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3/19/2020

Assistant Secretary for Economic Policy Michael Faulkender Economy Statement for the Treasury Borrowing Advisory Committee of the …

Assistant Secretary for Economic Policy Michael Faulkender
Economy Statement for the Treasury Borrowing Advisory
Committee of the Securities Industry and Financial Markets
Association October 28, 2019
October 28, 2019

The U.S. economy continues to grow at a steady pace, propelling further job creation and wage
gains. Inflationary pressures remain at bay, even with labor markets at or near full employment.
The recovery’s record longevity – now 124 months and counting - reflects benefits from progrowth measures like the Tax Cuts and Jobs Act of 2017 (TCJA) and regulatory relief that have
boosted growth and have delivered structural reforms to bolster the economy’s resilience.
Although slowing global growth and trade uncertainties have impacted business investment
and confidence, the e ects on the broader economy have proved limited thus far. Labor
markets show continued strength. The September headline unemployment rate declined to a
fresh 49-year low and Hispanic and African-American unemployment rates stand at record lows.
Job creation – at an average 161,000 per month thus far in 2019 – remains more than su icient
to keep the economy at or near full employment, and the total number of payroll jobs added
since the November 2016 election has climbed to 6.5 million. Moreover, job openings continue
to exceed the number of unemployed, and labor force participation rates have climbed back to
multi-year highs.
Following robust growth of 8.3 percent in the second quarter, core retail sales rose 6.8 percent in
the third quarter, indicating continued, strong household consumption. Indeed, the underlying
fundamentals of consumption are solid: nominal nonsupervisory wage gains have accelerated
to a higher and tighter range over the past seven months, and consumer sentiment remains at
elevated levels. Stable job creation, substantial nominal and real wage gains, and high
confidence are all signals that bode well for consumer spending in the near term.
The advance estimate for real GDP growth in 2019 Q3 will be released this Wednesday, October
30.

GDP GROWTH
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3/19/2020

Assistant Secretary for Economic Policy Michael Faulkender Economy Statement for the Treasury Borrowing Advisory Committee of the …

According to the third estimate for Q2, real GDP grew at an annualized rate of 2.0 percent,
bringing the average growth rate over the past 2 ½ years to 2.6 percent. Second-quarter growth
was led by a 4.6 percent surge in personal consumption expenditures, more than four times the
pace recorded in the first quarter and matching 2017 Q4’s robust pace. Growth was also
supported by a strong increase in government expenditures, as well as further investment in
equipment and intellectual property. A drawdown of inventories built up in previous quarters, a
pullback in structures investment related to declining oil prices, a modest drag from residential
investment, and a widening of the trade deficit contributed to the slowing of GDP growth in the
second quarter from 3.1 percent in the first quarter. Nonetheless, the pace of private domestic
final purchases – the sum of personal consumption, business fixed investment, and residential
investment – more than doubled to an annualized rate of 3.3 percent in the second quarter.
Consumer spending in the second quarter grew at the fastest pace since 2017 Q4, as the
annualized rate more than quadrupled from Q1 to 4.6 percent. This significant acceleration was
driven by an 8.6 percent increase in goods, including a 13.0 percent increase in spending on
durables, the fastest pace in five years, and a 6.5 percent advance in consumption of
nondurables, the fastest rate in nearly 16 years. Expenditures on services rose 2.8 percent in the
second quarter. Altogether, total consumer spending made the largest contribution to secondquarter growth, 3.0 percentage points, of any component of GDP. Turning to the third quarter, a
full three months of retail sales data is in hand. Nominal core retail sales, a key component of
consumer spending in the national accounts, appear to have grown at an annual rate of 6.8
percent in the third quarter, slowing modestly from the 8.3 percent pace in the second quarter.
This rate of growth suggests that real consumption of goods could make a more moderate,
though still quite solid, contribution to real GDP growth in the third quarter.
A er 12 consecutive quarters of positive growth, the third estimate of GDP indicated that
business fixed investment declined a full percentage point in the second quarter, a retreat that
mainly reflected an outsized 11.1 percent decline in spending on structures, which was partly
related to weak oil prices. Intellectual property products investment rose 3.6 percent and
spending on equipment was up 0.8 percent. Slower equipment investment in Q2 was linked in
part to the grounding of the Boeing 737 MAX airplane. Looking at available data for the third
quarter, spending on structures has declined sharply in July and August, and the continued
grounding of the Boeing 737 MAX as well as the strike by the United Auto Workers union at
General Motors have dampened activity in the manufacturing sector. However, the latter factors
should resolve soon in the manufacturing sector. With respect to the service sector, which
accounts for 70 percent of U.S. economic activity, the ISM non-manufacturing survey for
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3/19/2020

Assistant Secretary for Economic Policy Michael Faulkender Economy Statement for the Treasury Borrowing Advisory Committee of the …

September reported that most U.S. service industries remain sanguine about the near-term
outlook, even in the face of global economic headwinds. A er three consecutive quarters of
positive contributions to growth, the cycle of inventory accumulation turned negative in the
second quarter, subtracting 0.9 percentage point from real GDP growth as businesses drew
down inventories in response to strong demand.
Residential investment declined 3.0 percent in 2019 Q2, the sixth consecutive quarterly decline
in this sector, although the pullback was smaller than those seen last year and primarily
reflected a sharp reduction in the value of construction put in place since spring 2018. Looking
at other and more recent data, a variety of conditions in the housing market continue to
improve. For example, existing home sales (which account for 90 percent of all home sales) are
almost 8 percent higher this year through September, and new single-family home sales
(roughly 10 percent of home sales and considered a more timely measure) have grown by more
than 24 percent over the first nine months of 2019. Single-family housing starts are up 4.3
percent over the 12 months through September, and over the same period, total housing starts
rose 1.6 percent. Significantly, for eight of the past nine months, total building permits have
remained above total housing starts, pointing to a further pickup in homebuilding. These
developments reflect ongoing improvements in home a ordability and mortgage rates: over the
year through August, the FHFA home price index rose at its slowest pace in four years, and as of
late October, mortgage rates had declined 119 basis points since last fall. These conditions are
also reflected in a reviving of homebuilder sentiment: the National Association of Home
Builder’s home builder confidence index has trended higher this year to reach a 20-month high
in October, more than retracing last year’s decline.
Total government spending has stepped up over the past six quarters, a er making an
essentially neutral contribution to growth in 2016 and 2017. Overall, government spending rose
4.8 percent in the second quarter, reflecting a surge of 8.3 percent in federal spending (the
fastest pace since 2009 Q2) and a 2.7 percent advance in state and local outlays. Altogether,
government spending added 0.8 percentage point to real GDP growth in the second quarter.
The third estimate of Q2 GDP showed that export growth turned more sharply negative than
initially thought, declining 5.7 percent. Import growth was revised down slightly to a flat
reading, and on balance, net exports subtracted nearly 0.7 percentage point from real GDP
growth, a er adding more than 0.7 percentage point to growth in the first quarter. The trend of
trade data for July and August, if maintained through September, suggest that net exports could
be neutral for GDP growth in the third quarter.
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3/19/2020

Assistant Secretary for Economic Policy Michael Faulkender Economy Statement for the Treasury Borrowing Advisory Committee of the …

LABOR MARKETS AND WAGES
The unemployment rate fell to a fresh 49-year low of 3.5 percent in September, even as labor
force participation rates rose. In addition, selected unemployment rates set or remained at
historic lows: the unemployment rate for Hispanic-Americans fell to a series low of 3.9 percent in
September (series dates from 1973) and for African-Americans, the unemployment rate
remained at the record low of 5.5 percent (series data from 1972). Furthermore, the
unemployment rate for adult men (age 20 and over) declined to 3.2 percent in September,
matching the lowest rate since June 2000. The most comprehensive measure of labor market
slack, which includes those marginally attached to the labor force as well as those working parttime for economic reasons (the U-6 rate), declined 0.3 percentage point to 6.9 percent, the
lowest reading since December 2000 (and 2.2 percentage points below the pre-recession
average of 9.1 percent).
Labor force participation rates continue to defy demographic trends: workers are responding to
the various incentives of the TCJA, as well as rising wage rates and plentiful job openings.
Indeed, another labor market record is the greater availability of job openings over the number
of unemployed persons to fill them – a characteristic that has persisted for the past 18 months.
The overall labor force participation rate (LFPR) remained at 63.2 percent in September,
matching the five-year high reached in January, February, and August. The LFPR for prime-age
workers remained at 82.6 percent in September, matching the nine-year high reached in
January and August. From the employer’s perspective, of course, labor shortages remain a
significant challenge in general, and shortages of skilled or qualified workers has also been a
persistent problem, as reported in employer surveys since early 2018. The National Federation
of Independent Business’s small business optimism index for August showed a record high of 57
percent of firms reporting serious di iculties in finding qualified workers, a percentage which
declined only moderately to 50 percent in the NFIB’s September survey. The employment report
for October will be released this Friday, November 1.
It bears repeating that rapid wage gains have been a consistent feature of the economy for well
over a year and, more recently, have ramped to a sustained 3½ percent pace for nearly a half
year. Private-sector production and nonsupervisory workers have seen nominal wage growth at
or above 3 percent for the past 14 months, and for the past five months, nominal wage gains
have fluctuated between 3.4 percent and 3.6 percent. Over the 12 months through September,
nominal wages for these workers grew 3.5 percent, a marked pick up from the 3.0 percent pace
a year earlier. The combination of strong nominal gains and modest inflation has also boosted
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3/19/2020

Assistant Secretary for Economic Policy Michael Faulkender Economy Statement for the Treasury Borrowing Advisory Committee of the …

real purchasing power on a consistent basis: thus far in 2019, real average hourly earnings for
private-sector production and nonsupervisory workers have grown between 1.4 percent and 2.1
percent, including a gain of 1.9 percent over the 12 months through September. Another
measure of wage and salary growth, the Employment Cost Index (ECI), has also shown rapid
growth in private wages and salaries for several quarters; the ECI for the third quarter will be
released on Thursday, October 31.

PRICES
Consumer price inflation has been slowing at the headline level since July 2018, mainly
reflecting lower energy prices. Over the 12 months through September 2019, the Consumer
Price Index (CPI) for all items rose 1.7 percent, well below the 2.3 percent pace a year earlier.
Energy prices have fallen significantly since last summer; over the year through September
2019, energy prices dropped 4.8 percent, compared to a 4.8 percent advance a year earlier. On
the other hand, food price inflation has picked up from last year, rising 1.8 percent over the 12
months through September, roughly half percentage point faster than the 12-month pace
through September 2018. In contrast, core inflation, which excludes food and energy, held
relatively steady during the first half of 2019, but has accelerated recently. Core CPI was 2.4
percent over the year through September, accelerating from the 2.2 percent, year-earlier pace.
Headline inflation, as measured by the Personal Consumption Expenditures (PCE) Price Index
(the measure in which the FOMC’s 2 percent inflation target is expressed), has remained below
the target since November 2018. The 12-month headline PCE inflation rate stood at 1.4 percent
over the 12-months through August 2019, nearly a full percentage point slower than the
2.3 percent pace through August 2018. Core PCE inflation was 1.8 percent over the year through
August 2019, decelerating from the 2.0 percent pace over the year-earlier period. The PCE Price
Index for September will be released this Thursday, October 31.

CONCLUSION
The second quarter saw a more than quadrupling of growth in private consumption and a
doubling of growth in private final domestic demand. The economy’s resilience in the past few
months to such influences as slowing global growth and domestic di iculties at Boeing and
General Motors is evident across a variety of sectors. High consumer sentiment and solid
spending, demography-defying labor force participation and low unemployment rates, nominal
and real wage growth, and low inflation in the face of these headwinds is noteworthy. The
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3/19/2020

Assistant Secretary for Economic Policy Michael Faulkender Economy Statement for the Treasury Borrowing Advisory Committee of the …

Administration’s deregulatory measures and TCJA have contributed to the current expansion’s
record-breaking length and have laid the foundation for strong future economic growth.
Moreover, the reduction of fiscal uncertainty and the apparent aversion of a hard exit by Britain
from the European Union should also help bolster business confidence and economic activity in
coming quarters. Private forecasters predict real GDP growth of 2.2 percent in 2019 on a Q4over-Q4 basis and 1.6 percent in 2020. The Administration has a strong belief in the resilience of
the American economy and the pro-growth nature of its policies. In its latest projection, it
expects that a er temporary headwinds fade, economic growth will return to near 3 percent as
investment recovers and productivity accelerates.

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