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Signs of Steady Output Growth Continue While Labor Markets Disappoint

November 1, 2013 · Update in PDF PDF

Economic indicators released in September and October present a modest outlook for growth for third quarter 2013 and imply likewise for the second half of the year. Output growth for the second quarter remained unchanged in its third estimate. The employment situation also showed some mildly positive signs in September—buoyed by modest job gains and a decrease in unemployment—but disappointed expectations of a stronger jobs path out of the recovery. Inflation measures remain anchored, and gauges of future inflation exhibit stability as well.

Modest Output Growth Maintained, Indicators Signal More to Come

Real gross domestic product (GDP) grew 2.5 percent annualized in second quarter 2013 (Chart 1). This shows acceleration from the previous quarter’s rate of 1.1 percent and no change from the second estimate in August. Most components of real GDP showed either an increase or no significant decline in contribution to growth from first quarter 2013, offsetting the two that decreased, namely, real personal consumption and private inventories; and none showed much change in revision.

Prospects of future growth in real GDP are indicated in positive outlooks for manufacturing in industrial production and the Institute for Supply Management manufacturing index (Chart 2). Strength in industrial production in August was led by durable manufacturing goods, which grew 1.2 percent month over month after a 0.6 percent decline in July. Motor vehicles production increased 5.2 percent in August following a 4.5 percent drop in July. Capacity utilization rebounded to 77.8 percent in August from 77.6 percent in July.

The ISM nonmanufacturing index has been strongly positively correlated with real GDP growth in the past. The elevated level of the ISM nonmanufacturing index in August and September, together with a continued strengthening in industrial production and the ISM manufacturing index, is a good indicator of continued expansion in the second half of 2013. The partial federal government shutdown is expected to create a drag on growth in the fourth quarter due to a decrease in federal government spending and lowered consumer and business confidence.

Labor Markets Experience Unexpectedly Weak Gains in September…

Consistent with continued economic expansion in the third quarter, payroll data showed that total nonfarm employment grew modestly by 148,000 jobs. Private-sector nonfarm payrolls increased 126,000 in September; the government sector added another 22,000 jobs. Total nonfarm employment growth was revised upward on net for July and August, adding an extra 9,000 jobs in those two months.

Employment data by major sectors of the economy show that quarterly job gains differed markedly between what seems now to be a more moderate first half and a modest third quarter. The latter posted declines in several of 2013’s top-performing sectors—for example, leisure and business services (Chart 3). These deep drops in job gains for what have been high-powered industries this year are likely responsible for the failure of the latest report to meet forecasters’ expectations of a healthier labor market.

…But Improvement Seen in Recent Unemployment Data

Auspicious conditions emerged from unemployment data in September. The job openings element of the Job Openings and Labor Turnover Survey (JOLTS) and the Conference Board help wanted online index added to virtually unaltered upward trends in the two indicators since the recovery (Chart 4), hinting at strong potential for expansion to continue. Initial claims for unemployment have also exhibited an encouraging downward movement, recently hitting record recovery-lows (Chart 5). The behavior of these variables helped the unemployment rate inch down to 7.2 percent in September.

October data, however, displayed a spike in initial claims, partially accounted for by a previous delay in processing claims due to a California computer system upgrade, but also coinciding with shutdown-driven temporary layoffs of nongovernment workers and contractors and delays in hiring. The shutdown’s effect is significant enough to warrant concern that it might prove an impediment to job growth in the fourth quarter.

There is further motivation to be cautious. Jobs data pertaining to October potentially will be biased as a result of the shutdown’s interruption of the Bureau of Labor Statistics household survey, since respondents were surveyed at a later time than usual and thus may have more difficulty recalling dates of employment-related events.

Measures of Inflation Remain Anchored in August

The headline Consumer Price Index (CPI) inflation fell to 1.5 percent over the 12 months ending in August 2013. Trimmed mean and core measures of CPI—representing less-volatile, underlying inflation—showed negative to zero changes from July inflation reports (Chart 6). Similarly, trimmed mean personal consumption expenditure (PCE) inflation, a good predictor of future inflation movement, fell only slightly to 1.32 percent. The overall inflation outlook suggests that inflation pressures have stabilized, giving rise to a modest inflation picture over the coming year.

Consistently modest output growth is evident in 2013 thus far, and indicators portend further positive growth, although the government shutdown is expected to hamper what may be another modest half of the year. Labor markets have likewise evinced mostly modest gains along with other encouraging signs of health: Unemployment has fallen, and job openings are robust of late. But these positive aspects are tenuous following a weaker-than-expected September employment report. Moreover, the ongoing employment situation has been made fairly indeterminate due to uncertainty—predicated on the shutdown—in the October and other forthcoming data. It will therefore be closer to year-end before a definite view of current and proceeding labor market conditions can be garnered.

—Alan Armen

About the Author

Armen is a research assistant in the Research Department at the Federal Reserve Bank of Dallas.

 

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