The labor market data for January were mixed. On one hand, nonfarm payroll employment increased by 36,000, far below market expectations, which averaged roughly 150,000; on the other hand, the unemployment rate pulled back 0.4 percentage point for the second month in a row. This time it came down to 9.0 percent from 9.4 percent in December. The January storms, especially through their effects on construction jobs, can explain some of the anemic growth in payrolls, while the fall in the unemployment rate was mostly due to movements out of the labor force and from a technical adjustment by the BLS, updating population controls.

Real GDP increased at a 3.2 percent annualized rate in the fourth quarter of 2010, according to the BEA’s advance estimate (which is based on incomplete source data). Private consumption expenditures continued to show strength and grew at a 4.4 percent rate on the back of a strong increase in durables. A sharp decrease in imports also contributed to GDP’s strong showing. On the negative side, the main drag was private inventory investment. Economic activity in the manufacturing sector expanded in January for the eighteenth consecutive month, as the ISM’s Purchasing Managers’ Index grew 2.3 percent to 60.8, its highest level since May 2004.

Inflation, as measured by the CPI, was at 1.5 percent year-over-year in December 2010, while the less volatile core measure that excludes food and energy stood at 0.8 percent. The PCE measures also reflected this acceleration in food and energy prices, as the headline PCE index grew 1.2 percent in the fourth quarter of 2010 relative to the same quarter in 2009, while the core measure grew only 0.8 percent. In light of these numbers, the Federal Open Market Committee kept the target range for the federal funds rate at 0 to 1/4 percent at its January 25-26 meeting and maintained its commitment to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011.  [2011-02-04]  

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]