Skip to content

Posts from the ‘Business Cycles’ Category

Marketplace of Ideas


Money Talks Illustration by Oliver Munday, The New Yorker

GDP grew more than expected last quarter, jobless claims remain low, and one survey-based index says manufacturing activity hit a three-year high in July. Here are a few other stories from the week’s economic news:

  • The verdict on the July jobs report is that it was a “mild disappointment.” Non-farm payroll employment rose by 209,000 last month, below gains of 298,000 in June and 229,000 in May. Since the start of the year, the labor force has grown by an average of 126,000 people per month. Over the same period, job gains have averaged 230,000 per month. If sustained, that difference is enough to keep the unemployment rate falling by more than 0.1 point per month. The unemployment rate did nudge up a bit in July, to 6.2 percent from 6.1 percent, but that follows an outsized 0.6-point drop between March to June. While unemployment is down from a peak of 10.0 percent during the recession, Justin Wolfers, writing for the Upshot, says it is still way too high. Wolfers observes that if you were to line up all the unemployed people in the country, they would stretch from New York to San Francisco. That is a striking visual, but what does it mean for the economy? Following the recession, unemployment peaked at 15 million people. That number is down to 9.7 million now, but it is still higher than the low of 6.8 million prior to the recession. AIER’s Business-Cycle Conditions analysis suggests the economy will strengthen in the second half of the year, which should keep the employment picture improving.

Read more

People and Businesses in Recessions

The stubbornly high unemployment following the last recession, coupled with corporate profits reaching record levels, can create a picture in the minds of people that businesses are having it easy at the expense of workers. This picture may be misleading. Recessions are also tough on businesses and business owners, but the data that reflect this are not nearly as prominent as the unemployment statistics.

The way we measure unemployment is fundamentally different from the way we measure businesses. Businesses can appear and disappear in response to economic conditions, but people tend to stick around no matter what.

There is no equivalent of a long-term unemployed worker in data on businesses. People can remain unemployed for months or years, and we will have data about these numbers. Businesses usually cannot remain without customer orders for many months and survive. Such businesses close their doors and disappear from data – data about sales, data about business profits, and other data.

Read more

Good but not Great: Our View of the March Employment Report

The March Employment Situation showed improvement in hiring and hours worked, reflecting a rebound from weather-distorted data in January and February. There were also upward revisions to the prior month’s jobs numbers, adding an additional 37,000 to payrolls. For the private sector, payrolls rose 192,000 in March, bringing the three-month average to 182,000, just slightly below the 12-month average of 189,000.

On the negative side, hourly wages fell 0.1 percent for the month, putting the year-over-year gains at just 2.2 percent. Faster wage gains are the key to improving consumer confidence and accelerating consumer spending. The aggregate payrolls index, which combines employment, hours, and wages, rose 1.0 percent in March and is up 4.0 percent for the quarter – in line with growth over the past few years. The rise in the payrolls index points to continued moderate growth in personal income, which in turn should support moderate gains in consumer spending.

In total, the report suggests that the first quarter ended with improving, though not great, momentum, and this positive momentum will likely carryover into second quarter GDP growth. These results are consistent with the results of AIER’s on-going business indicators analysis.

However, many of the gauges on the Yellen dashboard – particularly broader measures of unemployment and the number of marginally attached, discouraged, and involuntary part-time employees – remain weak. With the outlook for growth still considered to be below trend, and with inflation measures running below the Fed’s target, the Fed is unlikely to change the course of monetary policy based on this report.



Temperature is a measurement of the average kinetic energy of the molecules in an object or system. The higher the temperature, the more rapidly the atoms within the material move. Conversely, the colder the temperature, the slower the atoms move.

The cold weather experienced across many parts of the U.S. over the past few months has likely had a similar effect on the economy–slowing down activity. Our Business-Cycle Conditions (BCC) indicators reflect the effects of severe weather on the economy. The percentage of our leading indicators that expanded in February fell to 67 percent following four months at 100 percent. That’s the lowest reading since September 2009. Notably, the percentage of leaders expanding is still above 50 percent–meaning that more than half of our leading indicators still suggest ongoing economic growth.

So how will the slowing economy affect Fed officials’ outlook for the labor market and inflation, and therefore future policy? Federal Reserve Chair Janet Yellen stated last month that Fed officials suspect “unseasonably cold weather has played some role” in the recent softening in economic indicators, but she voiced uncertainty over how much.

Likewise, Philadelphia Fed President Plosser said, “We may not get a good handle on the economy for a few months and even then we’ll still be uncertain as we always are.”

At AIER, we continue to believe that recent weakness in the economy is weather related. Therefore, we expect the economy to gradually re-accelerate and for Fed officials to follow through on their stated guidance of continuing to taper asset purchases in measured steps.

Don’t Panic over GDP Revision

GDPAmong the things you should worry about, the downward revision to fourth quarter GDP growth reported by the Commerce Department should not be high on the list. The latest estimate puts the annualized growth rate at 2.4 percent, down from 3.2 percent in the advance estimate released in January.

Looking at the details, downward revisions were made to the estimates for consumer spending, exports, and state and local government spending. Partially offsetting those downward revisions was a significant mark-up to the growth rate of business fixed investment, to a 7.3 percent pace from 3.8 percent.

The news of weaker fourth quarter GDP comes on the heels of a series of sluggish economic reports, which analysts have largely attributed to the effects of prolonged severe weather across much of the country. Fed Chair Yellen addressed the issue in congressional testimony yesterday, noting, “We will try to get a firmer handle on exactly how much of the soft data can be explained by the weather and how much is due to a softer outlook.”

The downward revision to GDP growth raises concerns in some quarters that the economy had already begun to soften in the fourth quarter—corresponding to the months of October, November, and December—before severe weather hit in December, January, and February. But keep in mind that the government shutdown at the start of the quarter, in October, directly subtracted 0.3 percentage points from GDP growth through the government spending component. The extent of the impact of severe weather effects at the end of the quarter, in December, is harder to quantify. Without those two exogenous factors, though, we likely would have seen significantly stronger GDP growth last quarter.

There is no indication that the underlying trend in the economy has weakened substantially. A key measure of domestic demand, real final sales to private domestic purchasers, rose 2.8 percent in the fourth quarter, just below the four-year average growth rate of 3.0 percent. This suggests that domestic demand remains resilient. What’s more, the latest reading on AIER’s latest Business-Cycle Conditions (BCC) indicators points to “strong economic momentum” at the end of 2013.

So we believe that transient factors were largely responsible for the fourth quarter slowing of GDP, and that the improving underlying trend will reassert itself in coming months.

That said, first quarter GDP results are unlikely to be spectacular given the severe weather events in January and February—and we have yet to see what mother nature will bring us in March. But a catch-up in economic activity from weather-depressed levels early in the first quarter should be forthcoming.

With the underlying economy likely to stay on an improving track, we expect monetary policy to stay on course as well, with the Fed likely to continue to taper its large-scale asset purchase program over the next several meetings. For more on Fed policy and AIER’s economic outlook, stay tuned for our upcoming BCC report, due out next week.

[Photo: Flickr/NCPA]

Mixed Signals on the Labor Market?

Labor MarketFor those who look to the labor market as a guide to the overall strength or weakness of the economy, the latest report from the Bureau of Labor Statistics is a confusing read.

Non-farm payroll employment rose by just 113,000 in January after an anemic 75,000 gain in December. For perspective, the average monthly gain in 2013 was 194,000. The weak December number was widely interpreted as a result of bad weather, but that does not seem to be the case in January: During the week the employment data were collected (including January 12), the weather across the country was not as severe compared to normal as it was in December. So many analysts were actually looking for a bounce back in payrolls for January, making up some of the ground lost in December.

Interpreting the latest results, the New York Times reports that “the labor market has been healing more slowly” compared to the overall economy, but that doesn’t seem to square with the speedy decline in the unemployment rate, now at 6.6%, compared to 10.0% at the peak.

Because the unemployment data measure those who are actively seeking a job, it is possible for the jobless rate to decline if people become discouraged and give up looking for work. This is signaled by a drop in the labor force participation rate. But the participation rate actually rose in January, according to the Bureau of Labor Statistics. The further drop in the unemployment rate therefore suggests an actual improvement in labor market conditions.

So which is it? Is the labor market improving, as signaled by the unemployment rate, or is it weakening, as suggested by the payrolls numbers? The two sets of data are derived from different sources—separate surveys of households and “establishments”—so one set of data could be off the mark. But it is also possible that both are right. Here’s why: The unemployment rate is a lagging indicator of economic activity—it tends to rise or fall only after weakening or strengthening occurs in the overall economy. But payrolls are a coincident indicator—changes tend to occur at the same time as shifts in the overall economy’s growth rate. So the recent improvement in the jobless rate suggests the economy strengthened in the recent past, while the weaker payrolls data could be telling us that the economy is starting to slow right now.

Are there any leading indicators of the labor market—data that could give us a heads-up on changes that are about to happen in the economy? The weekly data on initial claims for unemployment insurance benefits fill that role. They tend to be volatile and unreliable on a short-term basis, but we can smooth out that volatility by looking at averages over a few weeks at a time. The latest four-week moving average, at 333,000, is actually down from the 343,000 average for all of last year. This would support a more positive view of the labor market.

What’s the takeaway from all these different signals? We at AIER suggest that you step back from the daily data flow, which can be erratic and unreliable, and look for the underlying trends in economic activity. Our latest Business Cycle Conditions report, which does just that, shows the economy on track for continued improvement this year.

[Photo: Wikipedia/Brian Harrington Spier]

U.S. Manufacturing Activity Slows in January

amazon warehouseThe Institute for Supply Management (ISM) Report on Manufacturing Purchasing Manager Index declined sharply from 56.5 in December to 51.3 in January. While the index is still expanding, it registered the lowest level since May 2013. The survey of purchasing managers gives an overview on the factory floor.

New orders and production slowed significantly but are still expanding. In a reversal, back-logged orders began contracting as firms found time to play catch up. Inventories declined for second straight month. Despite the run up in Q3 inventories, real-time management has caused a long-term decline in inventory levels. It may seem unbelievable, but Amazon is exploring shipping goods before they are ordered.

Managers blamed cold weather for slower input deliveries in January. Although no commodities were reported in short supply, input prices trended higher. Employment in manufacturing increased, but at a slower rate, offering little help to stubbornly high unemployment.

The ISM  is not hard data, but rather the views of managers in the trenches. The index does not account for firm size or magnitude of variable increase/decrease. AIER continues to monitor an array of indicators in the monthly Business Cycle Conditions Reports to gain a comprehensive view of the economy.

[Photo: Flickr]

Daily Inflation Surges

Another month of ho-hum inflation in December left the CPI annual figure at 1.5 percent, on the low end of the historical spectrum but squarely within the typical annual range.

The new year, however, has seen inflation as measured by daily metrics surge to a 0.4 percent monthly rate, the highest since April 2013. This is likely the effect of arctic temperatures across the country pushing natural gas energy prices upward. As the demand for home heating fuels has surged, so have prices.

02/2014 Inflation Report Moneyness

Our most recent Inflation Report coined a term, moneyness, meant to describe the potency that money exerts as it flows through the economy. Moneyness is a concept that helps us understand the ability of money to fuel the economy.

Economists use two primary metrics to measure the speed and magnitude at which money moves through the economy: the “money multiplier” and the “velocity of money.” The money multiplier measures how often a dollar gets loaned. Money velocity measures how quickly money moves in and out of consumers’ pockets. Both of these measures are at historically low levels. Moneyness just isn’t what it used to be.

Moneyness tends to be a slow-moving metric, one that we would expect to take several quarters to really turn around. But the recent spike in daily inflation reiterates that no economy is immune to inflation. Prices are, after all, subject to the laws of supply and demand.

In the case of home heating fuels, demand has experienced a shock, causing prices to rise dramatically.

Please see our February Inflation Report for a full explanation of moneyness and a historical perspective on inflation.

Separating the Signal from the Noise

Economic IndicatorsLast week played out a familiar pattern in the economic news cycle: An indicator surprises to the upside, and people rejoice: The economy is doing better than we thought! Hurrah! But the next indicator surprises to the downside, and people tear out their hair: The economy is falling to pieces! We knew the signs of strength were false—woe are we!

Last week’s employment situation report from the Bureau of Labor Statistics (BLS) showed a paltry 74,000 gain in non-farm payroll employment for December, prompting much gnashing of teeth and wringing of hands among Wall Street analysts. Is the labor market much weaker than we thought? Will the Fed rethink its plan to taper its asset purchase program?

We at AIER advise that you tune out the media response to the day-to-day economic data flow and tune in to the underlying trends in the economy. The monthly indicators of activity, such as those covering employment, industrial production, and retail sales, all provide valuable information. They are compiled objectively, using sophisticated and time-tested statistical techniques. But any single data point is a poor guide to the economy.

Read more

Thanksgiving Weekend Spending Reports are Often Unreliable

Black Friday SalesThe hype around “estimating” the results of Black Friday shopping seems to be exceeded only by the hype leading up to the big weekend. Almost immediately, numerous media sources “projected” gains or declines, declaring the shopping season a success or failure. For example, the LA Times reported  lukewarm demand during Black Friday and the New York Times called the weekend gloomy. Similarly, the National Retail Federation estimated a 2.7% decline compared to last year, based on a survey of 4,464 consumers. But ShopperTrak estimated a 2.3% rise, based on foot traffic measured by cameras in 60,000 stores nationwide combined with government and retailer data. As it turns out, most of these estimates are often off the mark.

November retail sales actually rose 0.7% and were up 4.7% from a year ago, a solid start to the holiday shopping season. These November results dispel much of the hyperbole and uncertainty surrounding Black Friday. In general, this is because it’s more appropriate to use the broader, more comprehensive government statistics when gauging levels of activity, rather than private “estimates” as the aforementioned sources have done.

Results for December retail sales won’t be released by the Census Bureau until January 14th. While anything could happen in the important shopping days between Thanksgiving and the end of December, our Business Cycle Conditions Report explains why we continue to believe in the basic fundamentals for consumer spending: jobs, income, debt, wealth, and consumer confidence. These all suggest that the combined November and December shopping season is likely to post gains in the same range as the 5.4% increase in 2011 and the 4.7% increase in 2012.

[Photo: blazzzinred/Flickr]