Charles Steindel

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The two most comprehensive data sets on economic activity at the state level are personal income and payroll employment. The wage component of personal income (much the largest) is benchmarked to the QCEW as is, of course, payroll employment. As a general rule, other state-level data (including the nonwage components of personal income and household survey numbers) are much more tenuous, based on less frequent benchmarks and limited indicative numbers.

On March 22, BEA released initial estimate of the state personal income numbers for Q4 2017 and, naturally, for 2017 as a whole. For 2017 as a whole (year average 2017 vs. year average 2016), state growth in personal income ranged from -0.3 percent (North Dakota) to a whopping 4.8 percent in Washington. Aside from North Dakota, other states with particularly low growth included Iowa (0.3 percent), Alaska (0.4 percent), Kansas (1.0 percent), Nebraska (1.4 percent), South Dakota (1.4 percent), Connecticut (1.5 percent), Kentucky (1.6 percent), New Mexico (1.8 percent) and Wyoming (1.8 percent). States other than Washington with notably strong growth included Idaho (4.7 percent),Nevada (4.4 percent), Utah (4.4 percent), Arizona (4.3 percent), Colorado (4.1 percent), California (4.1 percent), Georgia (3.8 percent), Florida (3.8 percent), and North Carolina (3.8 percent). Clearly, growth in the West (with the obvious exception of Alaska, as well as Wyoming) outstripped the rest of the nation, especially the Plains states, where a drop in farm income had a notable impact.

Data on per capita income for 2017 was also released: there is considerable dispersion by state and region. Connecticut, despite its somewhat low aggregate income gain remains number 1 among the states, with income of $70,121 per head (Connecticut’s population growth is also quite low). Mississippi, number 50, had per capita income of $36,346, barely half that of the Nutmeg State’s residents (the gap from top to bottom would be even larger if DC’s $76,986 was included in the ranking). The differences in per capital income lead to some interesting contrasts in aggregate personal income between states which have clear population differences: New Jersey’s aggregate income is larger than Ohio’s, Connecticut’s is almost the same as Missouri’s, and Texas’ is only about 10 percent higher than New York’s despite Texas now having a population nearly 50 percent higher than New York.

Of course, these per capita figures do not take into account differences in prices and taxes across the states. BEA does produce estimates of real per capita disposable income by state, but these annual figures are released with a substantial lag. The price data by state are derived from estimates of state level PCE deflators, and these can’t be compiled until the state consumer spending numbers are produced. It is true that states with lower nominal pretax per capita incomes also tend to have lower tax burdens and lower prices, so the gaps are reduced somewhat when these adjustments are made, though there is not a wholesale reversal of rankings. It is often forgotten, though, that the personal income numbers are net of property tax—many “high-tax” states, such as New Jersey, are such because of high property taxes--though some may question the corresponding inclusion of imputed rental income in the computation of income). Moreover, no adjustments are made for differing levels of state and local government services consumed by residents without payment.

In the preliminary Q4 2017 results, state growth from Q3 ranged from 0.2 percent (North Dakota) to 1.5 percent (Nevada). These figures could well change substantively with the receipt of more comprehensive QCEW and other data.

State Employment 
On March 13 BLS released January labor market estimates by state, and on March 23 the February numbers came out. These figures include the regular benchmark revisions to the QCEW of the payroll numbers, which had been incorporated into the national figures in the February 2 release. In late February BLS had issued revised household data, reflecting the introduction of new Census Bureau information. New seasonal adjustment factors were also rolled out with these releases.

BLS introduced some changes into the payroll data with the January release. First, as was the case in the national report, industry figures are now reported on a 2017 NAICS basis, updated from the prior 2012 NAICS basis. Second, BLS is now applying the same concurrent seasonal adjustment methodology to state payroll data that it has been using for several years on the national data. As is the case in the national numbers, the updated seasonal factors will, prior to annual revisions, only be applied to the newly reported and prior two months.

BLS does not force the sum of state payroll employment to equal the national total (in the household survey the sum of the state values for the labor force and employment does equal the national totals for not seasonally adjusted series). Thus, there is a sense in which the “sum of the states” figure is a separate estimate of the national payroll situation. With both the national and state data now benchmarked to the QCEW, it is a good time to check on how they compare.

The answer is that the state sums have shown a bit less robust growth than the national aggregate. Over the course of 2017 (December 2016 to December 2017), the national release shows that nonfarm payroll employment rose 2.188 million; the sum of the states’ figure was up 2.073 million. While that gap looks fairly modest, it was considerably larger in 2016: the national total was up 2.344 million, more than 300 thousand greater than the 2.035 million reported by the sum of the states. The levels of the two aggregates, though, are quite close (in January, the sum of the states total was 147.838 million vs. the national figure of 147.864 million). Comparable comments can be made about the not-seasonally adjusted data.

Turning to the February figures, the household survey numbers suggest that regional differences in the tightness of job markets may be, despite much discussion, fairly limited at this point in the cycle. The state with the highest unemployment rate in January was Alaska (7.3 percent), compared to the low state, Hawaii (a remarkable percent)—a 5.2 percentage point gap. In the lower 48 states the range was a much narrower 3.2 percentage points: ranging from New Mexico’s 5.8 percent to 2.6 percent in both New Hampshire and North Dakota.

On the payroll side, Texas had the largest absolute increase in February (40,500 jobs); in percentage terms the largest gains were in Tennessee and Virginia (both up .5 percent). The sum of the states’ aggregate showed a larger increase in February than did the national report (350,000 vs 313,000). Despite the size of the aggregate gain, most states reported virtually no change in payrolls from January to February (a few report small losses); only 11 states had increases that were deemed statistically significant. These gainers were in the Northeast (Massachusetts, New York, and New Jersey), the Middle West (Illinois and Michigan), the Southeast (Florida, Georgia, South Carolina, Tennessee, and Virginia), as well as Texas.

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The two most comprehensive data sets on economic activity at the state level are personal income and payroll employment. The wage component of personal income (much the largest) is benchmarked to the QCEW as is, of course, payroll [...]

State Personal Income and Employment

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On March 13 BLS released January labor market estimates by state. These figures include the regular benchmark revisions to the QCEW of the payroll numbers, which had been incorporated into the national figures in the February 2 release. In late February BLS issued revised household data, reflecting the introduction of new Census Bureau information. New seasonal adjustment factors were also rolled out with these releases.

BLS introduced some changes into the payroll data with this release. First, as was the case in the national report, industry figures are now reported on a 2017 NAICS basis, updated from the prior 2012 NAICS basis. Second, BLS is now applying the same concurrent seasonal adjustment methodology to state payroll data that it has been using for several years on the national data. As is the case in the national numbers, the updated seasonal factors will, prior to annual revisions, only be applied to the newly reported and prior two months.

BLS does not force the sum of state payroll employment to equal the national total (in the household survey the sum of the state values for the labor force and employment does equal the national totals for not seasonally adjusted series). Thus, there is a sense in which the "sum of the states" figure is a separate estimate of the national payroll situation. With both the national and state data now benchmarked to the QCEW, it is a good time to check on how they compare.

The answer is that the state sums have shown a bit less robust growth than the national aggregate. Over the course of 2017 (December 2016 to December 2017), the national release shows that nonfarm payroll employment rose 2.188 million; the sum of the states' figure was up 2.073 million. While that gap looks fairly modest, it was considerably larger in 2016: the national total was up 2.344 million, more than 300 thousand greater than the 2.035 million reported by the sum of the states. The levels of the two aggregates, though, are quite close (in January, the sum of the states total was 147.750 million vs. the national figure of 147.864 million). Comparable comments can be made about the not-seasonally adjusted data.

Turning to the January figures, the state numbers generally showed less rich gains than the national estimate: the sum of states figure was up 170.5 thousand against the national increase of 239 thousand (as these things go, this was not such a marked discrepancy: last September's weak national increase of 14 thousand was dwarfed by the 106 thousand loss for the sum of the states, while in October the strong national increase of 271 thousand was small in comparison to the outsized 475 thousand gain for the sum of the states). Only 3 states-California, Maryland, and New Jersey-reported job gains that BLS saw as statistically significant (North Dakota had a statistically significant loss of jobs).

The household survey numbers suggest that regional differences in the tightness of job markets may be, despite much discussion, fairly limited at this point in the cycle. The state with the highest unemployment rate in January was Alaska (7.3%), compared to the low state, Hawaii (a remarkable 2.1%)-a 5.2 percentage point gap. In the lower 48 states the range was a much narrower 3.3 percentage points : going from New Mexico's 5.9% to 2.6% in both New Hampshire and North Dakota.

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On March 13 BLS released January labor market estimates by state. These figures include the regular benchmark revisions to the QCEW of the payroll numbers, which had been incorporated into the national figures in the February 2 [...]

January State Employment Report

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Paul L. Kasriel

In an April 16, 2024 Bloomberg News article entitled “**[What If Fed Rate Hikes Are Actually Sparking US Economic Boom?](https://www.bloomberg.com/news/articles/2024-04-16/booming-us-economy-inspires-radical-theory-on-wall-street?accessToken=eyJhbGciOiJIUzI1NiIsInR5cCI6IkpXVCJ9.eyJzb3VyY2UiOiJTdWJzY3JpYmVyR2lmdGVkQXJ0aWNsZSIsImlhdCI6MTcxMzM5MTUyNSwiZXhwIjoxNzEzOTk2MzI1LCJh)**”, it is argued that the Fed’s increase in the federal funds rate from 0.08% in March 2022 to 5.33% in July 2023, which, in turn, pushed up other interest rates, stimulated US domestic aggregate demand for goods and services by increasing interest income to holders of fixed-income assets. Wow! This novel hypothesis, if valid, turns monetary policy theory on its head.

Let’s look at some data. As can be seen in Chart 1, there does indeed seem to be some positive correlation between the level of the federal funds rate and the level of personal interest income. For example, when the Federal Open Market Committee (FOMC) hiked the federal funds rate from the beginning of 2016 through the first quarter of 2019, personal interest income moved up sympathetically. Although personal interest income had started increasing in 2014, before the FOMC had begun raising the federal funds rate. Similarly, as the FOMC began hiking the federal funds rate in 2022, personal interest income starting rising, too. So far, so good for this hypothesis that FOMC federal funds hikes raise personal interest income.

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But, when we compare personal interest income to total personal income, the story changes (see Chart 2). As the federal funds rate increased in 2016 through early 2019, personal interest income as a percent of total personal income moved up only marginally. In the 2022 through early 2024 period, the ratio of personal interest income to total personal income did move up, but only slightly higher than the level that prevailed in 2020, when the federal funds rate was effectively zero percent, and considerably below the 2019 level, despite a much higher federal funds rate in the more recent period. If higher personal interest income were responsible for the recent resilience in aggregate domestic demand, personal interest income as a proportion of total personal income would be higher. Alas, another beautiful theory spoiled by ugly facts.

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Let me offer a different hypothesis as to why US aggregate demand has remained resilient in the face of the FOMC’s federal funds rate hikes starting in 2022. This hypothesis was hinted at by one of my readers, Tague Goodhue, Managing Partner at Pantheon Investments, LLC. A year or so ago, Mr. Goodhue observed that although the growth in thin-air credit (the sum of the monetary base and loans/investments at depository institutions) had slowed dramatically, the amount outstanding of thin-air credit remained exceedingly high, such that the ratio of nominal GDP-to-thin-air credit, or the “velocity” of thin-air credit was comparatively low in terms of the period from the recovery of the Great Financial Crisis up until the Covid negative supply shock. This low velocity on thin-air credit implied that the public’s demand to hold rather than spend the resulting liquid assets created by thin-air credit was relatively high. If I had paid more attention to Mr. Goodhue’s observation I might not have made one of the worst calls of my career, including my retirement. That bad call being that a recession would begin in 2023 because of the precipitous slowing in the growth of thin-air credit. I won’t make that mistake again, just a different one.

As I mentioned, the creation of thin-air credit results in the creation of liquid assets. Plotted in Chart 3 are quarterly observations of thin-air credit (the blue bars) and quarterly observations of households’ and nonfinancial businesses’ holdings of deposits (demand, saving and time) and money market mutual fund shares (the red line). As you can see, starting in Q2:2022 through Q4:2024, the levels of thin-air credit and household/nonfinancial business holdings of deposits and money market mutual fund shares are almost equal.

240418X3.jpg

Now, let’s look at the relationship between the private nonfinancial sector’s holdings of deposits and money market mutual fund shares and private Gross Domestic Purchases (private aggregate demand). This is plotted in Chart 4. It is, in effect, the inverse of a velocity concept. As can be seen, as of Q4:2023, the private nonfinancial sector’s holding of deposits and money market mutual fund shares as a percent of nominal private Gross Domestic Purchases remains high relative to percentage levels in years prior to the Covid negative supply shock of 2022. Thus, the private nonfinancial sector as of the end of 2023 still held an abnormally-high amount of liquid assets, assets that could easily be used to purchase goods, services and assets.

240418X4.jpg

As an aside, the data plotted in Chart 5 show that growth in a narrower variant of thin-air credit has picked up in the past two quarters, including its bank credit component. Could it be that the Fed’s monetary policy has eased in the past two quarters despite the fact the federal funds rate has been held steady at 5.33.

240418X5.jpg

In sum, I would argue that the “new” view on how monetary works, namely that higher federal funds rates are stimulative, is utter nonsense. (I was going to use another term, but this is a family publication). Rather, the massive amount of liquidity that the Fed created in reaction to the Covid negative supply shock has not disappeared in either an absolute sense, but more importantly in a relative sense. This implies that the private nonfinancial sector, at least through Q4:2023, still has excess funds that it can use to purchase goods, services and assets.

Another Beautiful Theory Spoiled by Ugly Facts

Joseph G. Carson

The Federal Reserve's persistent use of the 'forward guidance' policy tool, which involves offering forecasts of growth, inflation, and policy rates to influence financial market conditions, is a misguided approach. This tool operates under the assumption that the Fed can accurately predict the future, a notion that is inherently flawed given the unpredictable nature of economic conditions.

In 2023, policymakers used its forward guidance policy tool to signal an end to its tightening policy cycle, thinking it had or would, in time, arrest the cyclical inflation cycle. At the end of the year, it went further, as it offered forecasts for 2024 that promised three official rate cuts.

Yet, in hindsight, forward guidance backfired. Promises of no more rate hikes followed by promises of lower official rates triggered a 100-basis drop in long bond interest rates and double-digit increases in equity prices. The dramatic change towards much easier financial conditions has helped produce economic results that the Fed was not expecting in its forward guidance. (Note: Q1 real GDP growth is estimated at 3%, while core consumer prices rose at an annualized rate of 5%, compared to forward guidance growth estimates of 2% and core inflation of 2.4%).

The challenge for policymakers is how to navigate the modification or discontinuation of the forward guidance policy tool. Forecasts from forward guidance are updated only four times a year, with the next update scheduled for the June meeting. While the Fed chair can provide an informal update at any time, official policy announcements are made at regularly scheduled meetings. A sudden deviation from the last forecast could disrupt the financial markets and undermine the Fed's credibility, if it still has any.

Yet, the problem with "forward guidance" goes well beyond the announcement dates. Policymakers offer forecasts on growth, inflation, unemployment, and policy rates for two years and a longer-run equilibrium level for each. And, regardless of whether current economic conditions are too hot or soft or inflation is too low or high, the Fed's forward guidance forecasts say, through the magic of monetary policy, growth, unemployment, and inflation will gravitate to trend.

Like everyone else, the Fed has had difficulty forecasting what the economy will be like in the next year, let alone in two or three years. Yet, unlike other forecasters, policymakers link an official rate path to its forecasts. That linkage makes official policy more predictable. However, it also creates the potential for a significant easings in financial market conditions, similar to what occurred since late 2023, long before policymakers achieved their intended outcomes.

Policymakers spent time "normalizing" official rates, and now they need to "normalize" their policy statement, making it shorter and with fewer promises. Eliminating forward guidance would also be a positive step because even though it implies "it all depends," it still drives market expectations of official rates.

The Fed's "Big" Mistake---- Continuing to Use Its Forward Guidance Framework As A Policy Tool

I enjoy examining data. It used to be a hobby that I got paid to do. Now, it is just a hobby. Below are some random sets of data of that I found interesting. Perhaps some others will, too.

As shown in Chart 1, starting in 2022, household interest payments as a percent of their after-tax income (Disposable Personal Income) started rising after declining in 2020 and 2021. By Q4:2023, household interest payments as a proportion of after-tax income had moved up to 5.4%. This compares with 5.0% in Q4:2019, just before the Covid pandemic hit the US. Notice that the main driver in of this proportional increase in household interest payments has been non-mortgage debt. With many 30-year home-mortgage rates locked in at around 3% in 2020 and 2021, households have been able to increase their spending relative to their after-tax income by increasing consumer loans, such as credit card and auto debt. Although household debt-service ratios are rising, they are a far cry from those that obtained just before the onset of the Global Financial Crisis, but …

240401X1.jpg

… banks are starting to report rising delinquency rates on consumer loans (see Chart 2). For all insured commercial banks, the delinquency rate on consumer loans in Q4:2023 reached 2.62%, surpassing the 2.47% of Q1:2020. Again, 2.62% is a far cry from the 4.50+% delinquency rates experienced in 2009. The biggest delinquency problem seems to be housed in smaller banks (the blue line in Chart 2). At 2.97% in Q4:2023, the consumer-loan delinquency rate for smaller banks is closing in on 3.17% set in Q4:2008.

The Federal Reserve Bank Quarterly Report on Household Debt and Credit shows balances delinquent at least 30 days but less than 90 days as a percent of outstanding balances have been rising for both credit card (blue bars) and auto loan (red line) debt (see Chart 3). For both credit card and auto loan debt, newly-delinquent debt balances as a percent of total outstanding balances in Q4:2023 were the highest since 2011.

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The Federal Reserve remits to the US Treasury the amount of its revenues that exceed its expenses. The Fed’s principal source of income is the interest it receives on the securities it owns and loans that it made. Up until October 2008, the Fed’s principal recurring expenses were the salaries paid to the largest staff in the world of crack economists, salaries paid to other harder-working support staff, supplies and utilities. Starting in October 2008, the Fed began paying interest on the reserves it created. These reserves are held by depository institutions, primarily commercial banks. As of February 2024, 81.3% of the Fed’s portfolio of Treasury securities had a maturity greater than one-year. Plotted in Chart 4 are the monthly average interest rates on the interest the Fed pays on the reserves it has created, the 1-year constant-maturity Treasury security, the 5-year constant maturity Treasury security and the 10-year constant maturity Treasury security. Starting in December 2022, the interest rate the Fed paid on reserves exceeded the yields on Treasury 5- and 10-year securities. In other words, the Fed was experiencing negative carry on its Treasury portfolio.

240401X4.jpg

The negative carry that the Fed experienced on its portfolio in 2023 resulted in a net operating loss, which, in turn, meant that the Fed was unable to remit funds to the Treasury for the first time since at least 1954 (when the series began). Rather, the Fed, in effect, incurred a debit balance with the Treasury in 2023 to the tune of $115.7 billion, which represented about 1.8% of total federal expenditures in calendar year 2023 (see Chart 5). The Fed will not be remitting any funds to the Treasury going forward until it has a cumulative net operating surplus equal to $115.7 billion and any accumulated further losses. When the Fed does not remit funds to the Treasury, the Treasury either has to borrow or tax more to fund a given level of expenditures.

240401X5.jpg

The Fed’s net operating deficit in 2023 also affected the financial sector’s profits as calculated in the GDP accounts. According to the GDP accounts, the US financial sectors profits slipped by $41.8 billion in 2023 compared to profits in 2022 (see Chart 6). But, this decline in 2023 financial sector profits was due to the Fed’s loss of $143.8 billion, as calculated in the GDP accounts. After excluding the Fed’s 2023 loss, private financial sector profits actually increased by $157.3 billion in 2023 vs. 2022. All that interest paid by the Fed on reserves held by depository institutions probably boosted the 2023 profits of the private financial sector.

240401X6.jpg

As an aside, the Fed started paying interest on reserves in October 2008 in order to induce banks to hold an excess of reserves so as to prevent the federal funds rate from falling below its target rate of 1.00%. By December of 2008, the Fed had dropped the lower bound of its target range for the federal funds rate to zero %. So, the Fed could have eliminated paying interest on reserves at that point. But, if the Fed had ceased paying interest on reserves in December 2008 after having instituted the payment in October 2008, would not that have made the Fed look to be incompetent? Don’t get me started on why the Fed targets an interest rate rather than a monetary quantity.

Lastly, the month-to-month increase in February 2024 Personal Income of 0.28% seemed small to me considering that Employee Compensation increased by 0.70%, the largest monthly increase since January 2023. The mystery was solved when I looked at the component of Personal Income, Receipts from Assets, which includes interest and dividend payments received by households. This component of Personal Income contracted by 2.07%, not annualized, in February 2024 (see Chart 7). Interest income contracted by 0.39%, whilst dividend income contracted by a whopping 3.66%, again, not annualized. When Receipts from Assets is excluded, Personal Income in February increased by 2.35%, not annualized. So, one issue regarding the near future behavior of Personal Income is whether or not the large decline in Income Receipts from Assets was a one-off event. I think so. Regarding Employee Compensation in March 2024, we will get some pertinent information on this with the release of the March Employment Situation on Friday, April 5, 2024. As always, be aware that these are preliminary data. They will revised many times until we know the “true” state of Personal Income in February 2024 or March, for that matter.

Viewpoints: March 2018

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State Personal Income and Employment

January State Employment Report