Joseph G. Carson

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Both the employment report and the Institute of Supply Management (ISM) survey of manufacturers for June show a strong "bounce" in jobs and new orders from very depressed levels. The financial markets view the data as another sign of the economy slowly returning to pre-pandemic levels. But the continued high levels of jobless claims and fast rebound in COVID cases to record highs raises doubts on the sustainability while also placing a "lower" ceiling on the scale on the bounce.

In June, payroll employment rose 4.8 million, well above consensus estimates, following a gain of 2.7 million in May and a record loss of 20.7 million in April. The "bounce" in jobs was broad-based as 75% of private industries added people to their payrolls in June. That compares to a record low of 4% in April.

Sixty percent of the job gains in June were centered in retail trade and leisure and hospitality industries, the two sectors of the economy that were badly hurt by government restrictions on travel and social and recreational gatherings.

The civilian unemployment rate of 11.1% in June was off 2.2 percentage points from the level in May. The household employment survey showed 4.9 million people found employment in June. But questions over the accuracy of the household employment data, especially the reported unemployment rate, still linger.

According to the Bureau of Labor Statistics (BLS), the number of households who responded to the survey in June came in at 65%, lower than the 67% in May, and 70% in April. A "normal" response rate is around 83%. BLS maintains that they were "still able to obtain estimates that met our standards for accuracy and reliability". But the potential error in the data has to be larger when the sample size is dramatically less than normal.

The ISM manufacturing survey in June posted a strong bounce of roughly 10 percentage points to 52.6, the highest monthly reading since April 2019. A record 25 percentage point jump to 56.4 in the new orders index was largely responsible for strong "bounce" in the ISM composite index.

The ISM index is a diffusion index. One of the shortcomings of a diffusion index is that it does not distinguish between the scales of gains and declines. For example, in June 37% of the respondents reported higher new orders, 39% said orders were unchanged, and 23% reported lower orders. Given the depressed level of order bookings, it is surprising that more firms reported no improvement in orders versus those that reported gains.

Taken together, June reports on jobs and manufacturing do show a bounce in economic activity, but from very depressed levels. Hours worked for production and non-supervisory workers contracted a record 45% annualized in Q2. That points to a record fall in GDP, wage and salary income, and operating profits, the latter of which is being overlooked or ignored by equity investors.

Also, the path forward is still filled with potholes and downside risks. The 1.5 million in new jobless claims in the latest week indicates the rebound in jobs is a bounce and nothing more. Also, the number of new COVID cases rising to a new record of 50,000 for a single day raises the odds of more layoffs as states force businesses to pause or reverse course in their reopening plans.

The equity market is priced for a "pandemic-free" economy. But pandemics are not solved by equity market recoveries but instead by medical science ability to find a cure. As such, equity investors should not expect the "good" news in the June data to continue as long as the pandemic remains unresolved.


Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
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Both the employment report and the Institute of Supply Management (ISM) survey of manufacturers for June show a strong "bounce" in jobs and new orders from very depressed levels. The financial markets view the data as another sign of [...]

The Economic "Bounce" Is In: What's Next?

Robert Brusca

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China's manufacturing PMI gained ground at a snail's pace recovering the minor ground lost in May. China's manufacturing PMI has been above 50 every month this year except for February when the virus outbreak led to a shutdown in Wuhan and the PMI gauge fell to 35.7 for one month.

What it is nonetheless clear for China is that even with this resilience China shows a weakening PMI trend over the last three months. And the previous three months includes that weak February observation. Average calculations show three-months weaker than six-months. But three-month changes from March to June levels show weakness in nine of 11 components as well as in the headline. The queue standing of the headline is still below its median at its 42.9 percentile with only two components with a ranking above 50. China's new export orders are exceptionally weak.


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Lessons? 
It is not clear what the lesson is from China since its data are suspect and Western nations are widely of the opinion China has not told us all it knows about what happened. China has not been cooperating and has been blocking any inquiry. But on the surface, the Chinese centralized control economy with massive 'Big Brother' spying capabilities has run rings around the capability of any Western nation to corral and control the spread of the virus. The Chinese have such a network that they might be able to do contact tracing on mosquitos. In the U.S., a CDC official has said that the U.S. has way too much virus to control it, an ominous overview. This comes as top U.S. disease expert Anthony Fauci, who is due to testify to Congress, says an "alarmingly large" number of Americans are "anti-science". But is that really true? Separately… is that what the problem is?

The U.S. experience 
It was not Americans skeptical of science but rather the CDC itself that bungled the message on risks from the start saying 'no' then 'yes' on masks… and now acting as though a mask is essential all-the-time. The CDC did not endorse the early closing of the U.S. borders when the pandemic was spreading from China and through Europe and into the U.S. The CDC endorsed the shelter in-place for everyone and now 40% of U.S. deaths have been in nursing homes where people sheltered in-place and the infection was not kept out. Moreover, CDC has no plan other than to keep shutting the economy and damping the spread of infection- a very expensive strategy and one that has to be repeatedly engaged. Fauci has never spoken of the NYC data that find that the pandemic is not really very lethal to healthy people! In a city of 8.8 mln with the pandemic running for a solid five months, it killed only 110 truly healthy people. It did kill 17,500 overall but 15,500 of these had other medical problems that contributed to them being in an already weakened state and 2K had unknown medical histories, only 110 people died in NYC who were known to be healthy at the time they caught the virus. So what is Fauci's view of science anyway? The coverage of the pandemic has become so wholly political I cannot believe any of the coverage I see on TV. I am disgusted by this.

The CDC and the medical establishment have in my view made grave errors in judgement and are trying to stay the course because they do not want their decision second-guessed. Anyone that 'knows science' knows that even in science there are disputes about how to do things. The people running the anti-disease effort in the U.S. are using the term 'science' to shut down criticism of what has been done. A disease that killed fewer healthy people in NYC that automobile traffic does in five months shut the city down. Think about that. I think we need to think about what science means before we brandish the term around as something that is neglected or being disbelieved. Many non-epidemiologists have been critical of what commandeering hospitals has done to people with non-Covid-19 medical problems. Many doctors are concerned about what being shut in has done to America's heath. Pediatricians and psychologists are concerned what the impact of the lockdown will be on children and others…and I could go on. Fauci is using his 'public safety pulpit' not to advance the cause of science but to protect and enforce his own flawed decision-making.

Be careful who you trust and believe and don't trust or believe ME on this! Look to the true sources: Trust Noble Laureate Michael Levitt <a href="https://unherd.com/thepost/nobel-prize-winning-scientist-the-covid-19-epidemic-was-never-exponential/">(here)</a> who says we should push for MORE controlled infection and herd immunity. Trust Dr. Zach Bush <a href="https://zachbushmd.com/video/the-highwire/
">(here)</a> who reminds us that SARs, bird flu and MERs all circulated for about two years then they went away for good – on their own. In other words, there is REALLY no science in the view we should wait for a vaccine to be developed. By the time we get one, we won't need it and because of the bum's rush to get one, it may not even be safe when it is developed. Trust Dr. Dolores Cahill, a highly credentialed Irish scientist, who also believes economies should not have been shutdown for this <a href="https://www.youtube.com/watch?v=Ua6meLlYJdY">(here)</a>. Trust Dr. Shiva Ayyadurai, an MIT PhD, <a href="https://www.youtube.com/watch?v=68z9W9CpjlY
">(here)</a> who urges the use of vitamin therapy to fight coronavirus. These are just a few of scientific names that disagree with Dr. Fauci and who cannot be said to be anti-science. Please dear readers open your minds! Read! Stop getting your news from Fox or CNN - these are not objective sources. You must look more broadly to credentialed experts. When you do that you will find plenty of highly credentialed criticism of what CDC has done and it is not that Americans reject science. That certainly may have 'some truth to it' but it is pathetic as an overarching excuse or reason. It is a tactic to stop any disagreement or brand it as facile.


Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
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China's manufacturing PMI gained ground at a snail's pace recovering the minor ground lost in May. China's manufacturing PMI has been above 50 every month this year except for February when the virus outbreak led to a shutdown in [...]

China's Manufacturing PMI Shows Resilience But Not a Hint of Strength

Charles Steindel

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The Federal Reserve Bank of Philadelphia's <a href="https://www.philadelphiafed.org/-/media/research-and-data/regional-economy/indexes/coincident/2020/coincidentindexes0520.pdf">state coincident index map</a> is again completely red- all 50 states saw drops of least 1 percent from February to May. The smallest drop in this period was Arizona's 4.9 percent; Hawaii plunged a staggering 53.9 percent.

April-May, of course, was another story, as was foreshadowed by the labor market data. 33 states had gains, with Kentucky's 16.1 percent topping the list. Still, 17 states continued to slide in May, with Delaware down a woeful 9.8 percent. As was the case for the labor market results, one can't generalize and say that states that reopened early did noticeably better; buttoned-down New Jersey recorded a larger increase in May than Texas and Florida. To throw more cold water on the May pickup, California and New York were down from April. Texas was the only one of the big 4 states to see a gain, and its 1 percent figure was far from Texas-sized.

The discrepancy between the state results and the national figure, compiled using the same data and methodology, continued in May. The national increase from April to May is reported to have been 2.5 percent, which certainly seems unusual given that none of the 4 largest states were anywhere close to that. Of other large states, only Michigan, Ohio and Pennsylvania had gains in excess of 2.5 percent (Pennsylania was up 7.5 percent), but the sum of those 3 states' nominal GDP is far less than California's. One would think they are quite inadequate counterweights to the weakness in the very largest states.

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The Federal Reserve Bank of Philadelphia's state coincident index map is again completely red- all 50 states saw drops of least 1 percent from February to May. The smallest drop in this period was Arizona's 4.9 percent; Hawaii plunged [...]

State Coincident Indexes in May

Andrew Cates

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European financial markets welcomed the news earlier this week that June's flash purchasing managers indices for the Eurozone and the UK had recovered much of the ground that they lost in April and May. The headline composite index for the Eurozone, for example, rose to 47.5 in June, its highest level since February, and up sharply from a low of 13.5 in April (see first chart). Very similar data were recorded in the UK suggesting that similar factors - such as lockdowns and subsequent re-openings - have been at play in driving purchasing managers' sentiment in these economies in recent months. There are several reasons, however, for being a little circumspect over the degree to which these surveys are promising a return to economic normality in the period immediately ahead.

Firstly, we should note that purchasing managers' surveys may not be that helpful as a leading indicator in the current virus-strained environment. These surveys, after all, generate diffusion indices which offer perspectives on the directional trend in various factors that potentially affect economic activity. But they don't offer any perspective on the magnitude of those movements. As companies open up as lockdown restrictions are relaxed that will inevitably generate a sharp pick up – from very depressed levels - in some of these surveys' sub-components but that arguably doesn't offer much help in tracking the evolution of the economy relative to previous norms.

That leads us to the second reason for caution which concerns the still-subdued levels of activity that are being implied by other economic data releases. For example, Google mobility data for Germany, France and the UK suggests activity in transit stations – presumably a reliable leading indicator of broader activity in City centres – is still very depressed notwithstanding the recovery from low points over the last couple of months (see second chart). It's true that there may have been (and will continue to be) some substitution away from using mass transit stations toward using private transport but this data is still a fair indicator of how far various economies may be from normality. Other high frequency data (e.g. electricity usage and restaurant bookings) along with more conventional economic data in the meantime such as retail sales growth and labour market data chime with this message as well.


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A third factor to bear in mind concerns the global nature of the pandemic and accordingly the global nature of the economic plight. The virus is sadly still in the ascendancy at the global level as evidenced in the third chart. Weekly changes in the global numbers of confirmed cases and deaths are either still climbing or have started climbing again. That clearly puts a heavy constraint on the degree to which lockdown restrictions can be eased where a first wave has yet to peak or further eased where a second wave has begun. This, in turn, though speaks to the synchronized nature of the global downturn and suggests that sectors that are exposed to world trade and travel could remain depressed for some time. It was notable on that score that this week's export orders sub-components in Europe's flash purchasing managers' indices remained relatively depressed. Equally this week's June CBI survey of UK manufacturers' suggested that export orders were at their weakest levels in over 40 years (see fourth chart).

The final and arguably the most important reason to be wary concerns labour markets. Sustainable economic activity that's not reliant on, say, Central Bank or government fiscal support, requires sustainable sources of household income generation. In other words we need to see healthy labour market activity that drives down unemployment, fires up wage growth and erases consumer fear. Labour market data, however, as we touched on above, is unsurprisingly offering consumers little comfort at present notwithstanding a plethora of government support programmes. Surveys of employment intentions in the meantime are riddled with gloom.

None of this is to deny that as European countries reopen that a pick-up in activity will take hold as the aforementioned purchasing managers surveys indicate. But it would be a brave man that would bet against the 7 to 8% retreat in GDP that's now being forecasted by the Blue Chip panel of economic forecasters in the euro area and the UK in 2020 and only the partial recovery that's being anticipated in 2021.


Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
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European financial markets welcomed the news earlier this week that June's flash purchasing managers indices for the Eurozone and the UK had recovered much of the ground that they lost in April and May. The headline composite index [...]

Some Relief for Europe But Not Much

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The first quarter personal income data reflected the initial impact of the pandemic. Two travel and tourism-heavy states, Hawaii and Nevada, were quite weak, with annual growth rates of -0.1 percent (Hawaii) and 1.0 percent (Nevada). New York, which shut down aggressively in March, was also low, at 0.7 percent. Curiously, New Jersey, whose pandemic experience has been quite comparable to New York's, was notably stronger, with a 1.8 percent gain—New York was held down relative to New Jersey by shutdown-related losses of earnings in construction, trade, and leisure and hospitality sectors. Reflecting the closure of auto plants, Michigan was the worst performing state in the nation, with its aggregate income falling at a 0.3 percent rate. States in the South and West, which had been growing rapidly and were slow to shut down, saw much stronger figures, led by New Mexico's 4.9 percent rate of growth. California and Washington, the two Western states that closed early on, both saw income grow at or above the national pace. Somewhat surprisingly, small energy-intensive states (West Virginia. Louisiana, Oklahoma, South Dakota, Wyoming, and Alaska) did not see remarkably slow growth in the first quarter; Alaska's 1.3 percent mark was the smallest of the group, while Wyoming was up at a 2.8 percent annual rate.

Transfers were a major support to incomes in the first quarter throughout the nation, with the start of the upsurge in unemployment benefits in March likely an important element. Earnings (wages, benefits, and proprietors' income) were dreadful, with many states seeing declines—the rate of decline was more than 3 percent in Nevada, Hawaii, and Michigan. On the other side, both Texas and Utah saw earnings grow at a 2.3 percent rate, which ordinarily would have been regarded as a meager showing.

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The first quarter personal income data reflected the initial impact of the pandemic. Two travel and tourism-heavy states, Hawaii and Nevada, were quite weak, with annual growth rates of -0.1 percent (Hawaii) and 1.0 percent (Nevada). [...]

State Personal Income in Q1 2020

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May's improvement in the labor market varied across the nation. While 38 states (including D.C.) experienced statistically significant declines in their unemployment rates (led by an astonishing 5.7 percentage point plunge in Mississippi) a number saw increases: Minnesota's was up 1.2 percentage points. Nevada, Hawaii, and Michigan reported unemployment rates above 20 percent. Nebraska's 5.2 percent rate was far and away the lowest, and obviously the only one not indicative of a deep recession. Interestingly, Nebraska's low rate (which was 3.5 percentage points under April's) is not a reflection of a sharp drop in the state's labor force. Nebraska's labor force was essentially unchanged in May from April.

Growth in payroll employment was also sharply different by state. Vermont was up 6.4 percent, and Michigan rose 5.2 percent. There doesn't seem to be an especially close connection between job gains and the pace of reopening. Texas was up 2.0 percent, which for May was a middle-of-the-road increase. Similarly, Florida was up 2.3 percent and Georgia 1.9 percent. Some more buttoned-down states did have more modest increases: .9 percent in California and 1.2 percent in New York. However, New Jersey's gain was 2.5 percent (this reflected very strong gains in leisure and hospitality after a complete collapse in April. The May gain, though, was odd because all restaurant table service—outdoor as well as in—remained banned the entire month). Sharp declines in government employment have been reported in the national data the last two months and May saw government jobs fall in every state (DC was down 100).

Putting the May increase in context of the recent declines, all states (plus DC) still show quite large drops in payrolls since February. The smallest has been Utah's 6.6 percent, while at the other end is Hawaii's 20.6 percent.

Like the mainland regions, Puerto Rico saw a rebound in jobs in May. For a third straight month BLS was unable to compile household sector numbers for the island.

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May's improvement in the labor market varied across the nation. While 38 states (including D.C.) experienced statistically significant declines in their unemployment rates (led by an astonishing 5.7 percentage point plunge in [...]

State Labor Markets in May

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Mr. Cohen criticized my article of June 8, <a href="http://www.haver.com/comment/comment.html?c=200608SP.html
">BLS Failed Its Mandate: "Fearless Publication of the Facts"</a>, stating my arguments were "exaggerated, misleading, and inaccurate". Let me respond to Mr. Cohen's key points.

First, the data in the June 8 article was taken from BLS's 15-page addendum. According to BLS, there were 8.1 million workers in April and 5.4 million workers in May that were classified as employed but absent from work. Mr. Cohen argues that the size of my misclassification is incorrect because there are always some people misclassified. That is true. BLS said that in the previous four years those numbers average 620,000 and 549,000 in May. But, misclassifications in April and May 2020 were 10X the norm---that's an accurate account of the data and not an exaggeration!!!

Second, Mr. Cohen says "misclassification" is not certain. That is fair. But so too are all of the numbers in the recent employment reports because of a change in gathering data and the low response rates. Mr. Cohen failed to mention that Census did not conduct in-person interviews, and two Census call centers were closed. Also, the response rate for households entering the survey for the first and second months was exceptionally low--30% below the average of the past 12 months. Surveys based on a smaller number of observations have higher error rates. That means the odds are high that the number of misclassifications is understated--that's not an exaggeration!!!

Third, Mr. Cohen argues that the data in May was an improvement from April "as the share of the adjusted unemployed on temporary layoff who were misclassified declined to 25% in May from 30% in April and 39% in March". A 25% 'error" does not mean the May data is accurate, only that it's less distorted than the prior two months.

Fourth, the June 8 article main argument was that BLS's statistical methodology failed to produce more accurate data. How can that point be argued? BLS was well aware of the problems with the statistical methodology in March. If BLS did more phone calling or extended the survey period to obtain more responses that would break from past practices. But it would have provided a more accurate picture of the level of joblessness during the pandemic.

The pandemic of 2020 will stand alone in American history triggering the sharpest contraction in economic activity without an accurate statistical record of job loss and the level of unemployment.

Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
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Mr. Cohen criticized my article of June 8, BLS Failed Its Mandate: "Fearless Publication of the Facts", stating my arguments were "exaggerated, misleading, and inaccurate". Let me respond to Mr. Cohen's key points. First, the data in [...]

BLS Failed Its Mandate: "Fearless Publication of the Facts" (Part 2)

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The Monthly Treasury Statement for May showed federal withheld income tax receipts falling a record 33% from the comparable period one year ago. The decline in May tax receipts exceeds the 30% decline in April. Monthly tax (gross) receipts have been reported since 1973 and April and May declines are the largest on record.

Federal withheld tax receipts are directly related to workers paychecks. The scale of the decline in tax receipts is nearly three times the decline in reported household and payroll employment. The unprecedented gap raises questions about the accuracy of the April and May employment reports.

Tax Receipts vs. Employment 

Federal withheld (gross) income tax receipts are highly correlated with employment levels and wage growth since taxes are withheld from workers paychecks. Monthly receipts can be noisy, often influenced by the number of workdays. Nonetheless, back-to-back monthly declines are rare and have only occurred during periods of exceptionally large declines in employment or when there have been legislative changes that lower peoples' withheld tax payments.

There are no legislative changes that would result in dramatically lower withheld gross federal income tax receipts. So the logical conclusion is that the sharp drop in withheld income tax receipts is directly related to a plunge in wage and salary income.

Without question, the tax data raises doubts over the scale of reported job loss as well as industries that experienced the largest declines. Tax receipts are off over 30%, while employment levels are off roughly 13%. How can tax receipts fall three times more than employment? As puzzling as that appears to be what is equally puzzling is that the vast majority of job loss was concentrated in lower-wage industries, such as leisure and hospitality and retail trade. If job loss was concentrated in low wage industries one would not expect tax receipts to fall three times as fast as overall employment.

In my recent article, <a href="http://www.haver.com/comment/comment.html?c=200608SP.html
">BLS Failed Its Mandate: "Fearless Publication of the Facts"</a> published on June 8, I made the argument that the Bureau of Labor Statistics (BLS) statistical methodology failed to ensure an accurate account of the employment situation. The tax data for April and May offers strong evidence that the employment data is inaccurate.

Mr. William W. Beach, BLS Commissioner, is quoted as saying there was no political bias in the published reports and the unemployment rate reported below its actual rate was "accidental". I agree with Mr. Beach on the first point. BLS government statisticians operate with the highest integrity. I know that to be the case because I started my career as a government economist/statistician at the Department of Commerce.

However, BLS statistical methodology did fail; not once, but twice in reporting grossly inaccurate employment statistics. The US statistical system is the "gold standard" of the world, producing the most accurate, and always operating with the mandate, "Fearless Publication of the Facts". But the employment reports for April and May show that no statistical methodology is perfect, and its the responsibility of BLS to ensure the accuracy of the data. The scale of the error in April was so large it should have set alarm bells so to avoid another "accidental" report of bad data.

The sharp drop in withheld income tax receipts strongly suggests that the "error" term of the household employment could even be larger than what BLS has stated. BLS said that the number of households entering in their survey for the first and second time was 30 percent below the average of the past 12 months. As a result, BLS was compelled to use a historically low number of responses to estimate household employment for April and May. So its highly possible that the number of people misclassified as employed instead of temporarily unemployed could be far larger than the 8.4 million for April and the 5.4 million in May.

Household employment data is based on a sample of 60,000 households out of a total household population of 125 million. Federal tax receipts are unambiguous. They reflect withheld income taxes taken directly from 30 million business establishments employing over 150 million workers before the pandemic. Which data series---reported household employment or withheld taxes---do think offers a more accurate picture of the current employment situation?

Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
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The Monthly Treasury Statement for May showed federal withheld income tax receipts falling a record 33% from the comparable period one year ago. The decline in May tax receipts exceeds the 30% decline in April. Monthly tax (gross) [...]

Federal Tax Receipts Show A Record Plunge in May: Raising More Doubts About the Employment Data

Headline US PCE inflation elevated by sticky services prices

US and global equity prices have recently diverged

US leading global upturn in economic surprises

Blue Chip forecasters look for further significant monetary easing apart from Japan

Recent rise in global supply chain pressures could augur a pickup in global inflation pressures

Underperforming German economy generating increased policy uncertainty relative to Europe and the US

Resilient US economy is pushing up longer-term inflation expectations and interest rates

Positive US economic data surprises leading to upward adjustment of interest rate expectations

Recent aggressive policy easing in China has given a massive boost to equity prices

FOMC expects much more easing now than in June

US is clear world leader in business capital spending on artificial intelligence

Blue Chip forecasters expect US to lead aggressive policy rate cuts over coming year—apart from Japan

Ratio of job openings to the number unemployed in the US now below pre-pandemic level

U.S. layoffs not showing as much cooling in labor markets as unemployment rate

While goods prices have moderated, service price inflation remains elevated and sticky

Since Jan 2023, BCEI US outlook has improved, worsened for Japan and the euro area

Persistent negative US economic surprises leading to big rate-cut expectations

Germany is Euro area weakling

Flash PMIs show good start to Q3 in US; loss of momentum in the euro area

Chinese economy on downtrend could threaten global economy

Working age population labor force participation near all-time high as retirements increase

Blue Chip forecasters look for widespread policy rate cuts just ahead

Flash June PMIs point to a widespread slowdown apart from the US

Announcement of snap French election is causing concern across Europe

The UK economy’s post-pandemic under-performance relative to its pre-pandemic trend

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The Federal Reserve Bank of Philadelphia’s state coincident indexes were again soft in October.. In the one-month changes, South Dakota led with a .67 percent gain, and Connecticut, Ohio, and Delaware had increases above .5 percent. However, the indexes for 13 states declined, with South Carolina and Michigan both down .4 percent (Michigan saw some pronounced retrenchment in autos, and South Carolina would have been hit by the Boeing strike). Over the 3 months ending in September, 12 states were down, with South Carolina (down 1.4 percent) and Massachusetts (off 1.1 percent) once again at the bottom. Connecticut was yet again at the top, with a 1.7 percent increase, with Over the last 12 months, 3 states were down, and 10 saw increases of less than 1 percent. South Carolina’s index was off by 1.2 percent. Arizona had a 4.9 percent increase, and Connecticut was up 4.7 percent, with 7 others up more than 3 percent.

The independently estimated national estimates of growth over the last 3 months (.55 percent) and 12 months (2.55 percent) appear to be roughly in line with the state numbers.

State Coincident Indexes in October 2024

State labor markets were little-changed in October. The Boeing strike, and Hurricane Milton, triggered statistically significant declines in payrolls in Washington and Florida. There were no other statistically significant changes, not even in North Carolina (which did have a insignificant drop). Nonetheless, the sum of payroll changes across the states was -76,400, a clear amount lower than the independent national change of 12,000.

Three states had statistically significant declines in their unemployment rates in October, and one  showed an increase.  None of the changes were larger than .2 percentage point.  The highest unemployment rates were in DC (5.7%),  Nevada (5.7%), California (5.4%), and Illinois (5.3%). No other state had rates as much as a point higher than the national 4.1%. Alabama, Hawaii, Maine, Mississippi, Nebraska, New Hampshire, North Dakota, South Dakota, Vermont, Virginia, and Wisconsin had rates of 3.0% or lower, with South Dakota at 1.9%.

Puerto Rico’s unemployment rate dropped to 5.4%--lower than both DC and Nevada, and matching California--while the island’s job count grew by 2,300.

State Labor Markets in October 2024

The new administration intends to pursue an unconventional fiscal strategy. A key aspect of the strategy involves reducing or abolishing non-defense government agencies in order to create fiscal space to make the current tax law permanent, lower taxes even more, and generate extra revenue through an extensive and significant tariff program.

The success of the fiscal policy of the new administration will depend on the reaction of the bond market, which has historically influenced policy changes. Three decades ago, Bill Clinton pledged a stimulus package if he won the election, but upon taking office, he had to shift towards a "financial market strategy" instead. Stimulus spending was abandoned in favor of a deficit reduction plan to prevent long-term interest rates from increasing. Given the imbalance in the federal budget is much larger today, it is crucial for policy decisions to take into account the bond market's reaction, raising the question whether policymakers will heed the advice as they did in 1993.

The odds are in favor of the opposite happening, as the new administration is not inclined to give in to the pressures of the bond market. If bond yields jump sharply, the administration might urge the Fed to intervene, potentially worsening the situation.

**The Federal Budget**

In the fiscal year 2024, total federal spending reached $6.75 trillion, resulting in a budget deficit of $1.83 trillion. Currently, defense budget and social programs are deemed off-limits, as are interest payments. This shifts the attention towards cutting expenses in non-defense discretionary spending.

During the fiscal year 2024, non-defense discretionary spending amounted to approximately $950 billion. Although non-defense spending had stayed stable in nominal values between 2010 and 2019, it surged in 2020 as a result of economic recovery initiatives through additional legislation. Nevertheless, there is a pattern of downward trend in non-defense expenditure even prior to the upcoming Congressional term, with forecasts indicating a decline to 2.5% of GDP over the next ten years as per the Congressional Budget Office. The smallest proportion of such outlays in the past five decades was 3.1%.

Although additional spending cuts may still occur, the meager budget share allocated to these programs indicates that the extent of budget savings is significantly smaller than advertised. Below are some more reasons why significantly cutting non-defense discretionary spending will pose political challenges.

With a budget of $238 billion, the Department of Education provides support to almost 100,000 public schools through its programs.

With a budget of $106 billion, the Department of Commerce supports research and development in emerging technologies such as artificial intelligence.

With a budget of $460 billion, the Department of Agriculture funds many projects in rural communities, including housing, community facilities, and utilities.

With a budget of $275 billion, the Department of Transportation makes billions of dollars in grants to improve and upgrade all types transportation systems.

Non-defense federal spending plays a critical role in the economy by offering assistance to businesses of different scales and types, along with state and local governments and individuals. This does not imply approval of the Federal budget or its spending preferences, but rather recognizing essential elements concerning federal spending and its economic influence.

Furthermore, handling the distributional effects of significantly reducing non=-defense spending will pose significant controversy and implementation challenges. For example, states in the northeast pay more in federal taxes than they receive in federal spending, while various states in the south, as well as a few in the mid-west and southwest, receive more assistance than they contribute in taxes. This raises the question of whether politicians from states receiving the most aid will support legislation that significantly reduces the assistance provided to their constituents. Every state listed that gets more in federal assistance than they pay in taxes voted for the new administration.

Extending the 2017 tax cuts adds another layer of complexity to the new administrations fiscal plan. The Congressional Budget Office projects that prolonging these tax cuts could result in a $4.6 trillion increase in the deficit over the next ten years. To counterbalance this, Congress would need to enact spending cuts averaging more than $450 billion a year, affecting almost half of non-defense spending. Moreover, there are discussions about proposing further reductions in federal taxes.

Implementing a comprehensive and substantial tariff program could lead to increased revenue. However, the effectiveness of this strategy is uncertain, as it relies on the assumption that foreign trade partners will not retaliate. Additionally, foreign entities play a crucial role in aiding the US in meeting its federal borrowing needs, hence implementing a tariff strategy is like informing your creditor that you intend to cease transactions with them but expect them not to demand repayment of your loans.

The tariff plan could potentially create complications for both the economy and the bond market. Significant risks include the possibility of higher consumer inflation, which may raise the expenses of social programs (such as inflation indexation) and widen the budget deficit. Additionally, it could lead to higher interest rates, affecting policy rates accordingly.

The new administration has expressed interest in influencing the Federal Reserve's interest rate decisions and has even proposed replacing the Fed Chair before his term expires in 2026. Unlike other government agencies that report directly to the President, the Federal Reserve is an independent agency accountable to Congress. Altering the Fed's independence would require legislative action, potentially causing disruption in the financial markets. The odds of changing the status of the Fed is minimal, but that does not mean the new administration will not publicly expressing its views, which pose challenges for the Fed and confusion (volatility) in the financial markets.

The new administration faces a specific challenge when it comes to dealing with the bond market, particularly due to the fact that it is commencing with an excessively large budget deficit that is forecasted to grow over the next decade. The sheer size of the bond market renders it impervious to being swayed solely through rhetoric or public persuasion. Irrespective of the new administration's declarations or viewpoints, the bond market will express its position on fiscal policy. Three decades ago, the Clinton administration changed direction when the bond market rejected a stimulative fiscal plan. If the new administration's fiscal strategy indicates larger budget deficits and increased inflation, the bond market's rejection will be more significant than that of 1993.