Skip to content

Posts by Robert Hughes, Senior Research Fellow

Keep the Fed’s Decision in Perspective

The Fed’s decision yesterday to raise the federal funds target rate by ¼ point, from a range of 0.25 – 0.50 to 0.50 – 0.75, sent shockwaves through markets. To be more precise, it wasn’t the increase itself, which was possibly one of the most widely anticipated moves in decades. Rather, it was that the Federal Open Market Committee (FOMC) raised its rate policy outlook for next year to include three ¼-point increases instead of two, raising the fed funds target for year-end 2017 to 1.4 percent.

This is being interpreted as a seismic shift in the Fed outlook. Whether one additional quarter percentage point is seismic is up for debate, but it is important information. Any change in the Fed’s assessment of the economy and outlook for future rate policy will affect the economy, but it should be kept in perspective. The forecasts (also known as dot plots) are updated quarterly, allowing participants to incorporate new economic data into their expectations. It also allows participants to reevaluate the scope and impact of potential future outcomes based on new information such as the surprise presidential election results and the potential impact on the economy from new policy.

As critics of the Fed will note, its forecasting prowess is far from perfect. Its members and staff are among the most talented economists in the profession, but they cannot accurately predict the future with any certainty. To that point: In December 2015, the FOMC projection for the fed funds rate at the end of 2017 (the period for which the FOMC just changed its latest forecast) was 2.4 percent. In the March 2016 projection, participants lowered their outlook for 2017 to 1.9 percent; in June, they cut it to 1.6 percent; in September, it was cut again to 1.1 percent; then finally in the latest projection, it was raised to 1.4 percent. So, the forecast is back to about where it was in June, and still well below prior forecasts.

Yes, it does represent an increase to the forecast following a string of cuts and that is a positive sign, but it should not change most views of the economy.  Everyone inside and outside the Fed see the same economic data and are aware of new developments such as the results of the presidential election. They are doing what every economist does: They update their assessments of the economy and its likely future path based on the latest information about where we are in the business cycle. The Fed’s updated outlook is confirmation of this process, but not a dramatic new piece of information.

What we know:

  • The 2007-2008 recession was the most severe since the Great Depression.
  • The economic recovery has been slow by historical measures, and growth has been erratic.
  • Inflation has been well below the Fed’s long-run target.
  • Much progress has been made over the past seven years, with the unemployment rate falling to 4.6 percent in November, and inflation measures moving closer to 2 percent.
  • The Fed has been exceptionally accommodative through quantitative easing programs and extremely low interest rates.
  • The Fed has said (and shown) that it will be cautious in removing monetary support for the economy.
  • The Fed has now raised rates for the second time in two years.
  • The Fed’s best ESTIMATE AT THIS POINT is that it will continue to raise rates SLOWLY.
  • The current projection calls for three ¼-point increases next year.
  • The Fed is data dependent and the path of future rate increases is not locked in.
  • Like all economists, its forecasts are subject to revision.

Tracking and understanding developments in Fed policy and FOMC participants’ projections is important. But it should be kept in perspective. It is just one piece of information that should be considered in a prudent and thoughtful analysis of the economy.

Click here to sign up for the Daily Economy weekly digest!

More Positive News For the Economy

The Federal Reserve yesterday afternoon released data on household balance sheets and income for the third quarter of 2016, and the results look favorable.  Household net worth rose to a record $90.2 trillion on gains in assets, amid modest increases in liabilities.

Equity holdings rose by $494 billion over the previous quarter, while the value of real estate grew by $554 billion. Total assets rose by $1.7 trillion. On the liabilities side, total liabilities rose by $152 billion, a 4 percent growth rate. Taking on more debt may be a sign that Americans are more confident in their own economic situation.

In another positive development, household savings rates remained at a relatively healthy level. Household savings measured in the flow-of-funds accounts tend to be volatile quarter to quarter, but on a two-year moving average basis, the household savings rate is slightly above 10 percent, well above the low of a 4.4 percent rate in 2007. But that still remains below the mid-teens rates that were prevalent from the mid-1960s through the mid-1980s.

The combination of gains in jobs and incomes, along with solid household balance sheets, rising net worth, and improving consumer attitudes are all positive developments for the economic outlook.

Click here to sign up for the Daily Economy weekly digest!

Mixed Details Behind Big Unemployment Rate Drop

A mixed November jobs report suggests the economic expansion continues to grind ahead and the labor market continues to tighten, but wage growth faltered.

A surprisingly large and somewhat misleading drop in the unemployment rate, to 4.6 percent, was the result of job creation and people leaving the workforce. Average hourly earnings fell 0.1 percent in November after good gains in October and September, leading to a year-over-year growth rate of 2.5 percent.

Still, there is enough favorable data in this report and other economic reports to make a December rate hike highly probable. However, the Fed is likely to continue on a path of very gradual rate increases in the future.

The November employment report showed mixed signals, with the economy adding 178,000 jobs for the month; 156,000 of them were from the private sector. The three-month average stands at 176,000 jobs per month while the 12-month average is 188,000.

All of the increase in private payrolls came from private services (+139,000), led by Professional & Business Services (+63,000), Education & Health Care (+44,000), and Leisure and Hospitality (+29,000).

Retailing jobs declined by 8,300 after falling 8,900 in October, while financial employment rose by 6,000. Goods producing industries gained 17,000, with construction up 19,000, manufacturing down 4,000, and mining up 2,000.

Wages were down 0.1 percent for the month but up 2.5 percent over the past 12 months. The length of the average workweek was unchanged at 34.4 hours.

When hours are combined with payroll gains and wages, the index of aggregate weekly payrolls, a proxy for take-home pay, was unchanged in November and is up 3.9 percent over the past 12 months – close to the multiyear average around 4 percent.

The unemployment rate ticked down to 4.6 as the participation rate fell to 62.7 from 62.8 percent in October. The broader U-6 underemployment rate fell to 9.3 percent.

Click here to sign up for the Daily Economy weekly digest!

As 2016 Ends, Big Economic News Awaits

The Thanksgiving holiday is over and the final month of 2016 is approaching. The coming week brings a crowded list of important economic events, and beyond it, some big economic news to watch in December.

The most notable news this week should come on Friday with the monthly report from the Bureau of Labor Statistics on developments in the jobs market.

On Thursday, the Institute for Supply Management will release its survey of manufacturers, while BLS provides the weekly tally of initial claims for unemployment insurance. And on Wednesday, the payroll processor company ADP will release its estimate for the Friday jobs number.

Also on Wednesday, the Fed will release the Beige Book report, a qualitative assessment of the economy from the twelve regional Fed district banks that will be used in FOMC deliberations.

All these data have been showing relatively positive trends recently.  New updates for all these are important as the final Federal Open Market Committee meeting for 2016 is scheduled for December 13 and 14. It’s widely expected that the FOMC will raise interest rates by 25 basis points at the December meeting. Comments from FOMC members suggest most believe that the economy is strong enough to withstand an interest rate increase. An increase in the federal funds target rate would be the first since December 2015. Our business cycle leading indicators support this view, having shown improvement over the past few months.

Meanwhile, attention will continue to be focused on the developments in the transition to a new president. That attention includes announcements (and speculation about announcements) for cabinet positions and the implications for future policy. Furthermore, the strong performance of U.S. equity markets since the surprise election results remain a major topic.

Finally, the last month of the calendar also brings attention to U.S. consumers and the holiday shopping season. Early reports of Black Friday shopping are already widespread. As we do each year, we caution against reading too much into these very early, very preliminary estimates.  There is still a long way to go before the ball drops in Times Square, and lots of new data to analyze along the way.

Click here to sign up for the Daily Economy weekly digest!

Existing Home Sales Keep Rising

We received more data this morning that show the housing market with continued upward momentum.

Sales of existing homes rose 2.0 in October to their highest level in nearly 10 years, according to data from the National Association of Realtors.  That follows a 3.6 percent gain in September.

There were gains across all four regions with the South, the largest region by activity, increasing 2.8 percent, followed by the Midwest up 2.3 percent, the Northeast up 1.4 percent, and the West gaining 0.8 percent.

The inventory of homes for sale fell by 0.5 percent to 2.02 million.  That decline pushed the months’ supply (inventory divided by the current selling rate) to 4.3 months, down from 4.4 months in September, and the lowest since January.

While the levels of activity for sales and new construction remain at moderate levels by historical measures, the limited supply has kept the market fairly tight. Still, housing is likely to be a small net contributor for GDP growth in 2017.

Jobs Report Shows a Continuing Economic Expansion

A moderately upbeat October jobs report suggests the economic expansion continues to grind ahead and the labor market continues to tighten. The October gains in jobs and wages suggest the economy is maintaining positive momentum in the early part of the fourth quarter.

Accelerating wage gains (up 0.4 percent for the month and 2.8 percent over 12 months) on top of a good pace of jobs growth should provide support for further increases in consumer spending heading into the holiday shopping period.

Generally favorable data in this report and other economic reports make a December rate increase probable. However, the Fed is likely to continue on a path of very gradual rate increases in the future.

The October employment report showed moderate strength, with the economy adding 161,000 jobs for the month; 142,000 of those were from the private sector. The three-month average stands at 176,000 jobs per month, while the 12-month average is 196,000.

All of the increase in private payrolls came from private services (+142,000), led by education & halth care (+52,000), and professional & business services (+43,000).

Retailing jobs declined by 1,000 after adding 22,000 in September. Financial employment rose by 14,000, and leisure and hospitality added 10,000.

Goods producing industries  were unchanged on balance, with construction up 11,000, manufacturing down 9,000, and mining down 2,000.

Wages were up 0.4 percent for the month, and 2.8 percent over the past 12 months.

The length of the average workweek was unchanged at 34.4 hours.

When hours are combined with payroll gains and wages, the index of aggregate weekly payrolls, a proxy for take-home pay, rose a strong 0.5 percent for October, and is up 4.4 percent over the past 12 months – good news for consumer spending.

The unemployment rate ticked down to 4.9 percent as the participation rate ticked down to 62.8 from 62.9 percent in September.

Click here to sign up for the Daily Economy weekly digest!

Rising Wages a Positive Sign Heading Into Holidays

The preliminary estimate for personal income for the third quarter shows a 3.9 percent increase, the same pace as in the second quarter, according to new data released by the Bureau of Economic Analysis this morning. These are solid though not spectacular gains.

Let’s look inside the details of the report on personal income. Wages and salaries — what workers see in their paychecks —  rose by 4.7 percent at an annual rate, also matching the pace of the second quarter. That pace is a good sign for consumers as the always-important holiday spending season approaches.

On a year-over-year basis, wages and salaries are rising at 3.8 percent pace, towards the middle of the range since the end of the last recession, but somewhat below the gains during previous economic expansions. However, inflation is also lower now than in previous expansions, leaving real wages and salaries growth looking more impressive.

As a proxy for wages and salaries, we track the Aggregate Payroll Index from the monthly employment report. This indicator is up at a 3.9 percent pace over the past 12 months through September.  We will get data for October in the employment report due out this Friday.

With the unemployment rate at 5 percent for September (October data will come out this Friday as well) and hourly earnings growth accelerating, consumers are likely in a good position for holiday spending this year.

Click here to sign up for the Daily Economy weekly digest!

New Home Sales Tick Upward in September

Sales of new single-family homes rose 3.1 percent in September to a pace of 593,000 homes, from a downward revised 575,000 pace in August (see chart). Though new home sales have been trending higher since hitting a post-recession low of 270,000 in February 2011, the overall level of activity remains tepid by historical standards.

Over the past four decades, new homes sales typically ranged between 600,000 to 800,000 during expansions. During the housing boom of 1996 to 2005, new home sales rose to a peak of almost 1.4 million, as the chart shows. The 593,000 pace for September is just approaching that lower end of the typical range, more than seven years into the current expansion.

The pace of new home building has generally paralleled the pace of sales, resulting in a relatively tight supply. The number of new homes for sale in September fell 0.4 percent to 235,000, resulting in 4.8 months’ worth of supply for September. Since 1970, the months’ supply for new homes in the U.S. has typically ranged between 5 and 8 months during economic expansions.  During recessions, the months’ supply can spike as high as 11 or 12 months. Conversely, during the housing boom, months’ supply often fell below 4.

In general, low interest rates combined with jobs and income growth should be supportive of the housing market. However, caution among buyers, lenders, and builders may be restraining a more rapid recovery.

Click here to sign up for the Daily Economy weekly digest!

Gasoline, Housing Push Up Cost of Living

Inflation trends tend to evolve slowly, though individual components like energy prices or food prices can be volatile month to month. There are three key points to note from the September CPI report from the Bureau of Labor Statistics:

First, the total CPI rose 0.3 percent for the month, led by a large 2.9 percent spike in energy prices (gasoline in particular), and a sizable 0.4 percent increase in the cost of shelter (see the red lines in table above).

Second, the total CPI is up 1.5 percent over the past year while the core CPI, which excludes volatile food and energy prices, is up 2.2 percent over the past year. The total CPI is running well below the 2.0 percent Fed target (and below its long-term average of 2.1 percent), while the core CPI is slightly ahead its long-term average of 2.0 percent (see black lines in table, as well as Chart 1).

Third, within the core, price pressures are NOT evenly distributed.  Price pressures continue to be concentrated in services such as shelter, medical care and education, while core good prices are essentially flat or falling slightly – though medical care goods are the notable exception (purple lines in table, as well as Chart 2).

These long-term trends are likely to remain in place for some time to come.

Click here to sign up for the Daily Economy weekly digest!

Our Economic Index Moves Into Positive Territory

Our index of leading indicators moved back above 50 for the first time since January, reflecting a more positive tilt to recent economic data. That’s according to our October edition of Business Conditions Monthly, which we are releasing today.

However, as we cautioned when our index first fell below 50, one month does not make a trend. A single reading of 54 is not enough evidence to suggest the economy is on a significantly stronger trajectory. We still believe the results over the past eight months are consistent with an overall slow-growth environment and continued economic expansion.

One significant risk for the medium-term outlook is the fiscal position of the federal government. Federal government debt is up a whopping 123.1 percent since the end of 2007. Even more disturbing is the debt-to-GDP ratio for the federal government, at 97.5 percent at the end of the second quarter of 2016, compared with a long-term average of 67.2 percent.

Adding further concern is the projected path of federal debt and deficits. The latest Congressional Budget Office projections show annual budget deficits widening over the next several years, exceeding 4 percent by 2022 from just over 3 percent currently. As the presidential election approaches, greater attention needs to be paid to U.S. fiscal policy.  Tax policy, spending policy, and the U.S. fiscal position are critical to the long-term health of the U.S. economy.

Click here to sign up for the Daily Economy weekly digest!