businesses in equipment managed a meager 0.2% growth in QI. For my friends in the construction industry, fixed investment in private non-residential and residential structures each declined on an annualized basis. Despite the political cheering, I still hold to a sub 2% GDP growth in 2019.

Q1 2019 GDP

Categories: GDP, GDP Growth, U,S, Economy, U.S. economy
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Price Pressures are Building in the U.S. Economy

August 10, 2018

There is disagreement among economists over how big a threat is rising inflation. A tame consumer price index and modest U.S. wage growth have many economists arguing against further interest rate increases in 2018. But there are signs that higher prices are working their way into the economy. The most obvious example is in goods that are affected by the trade war (skirmish?) between the U.S. and just about every other nation on earth.  Steel, aluminum, lumber, and washing machines are examples that have increased the price of building materials for new homes, laundry equipment, beverages in cans, and some other consumer goods. Even if the self-inflicted harm of a trade war disappears, however, consumers are likely to begin feeling price hikes. So much of what consumers purchase is transported via truck that recent increases in transportation costs (see graphic), unless abated, will soon affect consumer prices.

Truck Transportation Prices

We see this with gasoline price spikes and their resulting impact on grocery prices. Today, strong demand and worker shortages in the trucking industry are dramatically raising the cost of truck transportation services that will eventually work their way into consumer prices.

Categories: consumers, Interest Rates, prices, U,S, Economy, Uncategorized
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Not With a Bang But With a Whimper

July 26, 2016

The U.S. economy is currently in its 86 month of an economic expansion that began in the summer of 2009 according to the National Bureau of Economic Research, the organization that officially dates U.S. business cycles. If the expansion lasts another seven months (as it will), it will be the third longest economic expansion in our nation’s history, trailing only the 120 month expansion from 1991 to 2001 and the 106 month expansion from  1961 to 1969.

The probability of recession in the next six months is low but the business cycle hasn’t been repealed, another recession will occur and almost certainly sometime before the end of 2019.  It’s just that none of the excesses – wage and price growth, high energy prices, inflationary pressures, inflated asset values, etc.- that have preceded past recession are much apparent in today’s economy and there aren’t signs that any are imminent.  What will make the next recession unique in the post WWII era is that it may very well occur before the nation has fully recovered from the previous recession, despite how long the current recovery has lasted.  “Fully recovered” here means that the actual output of the nation’s economy (GDP) reaches its potential output (for a brief explanation of actual and potential output of the economy see this Congressional Budget Office publication). This is somewhat akin to feeling the effects of a hangover in the morning despite not having enjoyed the celebration the night before.  Unlike the last recession, or most recessions, the next one may not begin with a bang but rather with a whimper.

No expansion can last forever; the U.S. and the NH economies are showing signs of slowing so it is difficult for me to believe that the nation can avoid slipping into recession sometime during the first term of our next president.  If that President is named Clinton it will most likely mean a one-term presidency as three consecutive terms for an incumbent party (relatively rare in itself) along with a recession in the third term (unless is happens very early in her term allowing sufficient time for growth prior to 2020) would almost certainly result in the nation looking for a change in the party controlling the White House.  If the President is named Trump he will no doubt blame the recession on the past administration and that may help give him a pass in 2020, but a recession will challenge his claim as someone who knows how to create jobs, while his penchant for populist and nationalistic themes aren’t generally viewed as monetary and fiscal policies effective in combating a recession.  His administration’s and his personal  response to the recession might determine his fate (does anyone else remember the images of the first, single-term, President Bush zooming around in his cigarette boat off the coast of Maine while the U.S. was in the middle of the 1990-91 recession?).

The past two months have been marked by one very bad and one very good month for job growth in the nation and in NH.  I  advocate looking at three months of job growth numbers in discerning employment growth trends and a prudent man would wait for the release of the nation’s July job growth numbers on August 5th before making any proclamations about the direction of the U.S. or NH economy.  But a prudent man doesn’t write this blog and I am comfortable knowing that when you right too early it often seems like you are wrong so here are a few of the more accessible  indicators that I believe suggest slower economic growth moving forward.  There are others but jobs and revenues are what interest policymakers most so they are highlighted here.

  • The rate of private sector job growth has slowed.
  • The number of industries that are adding jobs versus the number shedding jobs (the employment diffusion index) has declined.
  • Help wanted advertising is declining.
  • Nationally, state corporate income tax collections appear to have peaked.

Slowing Private Employment Growth

Recognizing that there is always some level of unemployment in the economy, the nation and NH are at or very near “full employment,” making  job gains harder to obtain.  Full employment in the latter stages of recovery is the most obvious rationale for slower job growth going forward.  As the chart below shows, growth in private sector employment nationally is still solid but has been trending downward for some time while growth in NH accelerated in 2015 but appears to have peaked in early 2016.

private sector job growth

The Breadth of Job Gains Narrows

I use a 13 industry private employment diffusion index to assess the breadth of job growth across the private sector economy.  When more industries are adding jobs than are shedding jobs, the index is below .50 and the greater the number of industries adding jobs compared to those shedding jobs the higher is the index number.  The chart below shows that both the national and NH diffusion index have dropped, with NH’s decline of particular concern as it now stands below .50 on a three month moving average basis. NH’s employment numbers are often substantially revised so this index value may not be as bad as it appears here but the U.S. number still points to a slowdown.

diffusion index

Historically, significant declines in NH’s employment diffusion index have signaled turning points in the state’s labor market. The relationship between NH’s diffusion index value and the rate of year-over-year private sector job growth four months later is strong (a correlation of .82).  A simple linear regression of the NH diffusion index on private sector employment growth suggests the last two quarters of 2016 will see private employment growth in NH of about 0.6% on an annualized basis compared to the current rate of growth of about 2.0%.  Clearly not in danger of recession but definitely a slowdown.

diffusion index and emp growth

Fewer Help Wanted Ads

Nationally and in NH the number of help wanted ads has declined in recent months.  In NH the relationship between the three month moving average of help wanted ads and job growth in the quarter that follows is strong (R= .80).

NH US Help Wanted

Growth in State Corporate Income Tax Collections Has Peaked

Nationally, the rate of growth in state corporate income taxes is declining (chart below).

corporate tax revenues

The chart shows that compared to all states combined, the growth in NH’s business tax revenues is increasing as the growth rate nationally declines.  This despite the fact that NH’s private sector employment growth has been at about the U.S. average over the past year.  What is different in NH is the inclusion of NH’s Business Enterprise Tax revenue along with NH’s tax on corporate profits in the chart above.  Both private employment and wage growth have accelerated in NH over the past year. Wages and salaries paid by a business are the largest portion of the Business Enterprise Tax base so even as business profits grow more slowly, business tax revenues can be buoyed by substantial increases in overall wages and salaries.  While not a measure of the payroll of NH businesses, wage and salary income increased in NH by 8.6 percent between QI 2015 and QI 2016 compared to 5.3 percent nationally.  That increase has helped boost Business Enterprise Tax revenue and overall business tax revenue in NH in a way that it cannot in other states (most other states would see the change in individual income tax revenue).  The trend is depicted in the chart below that shows the growth rate of the annualized business profits portion of NH’s business tax revenue has slipped while the growth rate of the portion more dependent on wages and salaries has seen accelerated growth.  A slowing growth rate in private employment in NH implies slower growth in wages and salaries and business tax revenues in the state growing more similarly to the pattern among states nationally.  This will occur just as a budget surplus and strong overall revenue growth have increased pressures for additional state spending that had been muted by several years of relatively weak business tax and overall revenue growth.

NH business tax revenue growth

It is impossible to predict monthly payroll employment growth for a small state like NH (or any state for that matter) but I predict employment growth of about 120,000 jobs nationally in July but anything between 100,000 and 150,000 would be in line with the indicators highlighted in this post and consistent with a gradual slowing of economic growth nationally and in NH. Not soon but at some point that slowing will become a recession and that will be the reward for winning the White House and for new and incumbent occupants of statehouses across the nation.

Categories: Election, Employment Growth, Help Wanted, NH Economy, Recession, U,S, Economy
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Presidential Campaign Impacts on U.S. Job Growth and Implications for NH

June 9, 2016

The May U.S. jobs report with downward revisions to the March and April job numbers was bad, not bad enough that you should start stocking canned goods and bottled water in your basement but bad nevertheless.  The impact of 35,000 striking Verizon Corp. workers on the May numbers is cited as one explanation for the weak report but there were 25,000 temporary workers hired by the company during the strike so the overall impact was actually fairly small.  Seasonal adjustment factors (the statistical procedure used to smooth regular annual fluctuations in employment data throughout the year– things like Christmas hiring, summer employment of youth etc.) seem to be more problematic in recent years and that may also be a contributor.   Of course it is possible that hiring was just weak, plain and simple.  Hiring will continue to weaken, I just don’t think job growth is really as weak, and the slowdown as rapid, as the May jobs report suggests.

Presidential Campaigns Appear to Impact Job Growth

The first rule of politics is to forget all of the rules of economics and that is more problematic now that the national political climate seems to increasingly influence real economic variables. Think of the impact that debt ceiling debates and government shutdown threats have had on economic activity recently.  With almost no focus in the current presidential election on sound economics and economic policies it is easy to see how politics could  contribute to a weak May jobs report (when the empirical evidence doesn’t provide a clear explanation for economic events it is hard to go wrong blaming politics and politicians).  But there is some evidence that presidential elections can temporarily depress job growth.  The uncertainty of a presidential election, especially in a year without an incumbent, and the people and policies that candidates may employ in their administration can give pause to businesses investment and hiring decisions. The uncertainty surrounding future economic and fiscal policies in a presidential election year should arguably be greater several months prior to the election rather than a month or two when the election outcome and policy directions become clearer.  I compared average private sector job growth (government employment should not be affected) in the U.S. during the months of June-August in presidential election years, to the average job growth from September (of the year prior to the election) to May (of the election year).   Since 2000, in each presidential election year the average private sector job growth from June-August significantly lagged average job growth over the prior nine month (Sept-May) period. The pattern held in 2008 but because the U.S. economy was in free fall for other reasons it is not included here.   In years with no presidential election this generally was not the case (years such as 2002, 2003 and 2007 when the U.S. was entering or exiting a recession are exceptions).

UncertaintyJob growth in NH is going to slow regardless of political uncertainties given existing labor force constraints.  NH is essentially at full employment and the nation is close. The longer a recovery lasts the greater are the chances that job growth will slow.  Still,  there are more uncertainties regarding the presidential candidates and the policies that could affect business and the economy in this election than is typical in a presidential year so it is not unrealistic to think that politics is already affecting hiring and investment decisions.

Will New Hampshire Follow the National Trend?

State level job growth numbers for May will be released June 17th.  In a small state like NH monthly job growth can be especially volatile. Up or down  conclusions about a state’s economy should not be drawn from a single month of employment data.  A three month trend in private sector employment is a better reflection of the direction of a state’s economy and by that metric NH has been on a roll.  The chart below shows that after several years of below national average private sector job growth, the pace of job growth in NH is now at a level equal to the U.S. average.  Moreover, the growth trend for NH has accelerated while the rate of private sector job growth in the U.S. has decelerated.  The rate of private sector job growth NH is going to slow nonetheless,  just as it has in the nation overall.

private sector job growthI don’t think the private sector job growth trend has gotten enough attention in NH.  Many (including me at times) focused on several years of NH’s subpar total non-farm (including government) employment growth.  But as I have noted in prior posts, the percentage drop in government jobs in NH is among the largest of any state in the nation, masking some of the strength of hiring trends in NH’s private sector.  The chart below shows how both private sector and state and local government employment in NH have grown since each sector’s pre-recession peak.  Private sector employment in NH peaked in February of 2008 and after shedding 6% of those jobs during the recession NH has regained that many plus an additional 3%.  State and local government employment in NH did not peak until April of 2010.  It takes a couple of years for property valuations to reflect economic conditions so the largest declines in property valuations – and thus local revenues and employment- occurred as the recession had ended.  State and local government employment in NH is about 8.5% lower than at its peak, with local government shedding about 6,800 jobs and state government about 1,000 jobs.

public vs private sector growth

Labor Market Response in NH May Be Too Late

For too long in NH private sector job growth remained consistent at a subpar rate despite a large increase in help wanted ads in the state.  A combination of slow or no labor force growth and a mismatch between job opportunities and the skills of job seekers were the causes and not a fundamental erosion of NH’s business climate as I argued in this post.

NH US Help Wanted

But now help wanted ads in NH and the nation are slipping (chart above) and while the recovery isn’t over we are getting better more slowly.  Unfortunately, that is occurring just as the labor market conditions –  low unemployment, rising wages, and signs that NH is once again seeing net in-migration from other states, are all resulting in a more rapid expansion of the NH labor force, the key ingredient wages

the state has lacked in recent years to achieve a faster pace of  job growth.

NH Labor force growth

A Bumpy Ride for the Remainder of 2016

I am frequently in error but rarely in doubt and in this post  last fall I was confident NH would again exceed the U.S. rate of employment growth (it is still possible but not likely) and that NH would see a 2.5% increase in total employment in 2016 (that is not going to happen). In fairness, private sector job growth has been on a more than 2% growth pace for the year and I did include two caveats in my forecast last fall: first that labor force growth in NH would have to accelerate (in part due to a resumption in net in-migration to the state) and while the labor force is once again growing in NH,  it is at a pace that may not sustain the 2% plus growth that NH’s private sector is currently on.  Second, the decline in government jobs would have to abate – it hasn’t.  A month ago at a presentation at a local community bank I downgraded my job growth forecast for NH in 2016 from 2.5% to 1.8%.  With more recent national economic data – including the May jobs data and March/April revisions, readings from my PolEcon NH Leading Economic Index, along with the uncertainties produced by the nation’s political climate, I now believe the rate of growth will be just 1.2 to1.4 percent.

Categories: job growth, Labor Force, NH Economy, presidential election, Uncategorized
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The Incredible Shrinking Labor Force

January 10, 2014

The employment growth report released today by the U.S. Bureau of Labor Statistics was disappointing for sure (74,000 job growth when 200,000 was the consensus estimate) but December employment numbers are more prone to seasonal adjustment errors because of the large amount of hiring that occurs prior to the holidays and this year presented even more issues because of the shortened time between Thanksgiving and Christmas (Thanksgiving was on the 28th, its latest possible date).  December’s employment growth may still be disappointing but my bet is that December’s numbers will be revised up in future months.  Help wanted ads have been increasing for the past six months and the labor supply/demand ratio has been falling.  Unless there is an even bigger “skills gap” than many think, that implies stronger job growth than was reported in December.

The best thing about the report was that it helps focus more attention on the nation’s incredible shrinking labor force, a problem that significantly lowers the potential economic growth of our nation’s economy.  Too many media reports on the nation’s and NH’s economy focus almost entirely on the unemployment rate.  That is especially true in New Hampshire where, because of our demographics (a lower percentage of harder to employ populations are in our state’s labor force), we always have a lower unemployment rate than the U.S.   No matter how weak job growth is in New Hampshire, many will cite our lower than the U.S. unemployment rate as a sign of economic strength.  Some reporters (hat tip to John Nolan of the Rochester Times) have avoided confusing job growth with the unemployment rate but too many in our state confuse the two.

The problem of smaller or slower growing labor force is an important and vexing one for New Hampshire and the entire U.S. A smaller or slower growing labor force implies slower economic growth because the output of the economy grows when more people are producing, when more capital (equipment and machinery) allows the same number of people to produce more, or when knowledge/technology/skill levels improve and allow greater productivity per worker. So unless productivity is increasing to compensate, a shrinking or slow growth labor force means slower economic growth.

There are several reasons a labor force can shrink or grow more slowly. Some related to economic conditions, some related to demographics, and some (such as the current situation) seem to have an unexplained element. Nationally, population trends have meant slower labor force growth as lower birth rates over the past few decades and as baby boomers reach ages where labor force participation starts to decline. NH benefited from strong population growth in the 70’s and especially 80’s and 90’s. That provided a strong boost to our economy, especially since much of that pop. growth was the result of in-migration from other states by skilled, well-educated individuals (a good characterization of our in-migrants from other states is a two wage earner, married couple family, probably both college educated with children). That migration added tremendous talent to our labor force and made NH an attractive location for many business looking to employ skilled workers.

The labor force grows or shrinks by population growth in the working age population, or by changes in labor force participation (those of working age who choose to be in the labor market or not). NH and the U.S. have seen slower population growth in the working age pop., but more disturbingly, both have seen a decline in the labor force participation rate.  Yes NH still has a relatively higher participation rate but the trend decline is similar to the U.S.  The graph below shows the decline in participation among individuals aged 25-64 (to minimize schooling and retirement decisions as possible causes).

nh us labor force particpation 25-64

If your working age population isn’t growing, having high labor force participation rates is critical for economic growth.   NH has had very high participation rates compared to the U.S. because of our favorable demographics (few people who traditionally have lower levels of participation – minorities, those without a high school diploma etc., and because our population overall has higher levels of educational attainment that is associated with labor force participation).  Women in NH especially tend to have higher participation because of higher levels of education and lower fertility rates (child-bearing lowers labor force participation).  I have written many times on gender and employment (search on gender in this blog) and the “feminization of the workforce” is a theme (non-pejoratively as the father of daughters) I believe is continuing.   As the chart below shows, virtually all of the decline in the labor force participation rate in NH is a result of a reduction in the rate among males.

male female labor force participation

Labor force participation always drops during recessions as workers get discouraged and drop out.  What is especially troubling today is that labor force participation continues to be weaker even as the economy has improved. Some has to do with demographics as more of the working age population ages into groups with lower participation rates although participation among those with higher levels of educational attainment seems to have held-up best. The best explanation of why labor force participation has continued to be lower than in the past is that the skills required by the economy have been changing, making many workers less qualified than before and creating more discouraged workers. I think that is part of the issue but I don’t think the “skills gap” could have so abruptly hit the labor market to cause participation rates to fall so much over the last half-decade. The skills gap has been a more slowly growing phenomenon.  Among older men without a post-secondary degree, participation has been declining for decades.  The skills mismatch between the supply of labor among males and the demand has been ongoing for decades.  Did it peak so suddenly in the past decade to create a permanent decline in the male workforce?  I don’t think so, additional factors are contributing.  I remember in the 70’s when the first real oil crises hit (related to Middle East wars) and a lot of job losses resulted, especially in mill towns like the one I festered in as a youth.  Someone whom I thought was wrong about almost everything said to me at that time “a man should never be ashamed of any job he takes to feed his family.”   I didn’t think much about that back then, but today it seems especially appropriate, even as it appears to be increasingly a relic of an outdated ethic.  Economic conditions today aren’t the result of people not wanting to work and a labor market where many individuals are working at jobs that don’t fully utilize their skills is not desirable.  Changes in and the performance of the economy are  obviously largely responsible for declining labor force participation.   Still, with so many troubling indicators for males  – especially younger males (educational performance and attainment, household formations etc.)  emerging over the past decade or more , I can’t help wonder how much of the decline is the result of a lost ethic among my gender.

Categories: employment, Gender, Labor Force
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If We Can Beat the Mayan Apocalypse Why Not the Fiscal Cliff?

December 21, 2012

If the Mayan apocalypse can be postponed (I am not sure exactly at which time it is supposed to occur so I may be speaking too soon here) then surely the U.S. Congress can agree to actions to avoid the fiscal cliff.  Lawmakers are poised to give us over $500 billion in tax increases and over $100 billion in spending cuts to begin the new year.  The fiscal cliff is a  pretty big lump of coal as a gift to begin 2013.

What is extraordinary about the cliff’s self-inflicted harm is that it appears  almost all sentient beings realize what needs to happen. More importantly, there also appears to be substantial agreement on most of the actions necessary to avoid the economic harm resulting from the fiscal cliff.   Spending clearly has to be cut  just as surely as revenues have to be raised.

deficit trends

With so much apparent agreement on actions needed to avoid the damage, it is hard to understand the calculus of lawmakers as the lack of an agreement begins to  demonstrably affect business and consumer confidence as well as financial  markets.  Congress always comes up with a temporary fix for the alternative minimum tax and can easily do so again.  Almost everyone wants the payroll tax cut to expire (for different reasons – Republicans because they don’t like the temporary nature and believe it has no incentive for work and saving and Democrats because of its impact on the Social Security trust fund).  There is little support for extending unemployment benefits.  It seems like neither party really wants the spending cuts (Republicans opposed to defense cuts and Democrats to non-defense cuts).   There is disagreement over the tax increase for high income individuals included in the Affordable Care Act and Medicare reimbursements for doctors but those are a miniscule portion of the cliff’s effects.   Beyond all the posturing,  the fight in congress is really  about whether to extend tax cut provisions to 98% or 100% of U.S. households.

cliff effects on growth

I know I am simplifying here.  Even with many agreed upon temporary  fixes,  longer-term solutions must be found.  But lawmakers could still salvage strong economic benefits by avoiding the worst of the cliff’s impacts in the short-term while resolving longer-term issues in the first-half of 2013.  Such a “grand bargain”  would both increase business and consumer confidence and set the nation on a more sustainable budgetary and debt path that would quickly overcome any of the short-term negative impacts  resulting from necessary spending cuts and revenue increases.

Categories: Fiscal Cliff, Fiscal Policy, Politics, Spending, Tax Revenue, U,S, Economy
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