Charles Steindel

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The Philadelphia Federal Reserve Bank has issued estimates of state coincident indexes for February. This is essentially the last comprehensive snapshot of the distribution of activity prior to the impact of the pandemic. A look at the medium and longer-term developments seems fairly off the point. In the short-term, Arizona and Maine experienced declines from January to February (the fall in Arizona was so modest that in the Bank's report it is chalked up as "unchanged"); Maine was the only state to experience a three-month drop. The coincident indexes depend heavily on labor market data, with some smoothing of current developments. One suspects that bad as the March figures are likely to be, they could well be revised down when the raw information for April gets factored in.

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The Philadelphia Federal Reserve Bank has issued estimates of state coincident indexes for February. This is essentially the last comprehensive snapshot of the distribution of activity prior to the impact of the pandemic. A look at [...]

State Coincident Indexes in February

Joseph G. Carson

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The March employment report shows massive disruption in the labor market triggered by the coronavirus. And as awful as the payroll job loss numbers appear they pale in comparison to the record loss in household employment and surge in the number of people forced
 to work part-time.

In March, payroll employment fell 701,000, nearly 10 times greater than consensus estimates and far worse than the job loss of 27,000 in ADP employment released earlier in the week. The sharp drop in payroll employment last month was the largest monthly decline
 since the 800,000-job loss recorded in May 2009---near the end of the Great Financial Recession.

The employment statistics from the household survey were far worse. In March, household employment fell nearly 3 million. To put that in context, the drop in household employment in March 2020 was three times larger than any of the monthly job losses recorded during the Great Financial
 Recession.

Household employment is based on a survey of people, whereas payroll employment is a survey of business establishments. In other words, the household survey counts the number of people working, whereas the establishment survey counts the number of jobs (and many people
 hold more than one job).

At cyclical turning points, the household survey tends to flash "red" much sooner than the payroll survey. And that appears to be the case again in the current cycle.

Both surveys are conducted at the same time of each month: the payroll period that includes the 12th of the month. And what is noteworthy about the March household employment survey results is that people were losing jobs in record numbers even before the national
 emergency restrictions on work-life, social gatherings and travel were announced on March 13.

On top of the job loss, the household survey showed that 1.4 million workers in nonagricultural industries were forced to work part-time due to slack work or weak business conditions.

The 0.9 percentage point to 4.4% in the civilian unemployment understates the severity of the disruption in labor markets. That's because of record number 1.6 million dropped out of the workforce. In other words, if all of the people that lost jobs in March remained
 in the labor force the jobless rate would have been nearly one percent higher at 5.3%.

The household employment results for March are a harbinger of what will appear in the payroll data in the coming months.

Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
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The March employment report shows massive disruption in the labor market triggered by the coronavirus. And as awful as the payroll job loss numbers appear they pale in comparison to the record loss in household employment and surge in [...]

Massive Disruption in Labor Markets

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The Philadelphia Federal Reserve Bank has issued estimates of state coincident indexes for January. These indexes now take into account the annual labor market benchmark revisions. Additionally, movements in proprietors’ income are now assumed to affect a state’s index. Given that today’s release refers to January, and the massive events since then, the actual numbers released should be of little interest (the estimates for February will be released on April 10). For the 12 months ending in January, South Carolina saw the largest increase in activity: 5 percent. Arizona, Utah, Washington (state; the index is not computed for DC), Maryland, and Florida also saw gains about 4 percent. Louisiana and West Virginia experienced declines, and a swath of 15 states, almost entirely in the mid-section of the nation, saw gains of less than 2 percent (Alaska and Vermont were also in that group).

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The Philadelphia Federal Reserve Bank has issued estimates of state coincident indexes for January. These indexes now take into account the annual labor market benchmark revisions. Additionally, movements in proprietors’ income are [...]

State Coincident Indexes in January

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State labor markets were generally sound in February, prior to the onset of the pandemic. Texas led the way, with a 50,400 (.4%) rise in payrolls—tops in the absolute gain and trailing only Alaska in percentage change. Michigan and Massachusetts also had statistically meaningful increases. Eleven states reported minor declines in payrolls; the rest reported small gains.

Over the twelve months ending in January job growth was weaker in the mid-section of the nation than elsewhere, with six states in that zone seeing a loss of jobs (only West Virginia’s drop was statistically significant). Vermont also experienced a statistically insignificant job drop. Once again, job growth tended to be faster in West, with Utah’s 2.9% increase being the largest.

In the household numbers, Alaska’s unemployment rate moved down to 5.8% (North Dakota’s 2.2% was the lowest in the nation), so in February there was no state with an unemployment rate of 6% or higher. At this juncture, one can only speculate when that might again occur.

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State labor markets were generally sound in February, prior to the onset of the pandemic. Texas led the way, with a 50,400 (.4%) rise in payrolls—tops in the absolute gain and trailing only Alaska in percentage change. Michigan and [...]

State Labor Markets in February

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Government restrictions to contain coronavirus have caused tremendous economic damage compelling some to question is it worth "destroying the economy by trying to save it"?

This is not the first time government restrictions triggered a severe slump in the economy. In 1980 government imposed credit restrictions to kill the "inflation" virus. That policy literally tanked the economy within weeks, ultimately forcing Washington to relent.

The 1980 experience clearly shows easing government restrictions on people's mobility and businesses will trigger a substantial rebound in the economy. But will it be sustainable without addressing the core (coronavirus) issue? In 1980 it was not.

Economic Fallout &amp; Political Ramifications 

Since the publication of my article, "Investors Should Brace For A Record Decline in GDP" on March 13, analysts' forecasts the scale of the economic slump have gotten direr day by day. Forecasts of the possible slump in Q2 GDP quickly jumped to -10%, then -20%, and -30%.

It's quite possible that we have now seen the peak of the most pessimistic forecasts. Federal Reserve Bank of St. Louis President James Bullard stated that Q2 GDP could decline as much as 50%, sending the unemployment rate to 30% in the process. Based on the civilian labor force an unemployment rate of 30% would mean a loss of 45 million jobs, pushing the number of unemployed to 50 million.

Now that the severity of the economic slump caused by government restrictions has scared everyone a potential fissure has opened between government health officials and the nation's economic advisors and politicians.

On one side, health officials argue sustained social distancing is necessary to successfully beat coronavirus. On the other side, economic advisors and politicians argue that the economic and financial costs have become too great and a different approach is needed

America had a similar debate four decades ago when the economy faced a different enemy, uncontrollable inflation. At that time, Federal Reserve Chairman Paul Volcker argued, "Inflation was Public Enemy Number One".

The Federal Reserve, following the recommendation of the White House, placed restrictions of the use of credit in order to kill inflation. Initially brushed off as largely symbolic the government restrictions triggered the sharpest decline in consumer spending in the post war period. It was reported that some people felt it "almost unpatriotic to buy items on credit".

In a relatively short period of time the government restrictions were viewed as "overkill" and Washington was forced to undo its credit policy.

Washington is confronting a health and economic crisis today. Undoing or relaxing restrictions on people's mobility and businesses could very well lessen the severity of the economic contraction. But the ability to implement it in a piecemeal way will be most difficult, while never fully eliminating coronavirus.

In 1980, government restrictions on consumer credit were an all-inclusive policy, impacting everyone up and down the income ladder and in every city and state in the US. The decision to impose and remove credit restrictions impacted everyone simultaneously.

Decision on where to relax standards and where not will bring health care and economics together in away never seen before. Allowing some cities and states, or even parts of a state, to recover before others based on a bell-shaped health curve will prove to be unworkable, forcing federal and state governments to adopt a blanket policy approach.

Drawing on the 1980, investors should welcome the government to relax these restrictions on travel, work life and non-essential businesses since it trigger an economic rebound---maybe a V-shaped. Yet, would easing these restrictions give a false sense of security to the American people? Can the medical industry contain this virus and ultimately find a permanent cure? In 1980 recurrence of inflation one year later proved even more difficult to defeat triggering a deeper and more protracted recession.

Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
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Government restrictions to contain coronavirus have caused tremendous economic damage compelling some to question is it worth "destroying the economy by trying to save it"? This is not the first time government restrictions triggered [...]

"Déjŕ Vu"--"Destroying the Economy By Trying to Save It"

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BEA has released the first estimates of state personal income for the fourth quarter of 2019 and for 2019 as a whole. Right now interest in these figures may be mostly antiquarian. For 2019 as a whole, the fastest-growing states were in the West, with Colorado's 6.1 percent increase the nation's largest. South Carolina was the only state in the eastern half of the nation to be in the top 10 for growth—and it was 10th. The Great Lakes was the slowest-growing region, with Wisconsin's 4.0% gain (29th in the nation) noticeably under the nation's 4.4% pace. West Virginia's 2.8% growth was the nation's lowest (West Virginia is classified as a Southeastern state).

In the fourth quarter, much of the West was still strong, with the Southwest seeing the highest growth rate of any region. The Great Lakes states did experience a marked rebound, most likely reflecting the end of the GM strike (Michigan's 4.7 percent rate of growth was the nation's highest). North Dakota, after seeing income grow at an 11.1 percent rate in the third quarter, was last in the fourth quarter, with a 1.1 percent rate of growth.

Of course, the first quarter is likely to see very different results, with outright declines possible. It may be that small energy-producing states will be unusually hard-hit, as will, of course, the states now largely sheltering in place. Presumably, the new legislation will greatly expand federal transfer payments, but those effects will not be seen until the second quarter. Some may be looking at the state income figures to get a sense of the vulnerability of revenues to the virus event, but the potential for major federal aid is arguably the key element in assessing public finances.

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BEA has released the first estimates of state personal income for the fourth quarter of 2019 and for 2019 as a whole. Right now interest in these figures may be mostly antiquarian. For 2019 as a whole, the fastest-growing states were [...]

State Personal Income

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Economic recession is an infrequent occurrence, but in a fundamental sense recessions are the economy's way of cleansing the "rot" out the system that have been built up over time. This emanates from bad investments, bad loans, bad policies, excessive risk and speculation.

Recessions expose the vulnerabilities of the economy and the financial system. Even though the proximate cause could come from an outside shock it's the weaknesses and imbalances that are the underlying cause. So when the "right" shock comes along the fragile structure would collapse. Recessions fundamentally change behavior and policies and post recession business and finance will be materially different.

Economic Recession 

Since 1960 the US economy has experienced eight recessions; each economic downturn has been different along with the duration and depth. For example, some recessions were triggered by an exogenous shock (e.g. the oil shocks and now the coronavirus could be considered); some caused by tight money (to combat inflationary imbalances) and/or credit crunch. Meanwhile, others were started by an abrupt and sharp collapse in real and financial asset prices (financial imbalances).

In the post war period, the shortest recession has been six months and the longest eighteen. The average peak to trough decline in real GDP was around 1.7%, but the range is wide from 0.5% to 4.0%.

Economic recession acts like a forest fire, such that it doesn't discriminate between the "deadwood" and the "good" in the economy. In the process, it destroys jobs and people's lives, but also forces small companies (sometimes mid-sized to big) to close or downsize that were not previously vulnerable. It's the sheer force of an abrupt drop in spending, the curtailment of lending and the scramble for liquidity where few escape.

Some of the industries largely affected today include airlines, restaurants, hotel accommodations, and recreation (sports centers, parks, concerts, theaters, etc.). According to the data in the GDP report, the annual spending by consumers for these services and activities amounts to about $2 trillion - businesses probably spend similarly.

In other words, if there were a cessation of all of these activities for an 8-week period the impact to the US economy would be over $650 billion, equal to 3% of GDP (this is just from the aforementioned service industries). Only the consumer aspect of the spending decline would directly affect GDP, but these industries would feel the full impact of this spending collapse.

Spending in these service industries is not going to "zero", but in some cases it will. There are no professional sports of any kind scheduled for the time being or foreseeable future. These companies are enormously affected since they have to reimburse paid customers for travel and events cancellations.

It's impossible to predict confidently how severe the economic slump will be or the duration. Nothing on this scale has hit the US economy in the post-war period. This disruption goes far beyond work and finance because it also encompasses people's mobility, health care, education, all forms of entertainment and recreation, and confidence in our government.

Fast monetary and fiscal policy responses are helpful, but they do not fill all of the "holes" being opened in finance and the economy. Abrupt and sharp declines in asset prices have amplified distress, contributing to the downdraft in the economy. It is very hard to see how monetary policy can act as a shock absorber since the Fed's policy of low rates contributed to the financial imbalances that now exist.

Recoveries from the last three recessions were painfully slow. They were slowed by debt deleveraging cycle; commercial real estate and banking (early 1990s), non-financial companies (early 2000s); and residential real estate (starting in 2009). Odds are high that another debt deleveraging cycle will arise soon since US non-financial companies started 2020 with record levels of debt relative to GDP and cash flow.

It would be a mistake to think business and financial conditions would quickly return to levels prior to coronavirus outbreak. Recession changes consumer and business behavior in ways that are difficult to predict or forecast.

Post-recession, people will rethink travel destinations and the mode of transportation. Social distancing could alter how people choose to experience forms of entertainment and recreation. Businesses might opt for smaller work forces in several locations, versus bunching large groups in one place. They also may restructure existing supply chains or create new ones.

It is obvious government has to invest more in its public health system. Before the crisis is over it may be compelled to offer bailouts to a number of private sector firms at a cost twice of the $700 billion bank bailout in 2008.

Monetary policy will need to fundamentally alter its operating framework. Policymakers cannot avoid all recessions, but it needs to incorporate a better risk management approach in its policy decisions such that it reduces the risks of the "big" ones. Easy money did not cause the downturn, but it did contribute to the severity; it separated finance from the economy, elevated asset prices and encouraged non-financial companies to add record leverage.

Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
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Economic recession is an infrequent occurrence, but in a fundamental sense recessions are the economy's way of cleansing the "rot" out the system that have been built up over time. This emanates from bad investments, bad loans, bad [...]

A "Primer" on Recession: Post Recession Business & Finance Will Be Different

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In what now seems like ancient times, state labor market data was strong in January. Twelve states had statistically significant increases in payrolls over the month, led by a 35,700 gain in Florida and 33,500 in New York. Some other Northeastern states, including Massachusetts, New Hampshire, and New Jersey saw percentage point gains as comparable or larger than New York’s .3 percent (New Hampshire was up .7 percent) strongly suggesting that the remarkably mild winter boosted the numbers. Over the 12 months ending in January job growth was, as has been the case for some time, strongest in most of the belt of states from Washington to Texas, and generally weaker in states along the Mississippi River and its tributaries (along with Alaska and Vermont), with a number reporting statistically insignificant drops.

In the household survey, Alaska had yet again the highest unemployment rate, at 6%, while Mississippi stood at 5.5%, Louisiana at 5.3%, DC 5.2% and West Virginia. Among larger states, Pennsylvania’s 4.7% was highest. North Dakota’s 2.3% was the lowest in the nation, and Vermont and South Carolina reported 2.4% rates.

Once again, these are January numbers (they incorporate the annual benchmark and seasonal revisions). Like the soon to be released February figures, they are rather moot at this juncture.

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In what now seems like ancient times, state labor market data was strong in January. Twelve states had statistically significant increases in payrolls over the month, led by a 35,700 gain in Florida and 33,500 in New York. Some other [...]

State Labor Markets in January

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.