Weekly Economic Update: February 5 - February 9, 2018
CHART OF THE WEEK
Break in Policy Ushers in Economic Resurgence
With the election of a Republican majority in Congress and the Trump presidency, a striking change in the U.S. economy’s trajectory occurred. The election outcome gave rise to relief from the Obama Administration’s growth-constraining policies. Improved expectations raised forward-looking indicators and led to improvement in broad measures of real economic activity, such as business investment, employment, and industrial.
LAST WEEK
News & Commentary Weekly Highlights
Wall Street Journal: U.S. Gained 200,000 Jobs in January as Wages Picked Up
Economics21: Yes, You Can Be for Lower Taxes and Smaller Deficits
Cato: 2018: Turnover Questions at the FOMC
Financial Times: Shale powers US oil output to heights of 1970
JEC Releases
Paulsen Statement on January Jobs Report
Paulsen Statement on State of the Union
CBO Release
How CBO Produces Its 10-Year Economic Forecast
Top Economic Indicator Highlights
Personal Consumption Expenditures (PCE) Deflator (December 2017)
Category (percentage change from same month last year) |
Dec |
Nov |
Oct |
Overall PCE Deflator |
1.70% |
1.77% |
1.59% |
Core PCE Deflator (excludes food and energy) |
1.52% |
1.49% |
1.45% |
Noteworthy: The Fed’s main inflation rate metric decreased from 1.77% in November to 1.70% in December. However, the “core” measure, which excludes volatile food and energy prices, increased to 1.52% from 1.49% last month.
Federal Reserve FOMC Meeting Statement (December 2017)
Note: The fed funds rate is the 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, in 2008, the administratively determined interest on excess reserves (IOER) supplanted a market-determined fed funds rate as the Fed’s key policy rate. This is because the Fed’s emergency lending and quantitative easing programs created a vastly greater amount of excess reserves. The Fed pays IOER on the funds banks deposit with the Fed rather than 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.
Category |
Before FOMC meeting |
After FOMC meeting |
Interest on excess reserves (IOER)—upper bound |
1.50% |
1.50% |
Federal funds rate target (average of IOER and ON-RRP rates) |
1.37% |
1.37% |
Overnight reverse repurchase (ON-RRP) rate—lower bound |
1.25% |
1.25% |
Noteworthy: The Fed decided to hold its key policy rate, the IOER rate, steady at 1.50% last Wednesday. Please see JEC’s FOMC Review for more details.
Productivity and Costs (Q4-2017, 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 2008 to date, it has averaged only 1.2%.
Category |
Preliminary estimate |
Nonfarm Business Labor Productivity |
-0.1% |
Employment Situation (January 2018)
Category |
January |
December |
November |
Nonfarm payroll jobs (thousands) |
200 |
160 |
216 |
Headline unemployment rate (U-3) |
4.1% |
4.1% |
4.1% |
“True” unemployment rate (U-6) |
8.2% |
8.1% |
8.0% |
Noteworthy: The reported that 200,000 jobs created in January exceeded expectations. Average hourly earnings of all private-sector employees increased 2.9% from 12 months ago, its highest rate of increase since the last recession (2008-09). Furthermore, the reported pay data does not include the payment of irregular bonuses, such as those frequently mentioned in connection to the Tax Cuts and Jobs Act.
THIS WEEK
Upcoming CBO Event
CBO testimony before House Budget Committee on CBO's baseline projections and cost estimates (February 6, 10:00am)
Upcoming House Ways and Means Health Subcommittee Hearing
Hearing on the Opioid Crisis: Removing Barriers to Prevent and Treat Opioid Abuse and Dependence in Medicare (February 6, 3:00pm)
Upcoming Economic Data
Monday
PMI Services Index (9:45am)
ISM Non-Manufacturing (10:00am)
Tuesday
Trade Balance (8:30am)
Job Openings and Labor Turnover Summary (JOLTS) (10:00am)
Wednesday
Consumer Credit (3:00pm)
Thursday
Jobless Claims (8:30am)
PMI Manufacturing Index (9:45am)
Friday
Wholesale Trade (10:00am)