Tag Archives: unemployment

2014 Review: Economy Edition (02/04/2015)

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

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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

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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

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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

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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

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Note: S&P Case-Shiller 20-City Home Price Index as of Nov 2014

Footnote

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.

http://www.federalreserve.gov/faqs/money_12848.htm

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).

http://en.wikipedia.org/wiki/Full_employment

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2013 Review: Economy Edition

The last two weeks I reviewed investment performance in 2013 (2013 Review: Significant Events and 2013 Review: Asset Class & Sector Edition).  This last post in the annual review series will focus on economic indicators.

The employment situation continued to improve in 2013 (Exhibit 1).  The U.S. economy added 2.18 million new jobs (182,000 a month), slightly fewer than 2.19 million in 2012.  Total employment increased 1.6% which was better than 1.0% population growth.  The unemployment rate ended the year at 6.7% in December, the average of monthly rates was 7.4%.  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

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GDP growth slowed in 2013 (based on first three quarters) (Exhibit 2).  Auto sales, another metric of economic health, increased 6.8% approaching 16 million a year.  Inflation, as measured by Consumer Price Index, stayed very benign and decreased for the second year in a row.  This combination of slowing growth and mild inflation would argue for continued support from the Federal Reserve.

Exhibit 2 – Growth & Inflation

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Public debt increased to $16.7 trillion during the year (Exhibit 3).  On the positive side, a combination of tax hikes and spending cuts (sequester) led to a big drop in budget deficit.  It declined by 37% to $680 billion to about half of what it was in FY 2011.  The Federal Reserve expanded its balance sheet by over a trillion dollars to $3,759,000,000,000 (that’s a lot of zeros!).  Average monthly increase was about $90 billion, which is in-line with its official QE pace of $85 billion a month.  The purchases have been “tapered” to $75 billion beginning in January 2014.  We’ll do a separate post analyzing Fed balance sheet in more details.

Exhibit 3 – Debt & Deficit

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S&P 500 earnings growth accelerated to 10.7% (Exhibit 4).  However, most of the strong index performance in 2013 came from P/E multiple expansion, which increased by 17% to 17.2x from 14.7x.  Both 10-Year Treasury rate and 30-Year Fixed Mortgage rates increased from record-low levels.

Exhibit 4 – Earnings & Rates

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Finally, the housing sector continued its slow healing process (Exhibit 5).  While still nowhere near prior peaks, both unit numbers and prices improved again in 2013.

Exhibit 5 – Housing

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All of these data and MUCH more are available for free at http://research.stlouisfed.org/fred2/.  This is a great resource for investors and financial planners who like to do their own homework instead of relying on whatever sensationalized datapoints the media choses to focus on.

I plan on taking a closer look at many of these metrics in future posts.