Haver Analytics
Haver Analytics

Viewpoints: 2023

  • State labor markets were generally lackluster in August. Only 5 states saw statistically significant increases in payroll, while 3 had declines. North Carolina picked up 17,500 jobs while Missouri lost 13,700. Montana a .7 percent increase; Hawaii a .8 percent loss.

    10 states had statistically significant increases in unemployment from July to August, with New Jersey and Wisconsin both up .3 percentage points. North Dakota and South Carolina had significant .1 percentage point drops. Nevada continues to have the highest rate of any state in the nation, at 5.4 percent. Nevada, and DC had unemployment rates at least one point higher than the national average of 3.8 percent. Alabama, Arkansas, Florida, Hawaii, Kansas, Maine, Maryland, Massachusetts, Missouri, Montana, Nebraska, New Hampshire, both Dakotas, Oklahoma, Rhode Island, Utah, Vermont, and Virginia, were all at least a point lower, with Maryland at 1.7 percent.

    Puerto Rico’s unemployment rate was an unchanged 6.2 percent. The island added 3,900 jobs, bringing the number above May’s recent high.

  • The August report on consumer prices shows that inflation cycles are not linear; inflation patterns rotate, and service sector inflation cycles are hard to break.

    In August, headline consumer prices rose 0.6%. That represented the most significant month-over-month increase since June 2022. Also, that broke a 13-month pattern of successively lower headline annual inflation readings, proving that inflation cycles are not linear, up or down.

    Second, commodity (or goods) prices rose 1% last month, which accounted for much of the acceleration in the headline. That was only the fourth time in the previous fourteen months that consumer commodity prices increased, illustrating that inflation patterns tend to rotate over time, with some items growing almost every month and others occasionally.

    Third, in August, consumer service prices rose 0.4% and 5.9% in the past twelve months. Since the mid-1980s, consumer services inflation cycles have reversed after the federal funds rate exceeded the inflation rate, sometimes substantially. Consumer service inflation is still above the current fed fund rate range of 5.25% to 5.5%. Several analysts argue that the Fed tightening cycle is over. The history "bookie" says the odds of another rate hike are higher than what analysts think.

  • The US has mandated that light vehicles become much more efficient in coming years in an effort to lower greenhouse gas emissions. For example, light vehicles will be required to average nearly 50 miles per gallon across automaker production by 2026. The requirements are set to become even more stringent thereafter, with the ultimate goal of pushing automakers toward an all-EV fleet in coming decades. However, as a practical matter, there are increasing costs to driving emissions to zero. The improvements in fuel efficiency for many models are reaching diminishing returns, so the benefit to the environment of further gains is minimal. In addition, the country is not ready for an all-EV fleet. As EV production ramps up, the costs of needed raw materials will skyrocket, driving up vehicle prices.

    Policymakers could speed up progress toward lowering US gasoline usage and vehicle emissions with existing hybrid technology instead. To do this, policymakers would have to stop rewarding ever-higher miles per gallon for some models and instead focus on eliminating the worst gas-burning vehicles. This would bring down fuel usage in the meantime until the economy is readier for wide-scale EV production.

    Diminishing Returns. We have made a lot of progress for many vehicles that now get 33 to 50 miles per gallon. At 33 miles per gallon, it would take huge further gains to save little in terms of gasoline usage.

    Chart 1 shows miles per gallon on the horizontal axis and the corresponding gallons used to drive 100 miles on the vertical axis. By basing estimates of fuel efficiency on miles per gallon gauges, the gains seem much bigger than they are. As fuel efficiency rises – measured by miles per gallon – the fuel savings decline.

  • The Federal Reserve Bank of Philadelphia’s state coincident indexes in July suggest a slowdown in the rate of growth. 8 states saw declines in their indexes from June, with West Virginia and Montana down about .6 percent. No state had a gain larger than Pennsylvania’s 1 percent. Massachusetts and Maryland were again the leaders in growth over the last 3 months, but in both cases the increases were not above 3 percent (Massachusetts’ gain rounded up to 3 percent). 36 states had growth of 1 percent or lower, with 5 experiencing outright declines (Montana was down 1 percent). The 12-month numbers look better, with Massachusetts up a remarkable 7.3 percent, and Maryland rising 6.4 percent. Arkansas and Missouri had increases of less than 1 percent.

    The independently estimated national figures of growth over the last 3 months (.60 percent) and 12 months (3.25 percent) both look to be roughly in line with what the state figures suggest.

  • Only 4 states saw statistically significant increases in payrolls in July. Florida picked up 44,500 jobs, while Vermont had a .9 percent gain. The large increase in Vermont is a bit puzzling, since the disruptions caused by major flooding in that state occurred in mid-month, when the payroll count occurs (leisure and hospitality jobs did fall). Still, Vermont jobs had dropped sharply in June, so the July gain may be mostly normalization, perhaps related to seasonal adjustment issues.

    7 states had statistically significant drops in unemployment from June to July, led by Pennsylvania’s .3 percentage point fall. Nevada continues to have the highest rate of any state in the nation, at 5.3 percent. 3 states had significant .1 percentage point gains, though a number of others also experienced point increases, led by New Jersey’s .2 percentage point boost. Nevada, DC, and California all had unemployment rates at least one point higher than the national average of 3.5 percent. Alabama, Maine, Maryland, Massachusetts, Montana, Nebraska, New Hampshire, both Dakotas, Utah, Vermont, and Virginia, were all at least a point lower, with New Hampshire at 1.7 percent.

    Puerto Rico’s unemployment rate moved up to 6.2 percent. The job count increase of nearly 5,000 did not reverse all of June’s decline. The recent moves were mainly in the public sector.

  • Are we there yet? Incoming information on the economy tells policymakers they have not achieved economic conditions (below-trend growth and slack in the labor markets) to ensure inflation continues to slow. And that spells bad news for investors because policymakers have indicated that slowing inflation alone is not a sufficient reason to prevent additional rate hikes.

    At the July 25-26 FOMC meeting, policymakers stated that "a period of below-trend growth in real GDP and some softening in labor market conditions as needed to bring aggregate supply and aggregate demand into better balance and reduce inflation pressures sufficiently to return inflation to 2 percent over time."

    Tightness in labor markets has lessened somewhat, but a 3.5% jobless rate in July tells policymakers that they are far from a situation in which there is enough slack in labor markets to limit wage and price pressures.

    Yet, the economy's current growth performance is a more immediate concern to policymakers, especially after raising official rates over 500 basis points and expecting the lagged effects from higher rates to result in slower growth.

    GDPNow, published by the Federal Reserve Bank of Atlanta staff, offers a running assessment of current quarter GDP growth. The GDPNow model uses much of the same source data that BEA, the government agency responsible for estimating GDP. But GDPNow differs from the old GDP flash report, which BEA prepared because it does not use detailed or imputed data in the official estimates, so it can overstate and understate growth for any particular quarter. Nonetheless, it has credibility since a Federal Reserve Regional Bank published it.

    The latest estimate posted on August 16 shows Q3 GDP running at a 5.8% annualized rate, roughly three times above consensus estimates and far above what the Fed considers trend growth. The latest estimate only includes preliminary data for July, so two-thirds of Q3 economic activity is missing. Regardless of what's missing, it sends a message of strong and broad economic momentum in the early part of Q3.

    Even if the final Q3 growth number ends half as fast as the August 16 GDPNow estimate, it should tell policymakers the lagged effects of when rising official rates run below inflation are much less, or even non-existent, as when rising official rates are above inflation. And the current stance of monetary policy is even less restrictive than advertised, given the level of QE.

    So the level of official rates needed to slow the economy has yet to be reached, and whatever level policymakers or investors thought was appropriate should be raised by 100 basis points or more because of QE.

  • In this commentary I will explain the relationship between the shape of the yield curve, the behavior of nominal thin-air credit and the behavior of real aggregate demand for goods and services. Specifically, I will argue that there is a positive relationship between the “slope” of the yield curve and the percent change in thin-air credit. Further, I will argue that there is positive relationship between percent changes in real thin-air credit and percent change in real domestic aggregate demand for goods and services. For example, the steeper the slope in the yield curve, the faster will nominal thin-air credit grow. In turn, the faster will real domestic aggregate demand grow. The yield curve concept, I will be referring to is the spread between the yield on the Treasury 10-year security vs. the overnight federal funds rate (hereafter referred to as the yield spread). The importance of the federal funds rate in this yield spread will be explained later in this commentary. Thin-air credit for the purposes of this commentary will be defined as the sum of the asset categories of securities and loans on the books of depository institutions (currently, primarily commercial banks). “Thin-air” refers to the fact that the system of depository institutions has the unique ability among various other private lending entities to create credit figuratively out of thin air. (The central bank also has the ability to create credit out of thin-air. In fact, the central bank creates the “seed money” that enables the depository institution system to create thin-air credit.) The important implication of the ability to create credit out of thin-air is that the borrower can spend borrowed funds without necessitating any other entity to reduce its current spending. Thus, when new thin-air credit is created, we can assume that nominal current spending will increase, all else the same. (We cannot determine, a priori, what will be purchased by the borrowers of this new thin-air credit. It could be newly-produced goods and services or it could be existing assets, physical or financial.) We cannot make this same assumption when new credit is extended by non-depository entities. For example, if an individual extends credit, in order to fund that loan, she either has to cut back on her current spending or run down her current deposit holdings. If she reduces her current spending, i.e., increases her saving, no new net spending will occur from this loan because she will merely be transferring her spending ability to the borrower. If she funds the loan by running down her deposits, then there will be some net new spending in the economy. In economist jargon, this would be an example of an increase in the velocity of money. An increase in the velocity of money is another way of stating that there has been a decrease in the public’s demand for money balances. I am not aware of any statistic that measures total transactions in the US economy, transactions that include not only expenditures for newly-produced goods and services but also purchases of existing assets. So, I must rely on expenditures recorded in the National Income and Product Accounts (where the GDP data are reported). Because the bulk of thin-air credit created by US depository institutions goes to domestic borrowers, I have chosen Gross Domestic Purchases as my measure of aggregate domestic demand.

    If you intend to read further, I would advise you have some Red Bulls on ice. It’s going to be a long one. Plotted in Chart 1 are quarterly averages of the level of federal funds rate (the blue line) and the yield spread between the Treasury 10-year security and the federal funds rate (the red bars). The gray shaded areas demarcate periods of recession. Notice as the federal funds rate declines, the spread tends to widen. Similarly, as the federal funds rate rises, the spread tends to narrow, sometimes going into negative territory. Why might this be, especially, why might the spread narrow when the federal funds rate rises? Remember, the Federal Reserve sets the level of federal funds rate. It does so by regulating the supply of cash reserves it creates out of thin-air in relation to the amount of these reserves demanded collectively by depository institutions (hereafter, banks). Prior to March 26, 2020, the Fed imposed reserve requirements on banks. That is, banks were required to hold as cash reserves (either on deposit at the Fed or as coin/currency in their vaults) in an amount equal to a specified percentage of their deposits. The Fed varied this percentage from time to time for reasons known only to the Fed. Prior to October 9, 2008, when the Fed began paying interest on reserves held by banks, these required reserves largely defined banks’ demand for reserves. If the Fed wanted to increase the level of the federal funds rate, it would reduce the amount of reserves it supplied relative to banks’ demand for reserves. Even if the Fed had not imposed reserve requirements on banks, they still would have had a demand for reserves. Banks would want to maintain a certain level of reserves to cover their clearings with other banks. As mentioned above, on October 9, 2008, the Fed began paying interest to banks on their reserves holdings. The reason it did so was to increase banks’ demand for reserves. In November 2008, the Fed began its first round of quantitative easing (QE), which added reserves to the banking system, but had not yet lowered its federal funds target to zero. In order to prevent the federal funds rate from falling to zero, the Fed induced the banking system to hold these extra reserves by paying them interest on their reserves holdings. Eventually, the Fed lowered its target for the federal funds rate to zero, yet the Fed continued to pay interest on reserves held by banks’ as it still does to this day. Why?

  • The Federal Reserve Bank of Philadelphia’s state coincident indexes in June increased from May in all but 3 states (New Jersey, Indiana, and Montana). Maryland and Washington were the leaders, and the only states with increases above 1 percent. Massachusetts (whose gain in June was just shy of 1 percent) had the largest 3-month increase, close to 4 percent—more than a percentage point above number 2 Maryland. In a sign that growth is cooling 28 states had gains of less than 1 percent in this period, including Montana’s small decline. Over the past 12 months, Massachusetts was once again the leader, with an increase of 6 ¾ percent, with Maryland a point behind (Bay Staters are likely fairly indifferent to that gap given the Orioles’ current lead over the Red Sox). Minnesota and Missouri had increases of less than 1 percent.

    The independently estimated national figures of growth over the last 3 months (.73 percent) looks roughly in line of what the state figures suggest, while the corresponding 12-month result (3.50 percent) looks like it might be somewhat stronger than the state numbers.