Payrolls fell by “only” 247,000 in July, somewhat smaller than the 325,000 that analysts had anticipated.
The unemployment rate ticked down to 9.4%.
If you dig into the numbers a bit further, you find some other encouraging nuggets:
Job losses in May and June were 43,000 smaller than BLS had previously estimated.
The average work week ticked up from 33.0 hours in June to 33.1 hours in July. That may seem like a small change, but it’s a good sign that hours have bounced off the record low recorded in June.
Average hourly earnings increased 0.2%. Again not a huge change, but clearly pointing in the right direction.
The U-6 measure of unemployment, which includes workers who are discouraged or working part-time for economic reasons, declined from 16.5% to 16.3%:
Losing 247,000 jobs is not a good month in the job market. But it is the best month since last August, before the fall of Lehman.
One of my first posts cautioned against comparing the current economic downturn to the Great Depression. Our economy is certainly in terrible shape, as Friday’s GDP data confirmed. Indeed, it’s the worst downturn since World War II. But it still pales in comparison to the horror of the Great Depression.
Since we received fresh data on Friday, it seems like an auspicious time to present a new version of my chart making this point:
The green bar is the current recession. Most forecasters expect the economy to grow, albeit tepidly, in coming quarters. If they are right, the estimated peak-to-trough GDP decline in this downturn is 3.9%. (If you believe that forecasters are too rosy, feel free to add on your own estimate of further declines in the quarters ahead.)
Yesterday’s GDP report confirmed what many had already suspected: the current economic downturn is the worst since World War II.
According to the advance estimate, GDP fell at a 1.0% annualized pace in the second quarter, somewhat better than consensus estimates (which were looking for a decline in the 1.5% range). Revisions to last year, however, revealed than earlier parts of the recession were more severe than originally estimated.
Putting it all together, GDP has declined by an estimated 3.9% over the past four quarters. That edges out the recession of 1957-58, when GDP fell by 3.7% in just two quarters, as the deepest contraction in GDP since World War II.
To put this in context, the following chart shows the magnitude of all GDP declines since 1947:
There have been 25 such declines, ranging in length from one to four quarters. The current downturn beats all the others.
There wasn’t room to include the dates of the downturns in that chart, so here’s one that shows just the top five declines:
The economy contracted at a 1.0% pace in the second quarter, according to the advance estimate from the Bureau of Economic Analysis. That’s bad, of course, but much better than the 5.4% and 6.4% pace of declines in the two previous quarters.
Whenever the GDP data come out, the first thing I look at is Table 2, which shows how much different sectors of the economy contributed to the growth (or, in this case, the decline). The most striking thing about Q2 is how broad the weakness was:
As the chart shows, Q2 witnessed declines in every major category of private demand: consumer spending, residential investment, business investment in equipment and software (E&S), business investment in structures, and exports. Wow. To find the last time that happened, you have to go all the way back to … the fourth quarter of last year, when it was even more severe. But before that, you have to go back five decades to the sharp downturn of the late 1950s.
Not surprisingly, government spending helped offset the declines in private spending. Most of the boost came from defense spending, but state and local investment also helped (perhaps some glimmers of stimulus?).
A sharp decline in imports, finally, was the biggest contributor to growth in Q2, at least in an accounting sense. It’s important to choose your words carefully here, since declining imports are clearly not the path to prosperity. In a GDP accounting sense, however, import declines do boost measured growth. Why? Well consider the fall in consumer spending. That decline affected both domestic production and imports. GDP measures domestic production, so we need a way to net out the decline in consumer spending that was attributable to imports. That’s one of the factors being captured in the imports figure.
Note: If the idea of contributions to GDP growth is new to you, here’s a quick primer on how to understand these figures. Consumer spending makes up about 70% of the economy. Consumer spending fell at a 1.2% pace in the second quarter. Putting those figures together, we say that consumer spending contributed about -0.9 percentage points (70% x -1.2%, allowing for some rounding) to second quarter growth.
As I mentioned a few weeks ago, today’s GDP release is particularly important because the fine people at the BEA have gone back and made revisions to the entire history of GDP statistics. I will post again once I have a chance to review how history has changed.
Their answer? Because the Federal Reserve has been really, really busy.
Keister and McAndrews begin their analysis by documenting the remarkable increase in excess reserves since the fall of Lehman:
Since September 2008, the quantity of reserves in the U.S. banking system has grown dramatically, as shown in Figure 1. Prior to the onset of the financial crisis, required reserves were about $40 billion and excess reserves were roughly $1.5 billion. Excess reserves spiked to around $9 billion in August 2007, but then quickly returned to pre-crisis levels and remained there until the middle of September 2008. Following the collapse of Lehman Brothers, however, total reserves began to grow rapidly, climbing above $900 billion by January 2009. As the figure shows, almost all of the increase was in excess reserves. While required reserves rose from $44 billion to $60 billion over this period, this change was dwarfed by the large and unprecedented rise in excess reserves.
Some observers have expressed two concerns about the spike in excess reserves:
Over the past two years, many policymakers have identified loan modifications as key to fighting the mortgage crisis. The rationale for encouraging modifications appears quite simple: foreclosure is expensive for both the borrowers (who lose their home and their credit worthiness) and lenders (who often recover only a fraction of what they are owed). It would therefore seem that loan modifications — reducing payments so that owners can avoid foreclosure — are a potential win-win for both sides.
From that perspective, the slow pace of modifications appears rather mysterious, with potential causes including (a) stupidity on the part of lenders and servicers, (b) flaws in servicing contracts for securitized mortgages, and (c) borrower reluctance to even speak with their lenders.
Both the Bush and Obama administration have initiated a series of policies to encourage modifications, yet results have not lived up to expectations. The Washington Post has a nice article this morning that walks through one of the reasons for this failure. The basic problem is that the argument in favor of loan modifications focuses on only one kind of borrower: those who would make payments with some help but won’t make payments without that help. However, those borrowers are outnumbered by two other types: those who would pay without help and those who won’t pay even with help.
The St. Louis Fed has a nice one-pager that illustrates how the housing boom differed across homes in different price tiers.
In each of the four cities they examine (Boston, Cleveland, Phoenix, and Tampa), low-priced houses experienced the biggest boom (a relative concept in Cleveland, to be sure) followed by the biggest bust:
The authors interpret this as evidence that:
Middle- and upper-tier home buyers were more insulated from many of [the factors that drove the boom and bust in the prices of low-price tier homes]. They had less need for the newer mortgage products, as most of these consumers were not first time buyers. As homeowners, they had equity to put toward their purchase, in contrast to most lower-tier first-time home buyers.
The pattern is particularly striking in Phoenix, where the price index for low-price homes has now fallen below the indices for middle- and high-price homes.
Last week’s report on residential construction provided more evidence that housing may be beginning to bottom. The headline evidence, noted by most media and economic pundits, is the rebound in housing starts over the past two months:
The rebound is from an extremely low level, so it’s hard to get too excited about it. But it does suggest that the plummeting of the past few years may finally be over.
As I noted last month, however, a bottom in housing starts isn’t a bottom in housing. From a macroeconomic point of view, the key thing is the amount of construction activity, which depends on both housing starts and housing completions. Not surprisingly, house completions plummeted along with housing starts, albeit with a lag reflecting the time needed for construction: Continue reading “Step One of a Housing Bottom”
Neil Barofsky, the Special Inspector General for the Troubled Asset Relief Program (affectionately known as SIGTARP), is making headlines with his estimate that the government has provided “potential support totaling more than $23.7 trillion” in fighting the financial crisis. That estimate will be officially released on Tuesday morning in the SIGTARP’s latest quarterly report (you can find an early copy here – ht WSJ).
As the media are already noting (e.g., WSJ and Yahoo), there are many reasons to believe that the $23.7 trillion figure is overstated. For example, as noted in the footnote to the table above, the figure “may include overlapping agency liabilities … and unfunded initiatives [and] … does not account for collateral pledged.” In other words, there may be double-counting, some of the programs won’t happen or are already winding down, and the estimates assume that any collateral is worthless. For example, to get to $5.5 trillion in potential losses on Fannie Mae and Freddie Mac (part of the $7.2 trillion Other category), you would have to assume that all GSE-backed mortgages default and that all houses backing them are worthless.
In short, the SIGTARP estimate is a way upper-bound on likely Federal support to the financial support. That fact shouldn’t detract, however, from the importance of the rest of this report.
