Policy Backgrounders

The Weekly Round-Up: Developments on the Economy (October 7 2022)

October 10, 2022

CED & ESF ECONOMIC & POLICY BRIEF

The Weekly Round-Up:

Developments on the Economy

October 7, 2022

This week CEOs and financial markets received mixed news about the outlook for the US economy.

The September jobs report showed moderating job gains - with 263,000 jobs added for the month, vs. 315,000 jobs in August. While this is still a robust rate of employment growth, it is well below the average of 420,000 added per month so far in 2022. Softer job gains were expected amid a weakening economy, the Federal Reserve’s rapid interest rate hikes, and the recovery most industries have already seen from pandemic-induced job losses. With the number of job openings—an important leading indicator of hiring—already on the decline, September’s softer jobs report is another sign that the labor market is cooling. The pace of hiring is expected to slow further as the end of 2022 approaches.

Relatedly, the number of nonfarm job openings decreased to 10.1 million in August, according to the Job Openings and Labor Turnover Survey (JOLTS) released earlier this week. Openings had been 11.2 million the prior month and had reached an all-time high of 11.8 million in March 2022. Declining job openings may suggest labor market tightness is abating. However, job openings remain high by historical norms, and figures on labor turnover were relatively unchanged from the prior month.

Two surveys of manufacturers, by the Institute for Supply Management (ISM) and S&P Global, each diverged in September, with index numbers only slightly above the neutral mark of 50. The ISM Manufacturing Purchasing Managers Index (PMI) recorded 50.9, 1.9 points lower than the 52.8 in August. Meanwhile, the S&P Global PMI posted 52.0, up from 51.5 in August’s revised number. These two surveys tend to track each other, but in this case moved modestly in different directions. However, surveys are expected to fall below 50 over the coming months as economic growth slows further.

Finally, earlier this week OPEC+ (the Organization of Petroleum Exporting Countries plus Russia) agreed to cut oil production by 2 million barrels per day, rebuffing the Administration’s call not to cut production at this time. The action will raise oil prices to the benefit of Russia and other countries. However, given that some OPEC members are not currently producing oil to their full quotas, the fall in production may not be as large as the 2 million barrels per day figure. Regardless, any increase in prices will hurt US attempts to lower already high inflation rates.

For more information on these and other events, please see below:

1. SEPTEMBER JOBS GROWTH MODERATES WITH FURTHER COOLING EXPECTED

2. AUGUST JOB OPENINGS DECLINE STEEPLY FROM NEAR RECORD HIGHS

3. TRADE DEFICIT FALLS FOR FIFTH STRAIGHT MONTH

4. MIXED NEWS IN MANUFACTURING SURVEYS

5. CONSTRUCTION SPENDING DECLINES FOR SECOND STRAIGHT MONTH

6. WEEKLY UNEMPLOYMENT INSURANCE CLAIMS RISE BY 29,000

7. RECORD FEDERAL TAX COLLECTIONS CONTINUE

8. HURRICANE RELIEF FUNDING

9. CALIFORNIA DROUGHT

10. OPEC+ PRODUCTION CUTS

11. MONKEYPOX UPDATES

1. SEPTEMBER JOBS GROWTH MODERATES WITH FURTHER COOLING EXPECTED

The September jobs report showed moderating job gains - with 263,000 jobs added for the month, vs. 315,000 jobs in August. While this is still a robust rate of employment growth, it is well below the average of 420,000 added per month so far in 2022. Softer job gains were expected amid a weakening economy, the Federal Reserve’s rapid interest rate hikes, and the recovery most industries have already seen from pandemic-induced job losses. With the number of job openings—an important leading indicator of hiring—already on the decline, September’s softer jobs report is another sign that the labor market is cooling. The pace of hiring is expected to slow further as the end of 2022 approaches.

Read the TCB Economics, Strategy and Finance Center’s Insights on the job report here.

2. AUGUST JOB OPENINGS DECLINE STEEPLY FROM NEAR RECORD HIGHS

The number of nonfarm job openings decreased to 10.1 million in August, according to the Job Openings and Labor Turnover Survey (JOLTS) released Tuesday by the Bureau of Labor Statistics. Openings had been 11.2 million the prior month and had reached an all-time high of 11.8 million in March 2022. The largest decreases in job openings were in health care and social assistance (236,000) other services (183,000), and retail trade (143,000).  Declining job openings may suggest labor market tightness is abating. However, job openings remain high by historical norms, and figures on labor turnover were relatively unchanged from the prior month. The number of new hires rose modestly to 6.3 million from the prior 6.2 million, and total separations rose slightly to 6.0 million from the prior 5.8 million. Separations include quits (4.2 million) layoffs and discharges (1.5 million) and other separations (0.4 million) (figures are rounded). Each component was relatively unchanged from the prior month. The largest increase in separations came from accommodation and food services, a large industry with high labor turnover. Separations in that industry increased from 847,000 to 1.022 million.

3. TRADE DEFICIT FALLS FOR FIFTH STRAIGHT MONTH

The US Census Bureau and the Bureau of Economic Analysis reported Wednesday that the trade deficit in goods and services was $67.4 billion in August, a decline of $3.1 billion from July and a 37.0 percent decrease from the all-time high of $106.9 billion set in March. The change in August resulted from a decrease ($3.7 billion) in imports, partially offset by a decrease ($0.7 billion) in exports. Imports have declined 7.1 percent from their March high of $351.1 billion. A strengthening US dollar has made imports cheaper for Americans in dollar-denominated terms. The largest decline in imports was for crude oil, which decreased $2.7 billion, reflecting lower crude prices in August. Semiconductor imports, an item with recent supply chain issues, declined $0.5 billion. Though the trade deficit with China increased by $0.5 billion to $33.5 billion, this was more than offset by large declines in trade deficits with other major trading partners, including Japan ($1.9 billion) Mexico ($1.9 billion) and Canada ($1.2 billion).

4. MIXED NEWS IN MANUFACTURING SURVEYS

Two surveys of manufacturers, by the Institute for Supply Management (ISM) and S&P Global, each diverged in September, with index numbers only slightly above the neutral mark of 50. The ISM Manufacturing Purchasing Managers Index (PMI) recorded 50.9, 1.9 points lower than the 52.8 in August. This figure was the lowest for ISM since May 2020. In the critical areas of new orders (47.1, down from 51.3) and employment (48.7, down from 54.2) the ISM figures represent contraction. The S&P Global PMI posted 52.0, up from 51.5 in August’s revised number. This rebound was largely driven by an increase in new orders, which had declined for three straight months in their prior surveys. S&P Global also recorded faster employment growth. The ISM PMI and the equivalent S&P Global figure tend to track each other, but in this case moved modestly in different directions, with ISM respondents more pessimistic about new orders and employment, but S&P Global respondents more optimistic.

5. CONSTRUCTION SPENDING DECLINES FOR SECOND STRAIGHT MONTH

Construction spending in August fell to a seasonally-adjusted annual rate of $1,781.3 billion, down 0.7 percent from July’s revised estimate, according to Census Bureau data released Monday. This was the second consecutive month of decline, after a 0.6 percent drop in July. Every major category of construction spending fell. Private construction projects, comprising $1,426.0 billion, or most US construction, fell 0.6 percent. Residential construction, comprising $912.9 billion of that private spending, fell 0.9 percent, with new single-family homes falling 2.9 percent. Nonresidential construction fell 0.1 percent. Public construction fell 0.8 percent. Construction projects are often sensitive to the cost of capital, and interest rates have risen considerably in 2022. New single-family home construction, which is particularly sensitive to mortgage rates, has now fallen four months in a row. The Conference Board’s latest economic forecast shows a sustained decline in residential investment for the six quarters that began in Q2 of 2022, and a decline in nonresidential investment for the four quarters that began in Q3 of 2022.

6. WEEKLY UNEMPLOYMENT CLAIMS RISE BY 29,000

The Department of Labor reported Thursday that initial claims for unemployment insurance, a weekly indicator of labor market health, rose to 219,000 for the week ending October 1. This is an increase of 29,000 over the previous week’s revised level, the second largest weekly increase of the past year. The previous week’s revised level, 190,000, was the lowest figure since April 2022 and identical to the immediate pre-pandemic figure of 190,000 from February 29, 2020. Claims had risen over the summer, reaching a high of 261,000 in July, but mostly declined between July and last week. The most recent figure is the first large increase since the summer. The figure is still consistent with a strong labor market; the average weekly initial claims figure in 2019, the last pre-pandemic calendar year, was 218,000. The Conference Board’s latest economic forecast shows unemployment rising to 3.9 percent, above its current level of 3.7 percent, by the second quarter of next year.

7. RECORD FEDERAL TAX COLLECTIONS CONTINUE

For the first eleven months of Fiscal Year 2022 (October through August), the Federal government collected $4.408 trillion in total taxes, up 13.5 percent from last year’s record of $3,883 trillion according to the Monthly Treasury Statement. Of the new figure, just over half ($2.404 trillion) in individual income taxes (also a record), $1.357 trillion is social insurance and retirement taxes; and $91.1 billion in customs duties, among major items. Still, the government ran a deficit of $945.715 billion in this period. Major spending items over the period include Health and Human Services spending at $1.467 trillion, the Social Security Administration at $1.169 trillion, and the Treasury Department third at $1.139 trillion (including $677.6 billion in interest on the public debt and $461.7 in other expenses). Spending for interest on the national debt is thus higher than Defense Department spending on military programs ($649.27 billion).

8. HURRICANE RELIEF FUNDING

As Florida continues to recover from Hurricane Ian, the continuing resolution (CR) Congress passed last Friday included a special provision permitting the Federal Emergency Management Agency (FEMA) to spend funds at a higher rate to respond to Presidentially-declared disasters. (Most provisions of the CR require agencies to spend only at the rate appropriated for fiscal year 2022.)  The provision permits FEMA to tap its full-year appropriation as needed now, rather than just a prorated portion of it for the duration of the CR, which expires December 16. FEMA thus has access to roughly $35 billion in reserves. It is also possible that Congress will appropriate additional funds for FEMA (and possibly also other agencies involved in long-term relief efforts such as the Department of Housing and Urban Development and the Army Corps of Engineers) when it reconvenes after the November elections.

9. CALIFORNIA DROUGHT

California is now experiencing the driest three-year period on record, with drought looking increasingly likely next year as well. California’s water year runs from October 1 to September 30; the previous water year ended with a strong September heat wave and statewide precipitation only 76 percent of average.  According to the US Drought Monitor, nearly 95 percent of California falls in the categories of extreme, exceptional, or severe drought. California Department of Water Resources Director Karla Nemeth said that “[t]his is our new climate reality, and we must adapt. As California transitions to a hotter, drier future, our extreme swings from wet and dry conditions will continue. We are preparing now for continued extreme drought and working with our federal, state, local and academic partners to plan for a future where we see less overall precipitation and more rain than snow.

10. OPEC+ PRODUCTION CUTS

The OPEC+ grouping, consisting of members of the Organization of Petroleum Exporting Countries plus Russia, agreed to cut oil production by 2 million barrels per day, rebuffing the Administration’s call not to cut production at this time and raising oil prices to the benefit of Russia and other countries. National Security Adviser Jake Sullivan and National Economic Council Director Brian Deese released a statement that “The President is disappointed by the shortsighted decision by OPEC Plus to cut production quotas while the global economy is dealing with the continued negative impact of Putin’s invasion of Ukraine.” However, given that some OPEC members are not currently producing oil to their full quotas, the fall in oil production may not be as large as the 2 million barrels per day figure.

11. MONKEYPOX UPDATES

As of October 4, the US has confirmed a total of 26,194 cases of monkeypox. States with the highest case numbers include California (5,010), New York (3,964), Florida (2,558), Texas (2,389), and Georgia 1,821). Globally, 69,244 cases have been confirmed, with 68,538 cases confirmed in locations that have not historically reported monkeypox. The countries with the highest case numbers include the US (26,194), Brazil (7,869), Spain (7,188), France (3,999), and the UK (3,635). A total of thirteen deaths have been reported in locations that have not historically reported monkeypox.

CDC official Mark Lipsitch echoed a recent CDC report by stating that with monkeypox’s spread to “many geographic locations” across the country, “[t]here’s no clear path in our mind to complete elimination domestically.” However, the spread is slowing; the US outbreak appears to have peaked in early August, and the average number of daily reported cases, fewer than 150, is approximately a third of the caseload in the middle of the summer. Officials expect the decline will continue for another several weeks. If domestic transmissions were stopped, infections may still continue if people catch the virus while traveling internationally, noted Dr. Tom Inglesby, director of the Johns Hopkins Center for Health Security. With case numbers going down, this is a good time for local health departments to take a new stab at intensive contact tracing to try to stop chains of transmission, he said.