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CNB Economic Comments July 14
July 14, 2014
From: Gregory S. MacKay, Senior Vice President & Chief Economist
Date: July 11, 2014
June’s payroll report was more welcome than rain to a parched cornfield. Nonfarm payroll employment rose a healthy 288,000 in June. This is the fifth consecutive month of 200,000+ job growth. To put it in perspective, we haven’t had five consecutive months of 200,000+ job growth since the 1999-2000 Y2K ramp up. Goods-producing jobs like construction and manufacturing had steady, if not robust, growth. The service sector continued to provide the larger share of new jobs (236,000). There were good increases in the wholesale and retail areas and financial activities, while usual service standards such as temporary health, health care, and leisure all advanced a bit more slowly. Weekly hours worked were flat year-over-year, and average weekly earnings have risen 2.3% in the past year, and seem to be slowly accelerating. The unemployment rate fell to 6.1%, a new 6 year low. The number of unemployed has fallen by 2.27 million in the past year, job growth was 2.14 million, and 130,000 workers left the labor force. The country continues to move forward, as part time workers for “non-economic reasons” (bored people) rose by 840,000 in the last year, while part time workers “for economic reasons” rose only 275,000. Discouraged workers fell 350,000 over the last twelve months, and people unemployed for over 27 weeks fell by almost 300,000 in the past year. Yes, unemployment remains a problem, but there is steady improvement happening.
Fed watchers have waited three weeks for the release of the Federal Open Market Committee (FOMC) minutes of the June meeting. Writers had been hoping for better information on rate increase timing, GDP growth, and the employment situation, particularly after the poor first quarter GDP number. The ability to reach the new estimate of 2014 GDP growth of 2.1%-2.3% seems less than easy. We’ll need to see around 3.5% growth in the last three quarters, and second quarter doesn’t look that good. FOMC members saw better household and business spending, no inflation problem, a still sub-par housing market, but better labor conditions. The sum total doesn’t seem to add up to an economy that can reach a 2% 2014 growth rate. Much of the discussion at the June meeting centered on interest rate movements. A new card on the table is the suggestion that interest paid on excess bank reserves at the Fed be stopped, an idea I support. While not a huge business stimulus idea, it may help banks get some of their excess reserves into income generating situations. Further discussion centered on the timing of the end of bond purchases (currently $35 billion monthly). There was agreement that the program would probably end in October, but reinvestment of current holdings principal roll off and interest would continue indefinitely. The question of increases in the Federal Funds rate was left hanging, with the Fed statement (“economic conditions may warrant keeping the target federal funds rate below levels the committee views as normal in the long run”) still seemingly conflicting with the “dot-matrix” estimates of FOMC members. Only the unemployment issue seemed clear. There was consensus that the labor situation would continue to improve, although employment remains somewhat below the maximum level. I’ll wait to see what the FOMC says at its next meeting (July 29-30), as most corporate earnings will be out as well as the first look at second quarter GDP. All in, it’s still a slow, moderate expansion.
I’ve been asked by a number of readers lately about “trouble” in the economy. I admit to being puzzled by the question, with GDP back at pre-recession levels, unemployment falling back to near normal ranges, stock prices at or near all time highs, and low inflation. The ongoing weak link is housing, and that seems to be recovering at its own leisurely pace. However, the lousy first quarter 2014 GDP number brought some good questions from you folks. Without some complex math, the questions do seem to fall into two age specific groups: 18-65 and 65+. My younger friends – the “working group” – profess to have serious trepidation about the jobs market and income levels. The 65+ group – the retiree group - are concerned about the stock and bond markets: “when are stocks going to fall and when is your bank going to pay more interest on my C.D.s?”. Therein lies one explanation for the poor first quarter 2014 showing. The 18-65 group is working, spending, and trying to save for retirement. The 65+ group is generally retired and “living on a fixed income”. The spending habits for the two are different, with mortgage payments, health care, college and retirement savings for the younger and entertainment, health care, travel, and “not outliving my savings” the elder issues. The “workers” are more apt to have a larger portion of their income exhausted by “fixed” expenses, while the “retirees” can adjust spending somewhat easier due to the lack of high fixed expenses. Workers depend on income, retirees use the stock market and home value as a cushion for their habits. Now add in the fact that according to the U.S. Census, the 18-44 age group had zero growth between 2000 and 2010, while the 45-64 group grew by 20 million, and the over 65’s grew by 5 million. That’s erasing a lot of “necessary” spending. This economic expansion has been fueled by the Fed replacing a lot of lost home and market equity through “quantitative easing”. However, tighter lending standards, consumer fears, and weaker wage growth are sapping the spending of the working group. Retirees have had their generally larger stores of wealth replaced. Thus, consumer spending, the big dog in the GDP equation, is now subject to bigger swings. The new millennium has brought us two recessions, much slower GDP growth, and surprising quarters like the first quarter of 2014. My answers to the workers: jobs will keep recovering and income growth will remain firm in many trades, professional occupations, health care, and information systems. I don’t disapprove of service jobs like retail sales and leisure, but it’s generally not an easy path to fame and fortune. Retirees, enjoy! Yes, we’ll have another recession… we average one every ten years. No, it won’t be anywhere near as bad as the last one… and don’t forget that when your C.D. rates go up, so does the interest rate on your kids (and grandkids) houses, cars, boats, and credit cards.
Stock prices rested this week after setting new highs over the past couple of weeks. We’ll see a bunch of earnings reports in the next week or two which should help set the direction more firmly. At 3:20 p.m., for the week and year:
Dow Industrials 16934 -.8% +2.2%
NASDAQ 4413 -1.6% +5.6%
S&P 500 1967 -.9% +6.4%
Treasuries through two years are unchanged, with five year rates down 5 BPS, and 10 year rates down 8 BPS. Credit the world geo-political situation for the buying. Muni yields dropped more, as supply remains an issue.
U.S. Treasuries Municipal Bonds
07/11/14 06/13/14 07/11/14 06/13/14
2 year .45% .45% .32% .31%
5 year 1.64% 1.69% 1.30% 1.53%
10 year 2.52% 2.60% 2.38% 2.47%