Joseph G. Carson

<!DOCTYPE HTML PUBLIC "-//W3C//DTD HTML 4.01 Transitional//EN">
<html><head>
</head>

	 
 
 
 
 

After 18 months of negotiations, the trade talks ended with the US achieving very little. It is wrong to call this a "trade" deal, let alone a "substantial " one since the focus, almost exclusively, of the Trump Administration has been to reduce the trade imbalance and the agreement on farm purchases accomplishes little. It is also wrong to call it a trade "truce" since outstanding tariffs are still in place and future tariffs have not been rescinded. As such, Phase 1 of trade talks ended with many issues unsettled, leaving businesses and investors unsure on what lies ahead.

According to press reports, China has agreed to increase its purchases of US farm products up to $40 to $50 billion, although no timeline was offered. The US agreed to postpone a planned increase in tariffs scheduled to take effect on October 15, but let stand existing tariffs and did not remove the planned tariffs to take effect in December. Both sides agree to establish new rules to prevent currency manipulation (although the US designation of China as a currency manipulator still stands). Finally, it is reported that "progress" (no details) was made on intellectual property protection.

Remove for a second the two countries that are involved in these trade negotiations and just look at what has been announced. Country B has agreed to purchase $40 to $50 billion in farm products from Country A. On the surface, it would suggest that the bi-lateral trade deficit between the two countries is largely centered in agricultural goods and Country A has a comparative advantage (or a surplus) in farm (agricultural) goods. None of that is true.

In 2018, the bilateral merchandise trade deficit between US and China totaled $419 billion. Yet, trade in farm or agricultural goods reduced the overall trade deficit between the US and China. In 2018, the US exported $9.3 billion of agricultural goods to China and imported $4.9 billion, recording a small surplus of $4.4 billion in farm products.

In 2018, the gross output of the US farm sector totaled $380 billion, or about 1% of the gross output of all industries. Roughly one-third, or $133 billion of farm products were exported to all trading partners. Even if the US directed all of its agricultural exports to China it would only reduce the bilateral trade deficit by one-third. But that would not result in a lower overall US deficit as it merely increases, by a like amount, the US deficit with the rest of the world. In other words, shifting the direction of farm exports does not solve the US overall trade imbalance.

None of this is meant to downplay the important role of the farm economy, or to overlook the hardship the farm sector has experienced during the trade dispute between US and China.

Yet, the bilateral trade imbalance between the US and China involves many factors and the US needs to break away from the zero-sum thinking on China trade, because at the moment it is harming not helping US growth prospects.


Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
</html>

After 18 months of negotiations, the trade talks ended with the US achieving very little. It is wrong to call this a "trade" deal, let alone a "substantial " one since the focus, almost exclusively, of the Trump Administration has [...]

Trade Negotiations – US Agrees To A Farm Package, Not Trade Deal With China

<!DOCTYPE HTML PUBLIC "-//W3C//DTD HTML 4.01 Transitional//EN">
<html><head>
</head>

	 
 
 
 
 

Is it possible for a policy recession to occur when successive rounds of policy-stimulus have worked to extend the economic cycle and the policy-fuel runs out or cannot be provided in the same scale? We may soon find out.

The current stance of monetary and fiscal policies is at odds with the economic cycle. The economic cycle is the longest in the post war period, running now for 123 months. Long cycles, with dwindling amounts of resources as is evident with the jobless rate at 3.5% the lowest in 50 years, have been associated with no policy support.

For example, there were two other economic cycles (1960s and 1990s) that also ran well over 100 months in length and at the end of both cycles the US budget was in surplus. Yet, nowadays the federal budget is not only in deficit, but the scale of the deficit is increasing.

The Congressional Budget Office estimated that the budget deficit for fiscal year 2019, which ended on September 30th, totaled $984 billion, or 4.7% of GDP. The budget deficit has increased by over $300 billion over the past two years, largely due to the 2017 tax cut. Companies used most of their portion of the tax cut to buy back their own stock, lifting equity prices in the process.

The monetary side of the policy apparatus is also misaligned when compared to long cycles. At the end of 1960s and 1990's cycles (with jobless rates in the 3.5% to 4% range) the nominal fed funds rate stood 250 to 400 basis points above the consumer core rate of inflation.

With the decision to lower official rates by 25 basis points at the September 17-18 Federal Open Market Committee (FOMC) meeting the mid-point of the fed funds target today is 50 basis points below the consumer core rate of inflation.

The policy imbalances and the potential impact on the economy and the financial markets have not gone unnoticed by policymakers. At the September 17-18 FOMC meeting "Several participants cited considerations that led them to be concerned about financial stability, including low risk spreads and a buildup of corporate debt, corporate stock buybacks financed through low-cost leverage, and the pace of lending in the CRE [commercial real estate] market."

The potential imbalances in the commercial real estate market have been a focus of Mr. Eric Rosengren, the President of the Federal Reserve Bank of Boston. Mr. Rosengren has been warning about the fast rise in prices of commercial real estate, and also what he sees as an "asset-liability" mix problem.

Co-working firms are securing long-term leases from property owners, and then rent out the commercial space with short- term leases. Mr. Rosengren argues that the low interest rate environment has greatly increased leverage in the sector, while also pushing commercial real estate values to lofty levels. Mr. Rosengren has argued that although the risks of the co-working model will not be fully recognized until the next recession, he worries that additional policy-stimulus will only fuel even larger imbalances.

Low interest rates have also created an "asset-liability" mismatch on the household side as well. According to press reports, roughly one-third of new car loans taken out during the first half of 2019 had a average term that of nearly 7 years, with a small portion of new loans going beyond 84 months. Auto loans of 7 years and longer were not even offered in the prior cycle.

Stretching out the terms of car loans has been made possible by low interest rates, creating the impression that car buying has become more "affordable". But there is also big downside.

Cars are usually held for 5 years, so an increasingly number of current new car-buyers will be forced to pay off their existing car loan or roll the debt from existing auto loans into a new car loan. How many consumers would be able to afford paying for a new loan and the remaining portion of the old loan at the same time? That asset-liability mismatch has the potential to trigger a slump in consumer spending at some point.

Policymakers are charged with mandate of maintaining economic and financial stability. Yet, from a risk management perspective when does attempting to extend the current cycle cross the line and endanger future cycles? Based on segments of the debt and equities markets, as well as segments of the real economy that "line" has already been crossed.


Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
</html>

Is it possible for a policy recession to occur when successive rounds of policy-stimulus have worked to extend the economic cycle and the policy-fuel runs out or cannot be provided in the same scale? We may soon find out. The current [...]

A Policy Recession

<!DOCTYPE HTML PUBLIC "-//W3C//DTD HTML 4.01 Transitional//EN">
<html><head>
</head>

	 
 
 
 
 

Is it possible for a policy recession to occur when successive rounds of policy-stimulus have worked to extend the economic cycle and the policy-fuel runs out or cannot be provided in the same scale? We may soon find out.

The current stance of monetary and fiscal policies is at odds with the economic cycle. The economic cycle is the longest in the post war period, running now for 123 months. Long cycles, with dwindling amounts of resources as is evident with the jobless rate at 3.5% the lowest in 50 years, have been associated with no policy support.

For example, there were two other economic cycles (1960s and 1990s) that also ran well over 100 months in length and at the end of both cycles the US budget was in surplus. Yet, nowadays the federal budget is not only in deficit, but the scale of the deficit is increasing.

The Congressional Budget Office estimated that the budget deficit for fiscal year 2019, which ended on September 30th, totaled $984 billion, or 4.7% of GDP. The budget deficit has increased by over $300 billion over the past two years, largely due to the 2017 tax cut. Companies used most of their portion of the tax cut to buy back their own stock, lifting equity prices in the process.

The monetary side of the policy apparatus is also misaligned when compared to long cycles. At the end of 1960s and 1990's cycles (with jobless rates in the 3.5% to 4% range) the nominal fed funds rate stood 250 to 400 basis points above the consumer core rate of inflation.

With the decision to lower official rates by 25 basis points at the September 17-18 Federal Open Market Committee (FOMC) meeting the mid-point of the fed funds target today is 50 basis points below the consumer core rate of inflation.

The policy imbalances and the potential impact on the economy and the financial markets have not gone unnoticed by policymakers. At the September 17-18 FOMC meeting "Several participants cited considerations that led them to be concerned about financial stability, including low risk spreads and a buildup of corporate debt, corporate stock buybacks financed through low-cost leverage, and the pace of lending in the CRE [commercial real estate] market."

The potential imbalances in the commercial real estate market have been a focus of Mr. Eric Rosengren, the President of the Federal Reserve Bank of Boston. Mr. Rosengren has been warning about the fast rise in prices of commercial real estate, and also what he sees as an "asset-liability" mix problem.

Co-working firms are securing long-term leases from property owners, and then rent out the commercial space with short- term leases. Mr. Rosengren argues that the low interest rate environment has greatly increased leverage in the sector, while also pushing commercial real estate values to lofty levels. Mr. Rosengren has argued that although the risks of the co-working model will not be fully recognized until the next recession, he worries that additional policy-stimulus will only fuel even larger imbalances.

Low interest rates have also created an "asset-liability" mismatch on the household side as well. According to press reports, roughly one-third of new car loans taken out during the first half of 2019 had a average term that of nearly 7 years, with a small portion of new loans going beyond 84 months. Auto loans of 7 years and longer were not even offered in the prior cycle.

Stretching out the terms of car loans has been made possible by low interest rates, creating the impression that car buying has become more "affordable". But there is also big downside.

Cars are usually held for 5 years, so an increasingly number of current new car-buyers will be forced to pay off their existing car loan or roll the debt from existing auto loans into a new car loan. How many consumers would be able to afford paying for a new loan and the remaining portion of the old loan at the same time? That asset-liability mismatch has the potential to trigger a slump in consumer spending at some point.

Policymakers are charged with mandate of maintaining economic and financial stability. Yet, from a risk management perspective when does attempting to extend the current cycle cross the line and endanger future cycles? Based on segments of the debt and equities markets, as well as segments of the real economy that "line" has already been crossed.
</html>

<!DOCTYPE HTML PUBLIC "-//W3C//DTD HTML 4.01 Transitional//EN">
<html><head>
</head>

	 
 
 
 
 

In September, payroll employment rose close to consensus estimates and the jobless rate dropped to a 50-year low, easing fears, at least for the moment, of a broad slump in hiring and a deep economic slowdown.

Yet, the employment headlines are misleading. The underlying details on payrolls show there is in fact a hiring slump underway, consistent with the results from recent business surveys of manufacturing and service sectors. Q3 GDP growth will be the weakest since 2015, putting downward pressure on corporate earnings.

According to the Bureau of Labor Statistics (BLS), payroll employment rose 136,000 in September, and with upward revisions to prior months payroll employment in Q3 averaged 157,000 a month, roughly matching the 152,000 gain of the prior quarter. On the surface, employment conditions look be on a steady course, and unchanged over the past several months.

However, the payrolls of nonproduction and supervisory workers, which represents the bulk of the private sector workforce accounting for over 80% of the private payroll gains in the current economic cycle dating back to 2009, paints a much weaker picture of labor market conditions.

In Q3, payrolls of production and non-supervisory workers showed an average monthly gain of 71,000 (less than half the overall payroll gain), well below the subpar average monthly gain of 98,000 in Q2, and represent the smallest quarterly gain since 2010.

Equally important is the fact that the payrolls of production and non-supervisory workers in mining, manufacturing, retail trade, utilities, leisure and hospitality showed an outright decline in Q3. And the payrolls of production and non-supervisory workers in manufacturing and retail trade also posted a decline in Q2. The last time the payrolls of production workers in manufacturing and non-supervisory workers in retail trade declined for two consecutive quarters at the same time was 2009, during the Great Financial Recession.

The big puzzle in the September employment data was the drop (0.2%) in the jobless rate to 3.5%, driven by a large gain in household employment. According to BLS, household employment rose 391,000 in September, and by 1.264 million over the past three months. The three-month gain in household employment is the second largest quarterly gain of the current economic cycle, and is nearly three times the Q3 gain in payroll employment.

Household employment is based on a separate survey of people and tends to be very volatile, with outsized gains often followed by monthly and quarterly declines. The "bridge" between the two surveys is withheld income tax receipts as tax collections are the "hardest of hard" data, capturing in real time monies taken from currently employed workers paychecks. Withheld tax receipts over the past 6 months show little growth relative to the comparable period one-year ago, indicating that payrolls, especially the figures for production and non-supervisory workers, are painting a more accurate picture of labor market conditions and the direction of the general economy.

The bottom line is that the underlying labor market conditions have weakened and business surveys confirm the slowdown in hiring and overall growth.


Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
</html>

In September, payroll employment rose close to consensus estimates and the jobless rate dropped to a 50-year low, easing fears, at least for the moment, of a broad slump in hiring and a deep economic slowdown. Yet, the employment [...]

Payroll Data & Business Surveys Indicate Hiring Slump, Weak Growth And Profit Decline

Charles Steindel

<!DOCTYPE HTML PUBLIC "-//W3C//DTD HTML 4.01 Transitional//EN">
<html><head>
</head>

	 
 
 
 
 

BEA has released estimates of current-dollar consumer spending by state for calendar year 2018, along with revised figures for earlier years. It's useful to keep in mind what these figures are and are not:

1. As noted, they are annual estimates, released with some considerable lag. 
2. They are estimates of overall consumer spending, not for instance, retail sales. Anybody interested in seeing how these numbers may help explain, say, state sales tax revenues, will need to make considerable adjustments. For example, the largest single component of consumer spending is owners' equivalent rent, which is not subject to sales tax! 
3. In many categories, initial estimates of state consumer spending are assumed to be tied to growth in compensation in a corresponding retail store type—obviously, a somewhat questionable assumption, though it is hard to come up with a better alternative. 

In per capita terms, DC far and away leads the nation, with an estimated $63,151 in consumption per resident in 2018. This clearly is linked to high housing costs in the nation's capital. Massachusetts is number one among true states, at $55,095. Other high-housing cost Northeastern states are in the top ranks, including New Jersey and New York (property tax payments will enter into the consumed portion of rent). Two very high cost states to live in—Hawaii and Alaska--are high in the ranks, as are North Dakota, Minnesota, and Vermont. Minnesota ranks high because spending on many services is estimated to be high. Vermont also reports high spending on services, but it's interesting to see that both the Green Mountain State and North Dakota show unusually high spending levels on goods. It may be the case that compensation of retail employees is unusually high in both places (certainly, the shale boom could have produced that situation in North Dakota), and this is reflected in high estimates of spending on many goods.

On the low side, unsurprisingly poorer states are in the bottom grouping, with Mississippi the lowest, at $31,083.
</html>

BEA has released estimates of current-dollar consumer spending by state for calendar year 2018, along with revised figures for earlier years. It's useful to keep in mind what these figures are and are not: 1. As noted, they are annual [...]

Consumer Spending by State

<!DOCTYPE HTML PUBLIC "-//W3C//DTD HTML 4.01 Transitional//EN">
<html><head>
</head>

	 
 
 
 
 

The profits puzzle is no more. A recent report by the Bureau of Economic Analysis (BEA) stated that the primary reason that the GDP measure of operating profits does not show the "large run-up in profits" in other "popular measures" (e.g., S&P profits) is because it does not include capital gains, while other measures do. And it’s happening again.

BEA periodically publishes a report that provides a "conceptual bridge" to gauge the differences between the growth rates of the GDP measure of profits and S&P 500 reported profits.

According to BEA there are several accounting principles that affect measures of receipts and expenses and their timing, and "comparisons can be meaningful" with GDP & S&P 500 operating profits only if adjustments are made for the differences.

The adjustments fall into two broad categories: capital gains (net of losses) and bad debt expenses. Trading gains and losses are considered part of S&P 500 operating profits, but not part of GDP profits since they reflect a change (gain or loss) in the valuation of existing asset. Also, bad debt expenses are included in the GDP measure of profits since these reflect an adjustment to corporate balance sheet, while the write-down of existing assets are excluded from S&P 500 profits.

In past reports, BEA has published a series on GDP profits (after tax) and then an adjusted GDP profit series, netting out the bad debt expenses and adding back the capital gains (net of losses) in order to make the GDP profit series more aligned with the financial accounting basis for S&P profits.

According to the data published by BEA, capital gains (net of losses) run about 3 times larger than bad debt expenses during periods of economic growth and rising asset markets. But during periods slow growth or recession and falling risk markets capital gains (net of losses) can run equal to or even below bad debt expenses. Also, capital gains (net of losses) can ran as high as 30% of GDP measure of profits during rising risk markets.

Yet, it’s the "growth rates" that BEA believes offer the most meaningful insight when assessing the differences between adjusted GDP and S&P profits measures. And the differences in growth rates can be quite substantial, and in some cases the profit series move in opposite directions.

For example, in 2000 during the peak of tech bubble S&P operating earnings showed a double-digit gain in earnings, while the adjusted GDP measure of profits posted a decline. And in 2008 (financial crisis) the S&P operating profit declines was substantially larger than the GDP adjusted measure.

A senior BEA official said the next reconciliation report on GDP and S&P 500 profits would not be released until late 2020. Nevertheless, its already been well documented that capital gains are the key "wedge" between GDP and S&P profits and represent the most likely source of 2014 to 2019 outperformance of S&P 500 operating earnings. And its also important to note that while capital gains provide an extra boost to the growth rate of S&P 500 operating profits during rising risk markets they also represent a huge drag during down markets.


Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
</html>

The profits puzzle is no more. A recent report by the Bureau of Economic Analysis (BEA) stated that the primary reason that the GDP measure of operating profits does not show the "large run-up in profits" in other "popular measures" [...]

"Solving" The Profits Puzzle

<!DOCTYPE HTML PUBLIC "-//W3C//DTD HTML 4.01 Transitional//EN">
<html><head>
</head>

	 
 
 
 
 

The Philadelphia Federal Reserve Bank's estimates of state coincident activity for August show some increased dispersion and, overall, some signs of softening in economic growth. Over the last 12 months, 29 states show increases in their index in the 2 to 4 percent range—down from counts over 30 in that middle group in recent months. 7 states were at 4 percent or higher; 14 were lower than 2 percent, with Michigan reporting a decline. Western states were again generally stronger than the east; with Nevada at the top, with a 4.7 percent gain. Two large Eastern states—Georgia and Florida—did report growth of 3.5 percent. The weaker states tended to be in the middle portion of the nation, though New York was also in that group.

Over the three months ending in August, 24 states had gains of less than .5 percent, with 45 declines, with Kentucky's index down nearly 1 percent over that period. 14 states, though, had gains of 1 percent or more; these were in a wide swath literally from Maine to California (and with Alabama in the group just touching a southern border). Montana was again the state with the highest growth in this category. Its 2.48 percent increase was virtually the same as the preliminary 2.49 percent rise in its index reported for the April-July period

Montana also, (again) had the largest one-month increase in the initial results for August. 8 states saw declines (the initial report for July had 12 in this category), with drops of 2 percent or more in Delaware, Wyoming, and Kentucky.

The upshot from this survey is comparable to other recent reports. Growth is continuing, but with a fair number of states seeing cooling-off, and fewer showing extremely rapid growth. In the very largest states, Texas, California, and Florida still report strong numbers, though none of them were in the very top group; however, the figures from New York have been soft.
</html>

The Philadelphia Federal Reserve Bank's estimates of state coincident activity for August show some increased dispersion and, overall, some signs of softening in economic growth. Over the last 12 months, 29 states show increases in [...]

State Coincident Indexes

<!DOCTYPE HTML PUBLIC "-//W3C//DTD HTML 4.01 Transitional//EN">
<html><head>
</head>

	 
 
 
 
 

<a href="/comment/190924x.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/190924x.png" align="left"></a>
Operating profits for the overall economy have been essentially flat since 2014. Yet, during the same 5-year period operating profits for the S&P 500 companies are estimated to be up by a third.

Taken at face value, the profits data paints a picture of rising earnings for the companies that comprise the S&P 500 index while profits for millions of other firms are stagnant, if not contracting. How can that be? Are the earnings of S&P 500 companies "real" or are accounting gimmicks inflating them?

According to corporate profit data from the Bureau of Economic Analysis (BEA) operating profits for all US corporations (large and small and public and private) totaled $2.113 trillion in Q2 2019 essentially unchanged from the 2014 full year profit figure of $2.120 trillion.

Over the same 5-year period, the operating profits of S&P 500 companies have increased from $1.004 trillion in 2014 to an annualized estimated figure of $1.333 trillion in Q2 2019, and increase of 33%.

Both estimates of profits calculate earnings as the difference between receipts and expenses. Yet, the profit reports are based on two different accounting frameworks, financial and tax accounting.

Companies' use financial accounting to report their results, while tax accounting results is the primary source for the GDP measure of profits. As a result, differences between the two profit measures can result from the timing of when receipts and expenses are recorded, as well of what is included and not included in receipts and expenses.

For example, the GDP gauge of operating profits adjusts for misreported and/or overstated measures of current income. Income or losses derived from capital sales are not part of the GDP measure of profits because they reflect the sale of existing assets and GDP is only measuring the profits from current production, and not the change in the valuation of items that were produced in previous periods.

Yet, S&P 500 profits, which are based on a financial accounting basis, do include income derived from capital sales, and other financial flows and adjustments as well.

At the currently reported levels for Q2 2019 S&P 500 profits amount to a record 63% of overall operating profits for all US companies. In the past 30 years there is only one other period when the share of S&P 500 earnings topped the 60% level. That occurred in the late 1990s when the large gain in reported S&P 500 profits was largely driven by capital gain income. And, during that period the GDP measure of operating profits followed a similar pattern to that of 2014 to 2019---flat to slightly down.

Corporate profits are an important measure of the economy's overall performance as well as benchmark for the financial health of the corporate sector. The overall profit data raises questions about the general health of corporate sector. Moreover, the relative surge in S&P 500 earnings appears to be driven not by core operations and the experience of the late 1990s would argue that they unsustainable in their current form.


Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
</html>

Operating profits for the overall economy have been essentially flat since 2014. Yet, during the same 5-year period operating profits for the S&P 500 companies are estimated to be up by a third. Taken at face value, the profits data [...]

The Profits Puzzle

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

Our global data offering is unparalleled in terms of coverage, quality, and organization. We offer 290+ databases from 2500 government and private sources, a wealth of key survey and forecast data covering the world’s economies, and a robust offering of archive databases that drive machine learning for big data applications.

Optimized for precision analytics, our data is seamlessly integrated with Microsoft Office and all leading statistical packages through our DLX® software and platform independent HaverView™ website. We further offer direct database feeds, client server or cloud-based delivery, and RESTful API.


Privacy Policy

Disclaimer

Contact us

A premier time series data platform for the global strategy, research, and quant communities. 

New York

London

Singapore

Tokyo

Economy in Brief

Viewpoints

Contact Us

Our Data

Our Products

What We Do

Our Authors

About Us

Data News

Resources

Release Calendars

Training Center

Webinars

Newsletters

Download Software

For Clients

Live Updates

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.

Viewpoints

Jump to:

Trade Negotiations – US Agrees To A Farm Package, Not Trade Deal With China

A Policy Recession

A Policy Recession

Payroll Data & Business Surveys Indicate Hiring Slump, Weak Growth And Profit Decline

Consumer Spending by State

"Solving" The Profits Puzzle

State Coincident Indexes

The Profits Puzzle