Paulo's Econ Watch

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October employment by category - chart pack

Posted on November 6th, 2015

The charts below show employment by category. The blue line is total employment in the category, the orange bar is monthly change and the red line is the linear regression in the last two years.

Total payroll increased 271k in October, after a 137k growth in September (which was revised down from 142k). The trend for the last 6 months slowed from 280k/month by the end of last year to 215k in the 6 months to October.

Private payroll increased 268k in October, after 149k growth in September (revised up from 118k).
The trend for the last 6 months slowed from 270k/month by the end of last year to 201k in the 6 months to October.

Most of the slowdown in the pace of job creation was concentrated in the goods producing sector (mining and manufacturing); a concern last month was that this slowdown could be spreading to the services sector but October's data (and revisions) showed a healthy pace of job creation. Overall, the 6-month pace of job creation in the goods sector slowed from 50k (at the end of last year) to close to zero, while in the services sector it slowed from 220k to 201k in the same comparison.

Employment categories
Total nonfarm
Total private
Goods-producing
Mining and logging
Construction
Manufacturing
Private service-providing
Trade, transportation, and utilities
Wholesale trade
Retail trade
Transportation and warehousing
Utilities
Information
Financial activities
Professional and business services
Temporary help services
Education and health services
Educational services
Health care and social assistance
Leisure and hospitality
Other services
Government


Total nonfarm (trend from 243.9 to 242.7 to 242.1/m)

Total private (trend from 238.2 to 235.6 to 235.0/m)

Goods-producing (trend from 37.5 to 34.8 to 32.4/m)

Mining and logging (trend from -0.5 to -1.1 to -1.5/m)

Constructions (trend from 23.2 to 22.4 to 21.8/m)


Manufacturing (trend from 15 to 14.1 to 13.0/m)

Private service-providing (trend from 200.8 to 200.8 to 202.6/m)


Wholesale trade (trend from 8.2 to 7.9 to 7.8/m)


Retail trade (trend from 24.1 to 24.0 to 23.9/m)


Transportation and warehousing (trend from 12.7 to 12.4 to 12.1/m)


Utilities (trend from 0.6 to 0.7 to 0.7/m)


Information (trend from 3.9 to 3.9 to 3.8/m)


Financial activities (trend from 11.4 to 11.6 to 11.8/m)


Professional and business services (trend from 53.5 to 53.7 to 54.2/m)


Temporary help services (trend from 12.2 to 11.9 to 11.7/m)


Educational services (trend from 4.6 to 4.2 to 4.1/m)

Health care and social assistance (trend from 37.8 to 39.1 to 40.9/m)

Leisure and hospitality (trend from 37.2 to 37.1 to 37.1/m)

Other services (trend from 6.6 to 6.2 to 6.1/m)

Government (trend from 5.7 to 7.0 to 7.1/m)

US labor market conditions suggest job creation higher than observed in Aug/Sep

Posted on November 4th, 2015

Labor Market Conditions

Extracting a common trend

One possibility to summarize labor market conditions is to extract a common trend from several labor market indicators.

Based on previous work from Atlanta Fed (Labor Spider Chart) and from Kansas Fed (Assesing Labor Market Conditions), among others, I’ve compiled a list of labor market indicators: unemployment rate, employment to population ratio, labor force growth, U6 unemployment, short-term unemployment,job losers, unemployment longer than 27 weeks, involuntary part-time, hires, separations, quits, NFIB employment, NFIB plans to hire, Challenger job cuts, jobs plentiful, jobs hard to get, initial claims, Michigan consumer confidence, ISM employment, temp help, average hourly earnings, weekly hours index, weekly payroll index, employment diffusion index, Gallup job creation index.

It is possible to consolidate all the information in the list of labor market indicators in a few orthogonal components using principal component analysis (PCA). The table below shows that the first seven factors explain 92.9% of the data set variance. The first two factors explain 79% of the variance.

The table below illustrates this:

Table: Principal Components - proportion of variance accounted by each PC
PC1PC2PC3PC4PC5PC6PC7
Standard deviation4.0642.3661.2040.9000.7880.7300.691
Proportion of Variance0.5900.2000.0520.0290.0220.0190.017
Cumulative Proportion0.5900.7900.8420.8710.8930.9120.929

It is possible, then, to reconstruct the private payroll time series using just the main principal components (PCs). The idea is that the filtered private payroll built this way would embed the common trend among all the labor market variables in the data set, and therefore filter away the idiosyncratic part of the payroll leaving only the true underlying data.

The table below shows the results of a linear regression of private payroll on the first two principal components. One can see that the first two factors are able to explain a high proportion of private payroll variability (R2=0.85).

Adding factors three to seven increases R2 to 0.91. Results can be seen in the table below.

Regression Results
Private Payroll
(1)(2)
Constant63.31*** (7.00)63.31*** (5.49)
PC150.63*** (1.73)50.63*** (1.35)
PC223.60*** (2.96)23.60*** (2.32)
PC3-42.02*** (4.57)
PC4-4.16 (6.13)
PC5-16.34** (6.99)
PC6-20.76*** (7.53)
PC723.83*** (7.99)
N166166
R20.850.91
Adjusted R20.850.91
Residual Std. Error90.16 (df = 163)70.70 (df = 158)
F Statistic461.55*** (df = 2; 163)229.75*** (df = 7; 158)
Notes:***Significant at the 1 percent level.
**Significant at the 5 percent level.
*Significant at the 10 percent level.

Results for Sep/2015

The chart below plots the actual payroll printed (dots) and the underlying trend using the first two PCs.

The latest private payroll was 118 thousands (Sep/2015), while the underlying trend suggest payroll running at 233 thousands/month.

The underlying trend obtained adding factors three to seven becomes a bit more volatile, but suggest an uderlying trend running at around 194 thousands/month.

Bottom line

  • Latest payroll was 118 thousands (Sep/2015).
  • The average of the last 3 months was 138 thousands/month.
  • The common trend extracted from labor market indicators suggests underlying payroll running at around 194 thousands/month.

Dr. Paulo Gustavo Grahl, CFA (2015-11-04)


US Personal Income and Outlays in September: strong consumption if you exclude energy

Posted on October 30th, 2015

Main takeaways:
  • Slowdown in consumption in September mirrors the slowdown earlier this year, since it is all due to energy:
    • Consumption of energy goods and services dropped 5.3% (not annualized) in the month.
    • Excluding energy, consumption rose 0.4% in the month.
  • Consumption and income seem to have weathered well the tightening of financial conditions.
  • Nominal (real) disposable income trend growth in the last 12 months growing at 3.3% (2.9%) and consumption trend growth at 3.6% (3.0%).
  • Core nominal (real) consumption (ex food and energy) growing at 4.5% (3.3%) in the last 12 months.
Personal spending and household income both rose 0.1% in September. Savings rate almost flat at close to 5% (the average observed since 2013).

Disposable income seems to be in a steady trend, while household consumption rebounded from the lows early in the year and is back to its previous trend growth.

Chart 1a) Income and expenditures, nominal, since 2010

The growth trend in the last 12 months for disposable income remained at 3.3% in September (3.2% in July and 3.1% in June), while the growth trend for consumption moved up to 3.6% from 3.4% in August (2.8% in July and 2.6% in June).

Cart 1b) Income and expenditures, nominal, last 2 years

Chart 2a) Income and expenditures, volume, since 2010

When looking at volumes (constant prices) the trend growth in real disposable income slowed to 2.9% in September (from 3.0% in August and 3.2% in July), while real consumption rose remained stable at 3% (2.8% in July).

Chart 2b) Income and expenditures, volume, last 2 years

The chart below shows slightly different measures of income. The green line shows private sector wages have clearly slowed down in recent months (from above average growth) and are now more aligned with the broader concept of disposable income. Overall, all measures are growing at close to 4% in the last 6 months.

Chart 3a) Different measures / concepts of household income, since 2010

Chart 3b) Different measures / concepts of household income, last 2 years

The chart below shows that almost all the recent stagnation in consumption was due to 'energy' consumption.

Chart 4a) Household consumption, core vs total, nominal, since 2010

Chart 4b) Household consumption, core vs total, nominal, last 2 years

Chart 4c) Household consumption, core vs total, volumes, since 2010


Chart 4d) Household consumption, core vs total, volumes, last 2 years

Breaking household consumption into goods and services show that the recent soft patch was entirely due to goods consumption -- but take a look in the chart of volumes: it shows goods consumption growing even faster than its recent growth trend.

Chart 5a) Goods and services consumption, nominal, since 2010

Chart 5b) Goods and services consumption, volume, since 2010

Digging further into goods consumption it is evident that most of the hit happened in nondurable (which includes gasoline), but when adjusting for prices nondurable goods seem to be back to the previous growth trend.

Chart 6a) Goods consumption (durables and nondurables), nominal, since 2010

Chart 6b) Goods consumption (durables and nondurables), volume, since 2010

Chart below focus only on nondurable goods (volume) to better spot the trends.

Chart 6c) Goods consumption (nondurables), volume, since 2010






US October ISM Manufacturing preview: regional PMIs suggest a small upside risk vs bloomberg consensus

Posted on October 30th, 2015

Bottom line: the average of forecasting models suggest October ISM Manufacturing at 50.6, a bit above market consensus of 50.0. Looking only at the regional PMIs suggest ISM @50.5.

With all the key regional PMI's and the flash Markit PMI already released let's take a look at what can be inferred for the ISM. The chart below plots the ISM against the first principal component of all the remaining PMI's (also adding the GSAI - Goldman Sachs Analyst Index). It suggests October ISM at 50.5, a bit above market consensus.

Expanding the analysis, one can torture the numbers to come up with several competing forecasting models. This can range from simple Box-Jenkins and univariate time series filters to models using the principal components of regional PMI's and a mix of both.

Important to note that a simple random-walk forecast for the ISM Manufacturing is very competitive in terms of the measures of forecasting accuracy.

The literature on forecasting often suggest that combining different forecasting models produces, on average, better forecasts -- so let's give it a try.

Table below show the average point forecast for June's ISM Manufacturing as well as the range of point forecasts provided by the models I've tried.
Important: do not confuse this range with forecasting uncertainty; the error margins of the forecasting models are well wider than what is implied in the range of point forecasts.


Average forecastPoint forecast rangeBloomberg surveyBloomberg rangeActual
Sep 201459.158.3-60.658.557.0-60.056.6
Oct 201457.456.5-60.256.255.0-58.659.0
Nov 201458.057.2-59.058.054.5-61.058.7
Jan 201554.352.9-55.654.552.0-56.553.5
Mar 201552.149.6-52.952.549.5-55.051.5
Apr 201551.450.2-52.452.050.3-54.051.5
May 201551.149.6-52.352.050.0-52.5
52.8
Jun 2015
53.051.4-53.953.252.0-55.0
53.5
Oct 2015
50.6
50.1-52.3
50.0
48.9-51.5





US 3Q 2015 advance GDP: domestic demand at solid rates and net exports soft

Posted on October 29th, 2015

Main takeaways:
  • Strong domestic demand:
    • Consumption increasing at 3% yoy.
    • Investment slowed to 3.4% yoy -- but excluding oil sector, investment is up 6%yoy.
  • Government consumption and investment turned positive in 2014 and is up 0.7% yoy.
  • Net exports will likely continue to contribute negatively to GDP -- but in the recent US history, soft export growth was never associated with weak overall income growth.


US GDP increased 2% yoy in Q3.

Domestic demand (GDP excluding net exports and inventories) is growing at 2.8% yoy.


Private consumption rose 3.2% yoy - similar to the growth rate observed in the last 2 years.

Private investment slowed down to 3.4% yoy...

...but excluding the direct (accounting) impact of oil, investment is growing at 6% yoy.

Government consumption and investment turned positive in 2014.

Exports increased 2% on average in the last two years (and 1.5% yoy in Q3). The slowdown in export growth started in 2013, and precedes the strengthening of the dollar, which dates mid-2014.

Imports rose 4.8% on average in the last two years (5.5% yoy in Q3).

As a result of the slowdown in exports and strong imports, net exports became a drag to GDP growth, similar to what had happened from 2000 to 2006.


Looking at 5-year cycles, the strengthening of the broad dollar index (in real terms) suggests net exports will continue to be an accounting drag to growth.

At face value, this relationship suggests that, by late 2017, the 5-year average contribution of net exports to growth will be around - 0.4pp. Given the performance of the last 3 years, this would imply an average contribution of net exports of around -0.75 percentage points over the next couple of years.


The chart below shows that it is unusual for 2-year average contribution of net exports to GDP to be close to or lower than 0.75pp...


...and all those episodes of very negative net exports contribution were associated with very strong domestic demand.
A quick look at those episodes show that exports growth slowed down. In 1997-1999 period, for example, the US dollar was strengthening, US real exports were sideways, and imports were growing fast at the same time the US economy was very strong.

US GDP in 3Q shows domestic demand growing at "solid rates"

Posted on October 29th, 2015

Main takeaways:
  • GDP growth in Q3 at 1.5%, close to market consensus.
  • Inventories cut 1.4pp from growth in the quarter...
  • ...but quarterly swings in inventories have not changed overall growth path in the recent past.
  • Domestic demand growth is growing at "solid rates" -- to use the upgraded sentence in the FOMC statement.
  • Growth remains above potential => labor market likely to continue improving.
US GDP rose 1.5% in 3Q, close to bloomberg consensus. Consumption increased a healthy 3.2% (contributing 2.2 pp) and investment growing 2.9% (contributing 0.5pp). Domestic demand growth appears consistent with FOMC's description of "increasing at a solid rates in recent months".

Inventories were the main drag, cutting 1.4pp from growth in the quarter. The positive surprise was the flat contribution of net exports against an expected drag.


Inventory changes can be a key component of quarterly changes in growth, but they have not changed the overall trend. The charts below plot GDP and Final Sales (GDP less inventories) together with a trend since mid-2009 and a trend in the last two years.
Both GDP and Final Sales share the same 2.0% growth trend since the end of the recession and 2.5% growth trend in the last two years.



Important to highlight that current pace of growth appears to be above potential, therefore hinting that underutilization of labor resources would likely continue to diminish.


US CB Consumer Confidence drops in October, but still implies a healthy consumption growth

Posted on October 27th, 2015

Main takeaways:
  • Conference Board consumer confidence dropped 5 points to 97.6 in October.
  • Consumers' perception of the employment conditions worsened in October, but it is still above the level observed in the second half of 2014 -- a period where employment growth was booming.
  • Consumers’ optimism about the short-term outlook dropped 2.8 points to 88. It often leads consumption growth...
  • ...but despite the current slowdown, CB expectations index is associated with a healthy 2.6% real growth in consumption.
The Conference Board Consumer Confidence Index reading for October dropped 5 points to 97.6. Despite the monthly drop, the level of consumer confidence appears to have stabilized at a relatively high level.


Consumers perception of the employment conditions also worsened in October.
Less consumers think jobs are plentiful...

...and more find jobs are harder to get...

... but the overall employment condition is still above the level observed in the second half of 2014 -- a period where employment growth was booming.

Consumer expectations off the highs and may have turned down...

...but the present situation index does not seem to have topped.

Consumers’ optimism about the short-term outlook often leads consumption growth...

...but despite the current slowdown, CB expectations index is associated with a healthy 2.6% real growth in consumption.

Latest CFNAI print suggests GDP running just above 2%

Posted on October 26th, 2015

Filtering US GDP noise using CFNAI

Main takeaways:
  • “Potential" GDP growth (the one associated with CFNAI at zero) is close to 2.7% using the sample since 1985.
  • Latest CFNAI reading of -0.09 in Sep/2015 is usually associated with GDP growth at 2.3%.

Introduction

The Chicago Fed publishes monthly the CFNAI - Chicago Fed National Activity Index, and index designed to gauge overall economic activity and inflation pressure.

The CFNAI is a weighted average of 85 monthly indicators of economic activity, covering four broad categories: production and income; employment; personal consumption & housing; and sales, orders & inventories. A complete list of the variables included can be seen here. The CFNAI is the first principal component (common trend) of the 85 time series.

The CFNAI is constructed to have an average value of zero and a standard deviation of one. A positive reading means the economy is growing above trend. The 3-month moving average of the index is often used to filter monthly noise. According to Chicago Fed research, moving from an expansion period to a reading below -0.7 suggests a recession has begun. A reading above +0.2 suggests the recession has ended, and above +0.7 suggests a period of sustained increasing inflation has begun.

The chart below shows the CFNAI from Mar/1967 to Sep/2015.

The CFNAI has a positive correlation with GDP growth. The chart below shows that GDP trend growth (as measured by a CFNAI at zero) is around 2.8% for the full sample (when based on a linear regression). When looking at a local linear regression (loess) model, GDP trend growth is estimated at 2.7%, and the latest CFNAI printed -0.09 (3mma, Sep/2015) is associated with GDP growth at around 2.5%.

Checking for parameter stability

Formal tests for structural breaks in the relationship between GDP growth and CFNAI (not shown) do not suggest a statistically significant break in the parameters,i.e., the GDP growth rate equivalent to CFNAI at zero can be assumed constant for the whole sample period.


One way to illustrate that is to plot the intercept \(\alpha\) for the rolling linear regression \(GDP_t = \alpha + \beta \times CFNAI_t + \epsilon_t\) starting with the first 10 years of data up to the most recent quarter. The dotted lines represent one standard deviation of the coefficient estimate and show that there’s no structural break in the coefficient \(\alpha\). However, there is a (not statistically significant) jump in the intercept by mid-1980s, which coincides with the period when inflation finally moderated after the oil shock.

Using data since 1985


The chart below plots CFNAI and GDP growth restricting the sample to start in 1985. GDP trend growth (as measured by a CFNAI at zero) is around 2.8% for the sample since 1985 (when based on a linear regression). When looking at a local linear regression (loess) model, GDP trend growth is estimated at 2.7% in the same period. The latest print of CFNAI is associated with GDP growth at around 2.3% (chart).

Using data since 2000

Restricting the sample to start in 2000 we obtain:


GDP trend growth (as measured by a CFNAI at zero) is around 2.5% for the sample since 2000 (when based on a linear regression). When looking at a local linear regression (loess) model, GDP trend growth is estimated at 2.4% in the same period. The latest print of CFNAI is associated with GDP growth at around 2% (chart).



Dr. Paulo Gustavo Grahl, CFA (2015-10-26)

Atlanta Fed Wage Growth Tracker: down to 3% in September

Posted on October 15th, 2015

The Atlanta Fed has developed a measure of wage growth using microdata from the CPS. For details see Wage Growth Tracker. Wages have slowed down in the last three months, from 3.2% in June to 3% in September. The male and female wages have diverged recently, but the overall trend since 2010 is clear: up!


The chart below shows that the (3mma) median increase in wages for individuals working in September 2014 and September 2015 was 3.0%, and compares with the most common measures of wage growth.


US Inflation 1-1 with oil prices in the last 10 years

Posted on October 15th, 2015

The chart below plots oil prices vs CPI inflation for the last 10 years. One can see that there is a close association.


Indeed, using only oil prices one could have forecast the recent prints of CPI inflation.


Meanwhile, consumer prices excluding energy (and food) are very close to the median observed in the last 15 years (shades in the chart below are 1 and 2 standard deviation). And this happens despite the strengthening of the US dollar.


So, why is everyone worried about deflation / lowflation in the US?



Paulo Gustavo Grahl, CFA

Random comments on macro data. Views are my own. Except when they aren't.