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Weekly Economic Update for May 7 – May 11, 2018

Business are Investing More, which is Good for Workers

Since the November 2016 election, new orders of “core capital goods” (excludes defense and aircraft orders) continue to show robust growth after declining since late 2014. This counters the claim by some critics that businesses are just buying back their own stock or paying out more dividends, although it is important to note that stock buybacks and dividend payouts are by no means bad for the economy. Capital accumulation, which was a source of weakness for the U.S. economy during the Obama Administration, will help bolster worker productivity, which in turn will help propel employment and wage growth.

CHAIRMAN’S UPDATE

Paulsen Sets the Record Straight:
Tax Reform is Working for American Workers

In an op-ed for the Wall Street Journal's Opinion page, Chairman Paulsen shared the evidence for why tax reform is working for everyday Americans:

"The Bureau of Economic Analysis recently reported that real disposable income—workers’ inflation-adjusted earnings, after taxes—rose 3.4% in the first quarter of this year. The bureau specifically credited tax reform for higher wages as well as lower taxes... Even the Congressional Budget Office, which tends to play down the growth effects of tax relief, estimates the tax law will create nearly one million new jobs over the coming decade, along with higher wages and near-term annual growth of more than 3%. The Joint Committee on Taxation finds that cutting corporate taxes will generate long-term wage growth, and that tax reform will draw foreign investment to the U.S., producing strong benefits for workers."

Chairman Paulsen lauded the April jobs report as a sign of positive developments in the economy:

"These numbers show that we are on the right path with our economic policies: The unemployment rate dropped to 3.9 percent in April, the lowest since December of 2000. Our labor market is running strong with job creation of 200,000 per month on average this year. Wages are also improving, with the same wage gain year-over-year as in March of 2.6 percent. BLS reports 164,000 for April and a net upward revision of 30,000 jobs for February and March. The best part? We’re going to keep going. This economy still has room to run, so long as we stick to a path of unleashing America’s prosperity."

After the Federal Reserve decided at its recent meeting to keep its interest rate target unchanged, Chairman Paulsen noted:

“The Fed’s statement today echoes confidence in America’s rekindled economic growth, noting that, ‘business fixed investment continued to grow strongly.’ This along with CBO’s recent upward revisions to America’s growth prospects imply that reforms like the Tax Cuts and Jobs Act are leading to faster and sustainable economic progress.”

LAST WEEK

JEC Releases

Chairman Paulsen Cheers News of 3.9% Unemployment Rate
May FOMC Review: Interest Rates Remain Unchanged at 1.75%
First Quarter 2018 GDP Review: Here's Why U.S. GDP Growth is Exceeding Expectations

News & Commentary Weekly Highlights

Tax Foundation: Business Investment Increases by 39 Percent in Q1 2018
Reuters: Fed's Williams: I don't see any rapid increase in inflation coming
Bloomberg: These Six Issues Are Key to Trade Peace Between the U.S. and China
Reuters: As Trump's tariffs bite, small U.S. manufacturers begin to tap the brakes
City Journal: Fantasyland Economics

Top Economic Indicator Highlights

Fed’s Key Inflation Indicator Moves Toward Target

Personal Consumption Expenditures (PCE) Deflator (March 2018)

The Fed’s main inflation metric moved up toward the Fed’s symmetric 2% inflation target (symmetric means that 2% is not a ceiling but an average to be maintained over time). Inflation has consistently undershot 2% the last 5 years, therefore some levels above 2% should not be a cause for concern. Nonetheless, the Fed is expected to raise its interest rate target at its next meeting in June as part of normalization.

Productivity Growth is Still Rising

Productivity and Costs (Q1-2018, seasonally adjusted at annualized growth rates, preliminary estimate)

Increasing productivity growth is essential for living standards to improve. Before 2008 nonfarm business labor productivity growth averaged 2.4%; from 2012-2016, it average 0.7%. Increasing capital accumulation (business investment), bolstered by regulatory reform and the Tax Cuts and Jobs Act should help boost productivity growth in the coming quarters. For Q1-2018, the preliminary estimate for labor productivity growth was 0.7%. Productivity growth was slowed by a robust increase in hours worked by all persons, which portends that jobs are being added and hours worked have increased as the economic growth continues to ramp up.

Federal Reserve Leaves Interest Rate Target Unchanged

Federal Reserve FOMC Meeting Statement (May 2018)

As expected, the Federal Reserve held its key monetary policy interest rate, the interest on excess reserves rate (IOER, see “Note” below for more details) at 1.75%. (The 2008-09 recession prompted the Fed to cut the rate to 0.25%; its key policy rate was a high as 5.25% in 2007). The Fed is expected to raise its interest rate target to 2.00% at its next Federal Open Market Committee (FOMC) meeting in June.

Note: The fed funds rate is the market-determined rate banks charge each other for overnight loans when they do not hold large excess reserves at the Fed. The Fed would make small interventions in the fed funds market to influence that rate. However, beginning in 2008, the Fed’s emergency lending and quantitative easing programs created a vastly greater amount of excess reserves, which led to the administratively determined interest on excess reserves (IOER) supplanting the fed funds rate as the Fed’s key policy rate (see Chapter 2 of JEC’s Annual Report for more details on this topic). The Fed pays IOER on the funds banks deposit with the Fed, money that banks might otherwise lend to consumers or businesses. A higher IOER rate portends a tighter monetary policy because it encourages banks to hold reserves rather than to make more loans.

A much-reduced level of trading still occurs in the fed funds market as government-sponsored enterprises (e.g., Fannie Mae and Freddie Mac), which are ineligible to earn IOER, lend their idle cash to banks at the fed funds rate. Banks then deposit the cash with the Fed to earn a higher IOER rate. To prop up the fed funds rate as the Fed raises the IOER rate, the Fed withdraws cash from the market by temporarily selling some of its securities for cash at its overnight reverse repurchase (ON-RRP) rate, which sets a floor for the fed funds rate. The continued existence of the fed funds market and the ON-RRP facility should not distract from the fact that the Fed now uses IOER as the key rate to conduct monetary policy.

Labor Market Conditions Remain Favorable

Employment Situation (April 2018)

After a slow March jobs number of (103,000 jobs created; subsequently revised up to 135,000), 164,000 jobs were created in April. The unemployment rate fell to 3.9%, the lowest since December 2000. Wage growth remains modestly better, suggesting there is still room for faster economic growth.

 

THIS WEEK

Upcoming Economic Data

Monday
Consumer Credit (3:00pm)

Tuesday
NFIB Small Business Optimism Index (6:00am)
Job Openings and Labor Turnover Summary (JOLTS) (10:00am)

Wednesday
Producer Price Index (8:30am)
Wholesale Trade (10:00am)

Thursday
Jobless Claims (8:30am)
Consumer Price Index (8:30am)
Federal Reserve Balance Sheet (4:30pm)
Money Supply (4:30pm)

Friday
Import and Export Prices (8:30am)
Consumer Sentiment (10:00am)