This week, the Federal Reserve issued the minutes of their last meeting. While many commentators noted the committee's split on the timing and amount of asset sales, I believe it's important to look at some potential shortcomings in the committee's analysis of the current economic situation. Let's start with their analysis of the jobs market, which they viewed as mostly solid. But, once again, their analysis overlooks keys areas of weakness:
Total nonfarm payroll employment expanded further in April and May, and the average pace of job gains over the first five months of the year was solid. The unemployment rate moved down to 4.3 percent in May; the unemployment rates for African Americans and for Hispanics stepped down but remained above the unemployment rates for Asians and for whites. The overall labor force participation rate declined somewhat, and the share of workers employed part time for economic reasons decreased a little. The rate of private-sector job openings increased in March and April, while the quits rate was little changed and the hiring rate moved down. The four-week moving average of initial claims for unemployment insurance benefits remained at a very low level through early June. Measures of labor compensation continued to rise at moderate rates. Compensation per hour in the nonfarm business sector increased 2-1/4 percent over the four quarters ending in the first quarter, a bit slower than over the same period a year earlier. Average hourly earnings for all employees increased 2-1/2 percent over the 12 months ending in May, about the same as over the comparable period a year earlier.
But consider the following two graphs:
The top chart shows the number of people working part-time for economic reasons. The absolute level is still higher than levels seen in the last expansion. The bottom chart is the Atlanta Fed’s labor market spider chart, which shows that labor market utilization is still weak (see lower left-hand corner of the chart).
While the Fed was also fairly bullish when describing personal consumption expenditures, they seemed to gloss over recent underlying weakness in this number:
The table above shows the monthly change in personal consumption expenditures and various subcategories of PCEs for the last eight months. Since January, topline PCE growth has only increased strongly in 1 month - March. Spending on durable goods and services has been weaker in four of the last five months. While these numbers are hardly indicative of a recession, they do represent a slowdown which has occurred over nearly half a year, which is statistically significant.
While the committee characterized industrial production in fairly strong terms, the long-term chart tells a different story:
The current level of year-over-year growth is some of the weakest over the last 50 years. Oil’s price decline that started in 2014 is partially responsible for causing a contraction in the mining sub-category. But other subcategories of industrial production have been weak the last three to four years indicating the US manufacturing base is not growing as robustly as the FED would like to believe:
The top chart breaks industrial production data down into industry groups. Only mining has performed well. The bottom chart uses a final products categorization system. Here, construction supplies have performed well and mining is once again growing. But consumer goods and business equipment have been treading water over a year. The above two charts show that while some components of industrial production have increased, others are lagging.
In questioning the Fed’s analysis, I am most certainly not saying the economy is crashing or that a recession is just around the corner. Instead, it simply seems that the Fed views the economy through a stronger prism than what exists.