Economic growth picked up moderately in the third quarter, with the final estimate of GDP coming in at 2.6 percent compared to the 1.7 percent rate posted in the second quarter. The final estimate was revised upward only slightly from the previous month’s estimate of 2.5 percent. The third estimate was more of a fine-tuning compared to the initial November revision (from the “advance” to the second estimate), which pushed reported GDP growth up from 2.0 percent to 2.5 percent.

Inventory restocking continued to be strong in the third quarter, as inventory investment contributed 1.6 percentage points to GDP growth. The inventory cycle initiated during the recession has lifted GDP growth for much of the year, but it is likely to have run its course. We look for smaller contributions in the fourth quarter and into 2011. Foreign trade was the biggest drag on growth in the third quarter, as imports jumped 16 percent and export growth slowed to just 6.7 percent. In all, foreign trade subtracted 1.7 percentage points from third-quarter GDP growth. We expect the deceleration in exports to be temporary, as rapid growth in the emerging-market economies and a weak dollar turn the net export contribution from negative to positive. Also, the surge in import growth should slow as demand from inventory rebuilding diminishes.

Employment continued a gradual recovery in December, with 103,000 jobs added to payrolls, but this growth was about 40,000 short of analysts’ expectations. The October and November numbers were revised higher by a combined 70,000 jobs. Over the entire October-December period, the economy generated an average monthly addition of 128,000 jobs. The household survey told a different story in December, as the unemployment rate dropped 0.4 percentage point from 9.8 percent in November to 9.4 percent, far lower than expectations. Household employment rose 297,000, nearly three times more than payroll empoyment. The big drop in the unemployment rate, though, was also the result of 260,000 people leaving the labor force. The labor force participation rate fell from 64.5 percent to 64.3 percent for a new cyclical low. The employment-to-population ratio, a somewhat more stable measure of labor market conditions, ticked up 0.1 percentage point to 58.3 percent, well short of the 63.4 percent rate recorded prior to the recession.

Inflation appears to be stabilizing, but further disinflation remains more of a near-term concern than rising inflation. Wage pressures are nonexistent. Anemic compensation growth and moderating productivity improvements imply further declines in the unit labor cost of production. Commodity price pressures are on the rise, but these are much smaller inflation catalysts than labor costs. The core consumer price index (which excludes food and energy prices) was up only 0.7 percent over the past 12 months in November compared to a 1.0 percent rate recorded as recently as August 2010. Year-over-year core personal consumption expenditures, watched more closely by Federal Reserve policymakers, ran at a similar 0.8 percent rate in November. Both measures fall well below the 1.7 –2.0 percent long-term range favored by the Federal Open Market Committee.  [2011-01-11]  

Monetary policy since the November Federal Open Market Committee (FOMC) meeting has been calm. Treasury purchases have continued as a part of both the reinvestment from agency debt and agency mortgage-backed securities proceeds and the second round of large-scale purchases. As of the first week in December, the reinvestment strategy has purchased $135 billion, and the second round of easing has purchased $44 billion.
Data were released on December 1, 2010, detailing the transactions that took place in the Fed ’s emergency lending facilities throughout the financial crisis. Reactions to the data have keyed on the assistance provided to foreign banks as well as the types of collateral used in the transactions.
An exit from Federal Reserve aid was announced by American International Group (AIG) in late September 2010. The insurance company plans on fully repaying the Fed by the end of the first quarter 2011, although outstanding loans will still exist with the limited liability companies created to assist AIG, Maiden Lane II, and Maiden Lane III. Economic data have generally indicated an improvement in overall conditions; however, the most recent employment report noted weak job growth and an increase in the unemployment rate to 9.8 percent. Inflation and inflation expectations remain soft in the wake of the FOMC ’s announcement to purchase $600 billion in Treasury securities.
  [2010-12-09]  

The third estimate of third-quarter GDP growth was revised slightly up from 2.5 percent to 2.6 percent. Inventories were revised up, offsetting the decline in personal consumption and making the revisions largely inconsequential when comparing the two estimates. Compared to the initial November revision (from the ?advance? to the second estimate), which pushed GDP growth up from 2.0 percent to 2.5 percent, the third estimate was more about fine-tuning the previous estimate.

All told, real personal consumption grew 2.4 percent in the third quarter, after rising 2.2 percent in the second quarter, and contributed 1.7 percentage points to real GDP growth. Preliminary reports of (nominal) holiday retail sales in excess of 5 percent year-on-year bode well for fourth-quarter real consumption growth, which should tip the scales at well over 3 percent.

Foreign trade was the biggest drag on growth in the third quarter, as imports jumped 16 percent and export growth continued to slow to just 6.7 percent. In all, foreign trade subtracted 1.7 percentage points from third-quarter GDP growth. We expect the deceleration in exports to be temporary. Rapid growth in emerging-market economies coupled with a weak dollar should soon turn the net export contribution from negative to positive. Furthermore, the surge in import growth should slow as demand from inventory rebuilding diminishes.

Inventory restocking continued strong in the third quarter, as inventory investment contributed 1.6 percentage points to GDP growth. The inventory cycle initiated during the recession has lifted GDP growth for much of the year but is likely to have run its course. We look for smaller contributions in the fourth quarter and into 2011.

Alternatively, housing probably has further to fall. Residential investment plunged 27.3 percent in the third quarter, more than erasing the temporary gains achieved in the second quarter. The temporary homebuyers? tax credit is the clear culprit, as it merely pulled housing starts from the second half of the year into the first. Nonresidential fixed investment expanded 10.1 percent in the third quarter, largely on a 15.1 percent rise in business spending on equipment and software. That solid gain follows two consecutive gains in excess of 20 percent. A robust expansion in drilling and mining nearly overcame steep drops in commercial construction. As a result, nonresidential fixed investment in structures managed to (nearly) tread water, falling only 3.6 percent compared to a 13.5 percent drop over the previous four quarters.  [2011-01-11]  

December’s employment report was emblematic of the overall progress made in labor markets in 2010, as it presented a mixed message on the status of U.S. labor at the close of the year. Surprising most analysts, the unemployment rate moved down 0.4 percentage point to 9.4 percent in December. This is the largest month-to-month drop in the unemployment rate since April 1998. The large drop in the unemployment rate reflects a sharp decline in the number of people unemployed (-556,000), a rise in the number of the employed (+297,000), a reduction in the overall size of the labor force (-260,000), and a rise in the number of individuals not in the labor force (+434,000). The fall in unemployment did not directly translate into one-for-one increases in employment, however, as the labor force participation rate declined from 64.5 percent to 64.3 percent.

The Bureau of Labor Statistics’ monthly labor market report provides two estimates of employment—one based on households (the above) and one from a survey of the payrolls of employers. In December, payroll employment expanded by 103,000 workers, and this was below most analyst expectations. Such month-to-month differences in employment estimates from the household and payroll surveys are common. On the bright side, payroll employment estimates for October and November were revised upward a total of 70,000.

Looking over the course of 2010, the unemployment rate fell from 9.9 to 9.4 percent, but of course, almost all of the decline was due to the drop that occurred in December. Both the household and payroll surveys estimate that employment increased over the year by 1.1 to 1.25 million workers, averaging roughly 100,000 jobs per month. This rate of employment growth will not be sufficient to bring down unemployment rates, as many analysts expect the labor force participation rate to rebound, bringing more individuals into the workforce.

This month, our coverage of labor markets takes a look at recession and recovery in the Fourth District. Ohio and Pennsylvania have experienced markedly different employment paths during the recession, and we explore the potential reasons for the observed divergence.   [2011-01-11]