U.S. GDP numbers were released last Friday, which means we can now finish 2014 year-in-review series by taking a look at major economic indicators. The employment situation continued to improve in 2014 (Exhibit 1). The U.S. economy added 3.47 million new jobs (289,000 a month), which was a 60% improvement over 2013. Total employment increased 2.5% which was quite a bit better than the 0.6% population growth. The unemployment rate ended the year at 5.4%, which is in the range of what Fed currently considers full employment (see footnote). U-6 rate is a broader measure defined as “Total unemployed, plus all marginally attached workers plus total employed part time for economic reasons”.
Exhibit 1 – Employment
GDP growth remained in the 2% range last year (Exhibit 2). Auto sales jumped 8.9% to over 17 million a year (the highest level since 2005). Inflation, as measured by Consumer Price Index, actually decreased and came in at 0.8%. This level is well below the Fed’s 2% target and something to keep an eye on as everyone is trying to figure out when it will start raising rates.
Exhibit 2 – Growth & Inflation
Public debt increased to $17.8 trillion during the year (Exhibit 3). On the positive side, a combination of tax hikes and spending cuts led to a big drop in budget deficit. It declined by 30% to $483 billion or (only) 2.8% of GDP. Despite the “Taper” , Federal Reserve still expanded its balance sheet to $4.2 trillion. Average monthly increase was about $40 billion (down from $90 billion in 2013). It should actually decline this year as securities mature and there are no fresh purchases. We’ll do a separate post analyzing Fed balance sheet in more details.
Exhibit 3 – Debt & Deficit
Note: Public debt figure as of Q3:2014
S&P 500 earnings growth decelerated to 7.9% (Exhibit 4). P/E multiple expanded 3.3% to 17.8x. 10-Year Treasury rate declined to 2.2%, which was totally unexpected as most market pundits predicted a big jump in rates for 2014. 30-Year Fixed Mortgage rates also declined ending the year just under 4%.
Exhibit 4 – Earnings & Rates
Note: Q4:2014 S&P 500 earnings are consensus estimates as of Jan 22, 2015
Finally, the housing sector continued improving (Exhibit 5). Both units and prices increased again in 2014, albeit at a much slower pace than in recent years.
Exhibit 5 – Housing
Note: S&P Case-Shiller 20-City Home Price Index as of Nov 2014
Federal Reserve currently considers full employment to be in the 5.2% – 5.5% range.
Committee participants’ estimates of the longer-run normal rate of unemployment had a central tendency of 5.2 to 5.5 percent.
More traditionally “Full Employment” in the U.S. means 4%.
The United States is, as a statutory matter, committed to full employment (defined as 3% unemployment for persons aged 20 and older, 4% for persons aged 16 and over); the government is empowered to effect this goal. The relevant legislation is the Employment Act (1946), initially the “Full Employment Act,” later amended in the Full Employment and Balanced Growth Act (1978).