Tuesday, March 20, 2018

Prime age labor force participation: disability and homemaking decline

 - by New Deal democrat

About a year ago I wrote a series of posts on various reasons for the relatively low labor force participation by prime age individuals, and its effect on wages; In my post summing up that study I wrote:
A major element of the participation rate is comparison with other alternatives to being in the labor force. 
Two alternatives to labor participation appear to have had a significant effect on the rate.
First, the cost of child care, which has soared over the last 15 years, compared with subdued (or paltry) wage growth has caused many women and some men as well in the prime age demographic to leave the labor force completely and instead raise their children as homemakers. 
A second alternative, which appears to be a major determinant of the decline in male participation at least over the last 60 years is the expansion of disability insurance. This increase in disability has been mainly due to neck and back conditions, and together with improved longevity, has increased the incidence of long-term disability dramatically.  
It has also been suggested that the huge increase in the incarceration rate from roughly 1980 through 2000 has also played an important role in depressing participation.
I bring this up again because a few days ago the NY Times published a very interesting graph depicting the trends in the percentage of prime age individuals who report that they are not in the labor force due to homemaking, disability, discouragement, being in school, and "other," which presumably includes incarceration:

Further, one important reason for the decline in disability is simply that the large Boomer generation is aging out: in 21 months the last Boomer will have turned 55. This will mean that the younger half of the prime age demographic, roughly, will be the even larger Millennial contingent, while the presumably less healthy older half will roughly consist of the "baby bust," a/k/a Gen Xers, a point referenced by the Times:
The data shows that the decline has come almost entirely from the older half of the prime age population.
As Spock might say, "fascinating."

Monday, March 19, 2018

JOLTS revisions paint brighter labor market picture

 - by New Deal democrat

Last Friday's JOLTS report for January included some important revisions, particularly with regard to hiring.  So let's take a closer look.

As a refresher, unlike the jobs report, which tabulates the net gain or loss of hiring over firing, the JOLTS report breaks the labor market down into openings, hirings, firings, quits, and total separations.

I pay little attention to "job openings," which can simply reflect that companies trolling for resumes, or looking for the perfect, cheap candidate, and concentrate on the hard data of hiring, firing, quits and layoffs.

The first important relationship in the data is that historically, hiring leads firing.  While the one big shortcoming of this report is that it has only covered one full business cycle, during that time hires have peaked and troughed before separations.

And here, there has been an important revision.  Here is the historical relationship on a quarterly basis between hiring (red) and total separations (blue) as it existed through the end of the third quarter of 2017:

Note that hiring had just gotten around to equalling its peak from late 2015.

Now here is the same data, with revisions, through the fourth quarter of 2017:

Our update graph shows hiring exceeding its prior peak in the third quarter and clearly establishing a new high in Q4 2017.  That is unequivocal good news, since in the last expansion, hiring was the first metric to peak.

Here is the monthly breakdown over the last 2 years:

The positive trend in both hiring and total separations is clear.

Further, in the previous cycle, after hires stagnated, shortly thereafter involuntary separations began to rise, even as quits continued to rise for a short period of time as well:


[Note: above graph show quarterly data to smooth out noise]

Here are voluntary quits vs. layoffs and discharges on a monthly basis for the last 2 years:

With hiring increasing in the past few months, I expected the number of voluntary quits to improve as well, and they have:again, if the pattern from the last decade holds, I would expect quits to  improve somewhat as well.  As in the last business cycle, quits are still rising. The only divergence is that  involuntary separations remain off their bottom.

So while I continue to watch to see if hiring stagnates,the new highs in hiring are a very positive sign, consistent (though not necessarily) even with being before mid-cycle.

Sunday, March 18, 2018

A thought for Sunday: in which I pour some cold water on 2018 midterm overoptimism

 - by New Deal democrat

In the wake of Conor Lamb's election victory in Pennsylvania last Tuesday night, some Democratic partisans are suggesting that every GOP-held seat from a district that is less than trump +20% is in play.
Hold your horses. The results of last June's special election in Georgia, in which GOPer Karen Handel defeated Democrat Jon Ossoff show that there is a roadmap to the GOP minimizing their losses in this November's midterms.

Because while all of the legislative elections in 2017 and so far in 2018 have featured huge gains in Democratic turnout, the difference in Georgia was that there was a *similar* spike in GOP turnout.  And this playbook is going to be easier for the GOP to run in nationwide contests than in local special elections. 

Let's start with turnout in Pennsylvania last week. Here's the graph on point:

Democratic turnout in the PA special election approached that of Presidential election levels, while GOP turnout was much smaller. Simple point: when D's turn out, and R's don't, D's win.

Let's take a similar look at turnout in the Virginia legislative elections  last November:

What is noteworthy in this graph, and a point that was made at the time, is that it wasn't only Democratic turnout that exceeded the levels of the last state election. GOP turnout was *also* higher, although not by nearly so much. Even so, that slight increase in GOP turnout was enough for them to hold on to the Virginia House of Delegates (literally, by one vote!) even though more votes were cast statewide for Democratic candidates, by a margin of 54%-46%.

Finally, let's turn to the Georgia election from last June.  Here is the similar graph:

While there was sky-high Democratic turnout, turnout by GOPers was almost as high -- enough so that their candidate prevailed.  In other words, when both D's and R's turn out at near-Presidential levels, the outcome resembles that of the district's vote in the last Presidential election.  That's the point made in this analysis by Politico:

Pollsters say sky-high turnout drove Handel, the GOP nominee, to a nearly 4-point victory on Tuesday, despite most pre-election surveys showing Ossoff with a small-but-shrinking lead. 
... [I[t wasn’t because Democratic voters didn’t show up. More than 259,000 votes have been tallied as of Wednesday afternoon, considerably more than the 193,000 votes in the first round of voting in  April. 
In fact, turnout was much higher than for other off-year special elections in recent history.... 
John Anzalone, Ossoff’s pollster, said the Democrat’s campaign succeeded in turning out its voters — but they were swamped by Republicans who came out in numbers that ended up dwarfing previous high-profile special elections ....
“When turnout starts going up that high, and people start coming out of the woodwork to vote,” Cahaly said, “it moves back to the [natural] alignment of the district.”
Cahaly added that, in his view, Handel and Republican outside groups also drove turnout by nationalizing the race.

In November, it is going to be much easier for the GOP and their propaganda organs like Fox to "nationalize" local elections, arguing that a Democratic House is likely to impeach Trump (true) and veto new regulations on, e.g., Muslim and Latino immigratiion proposed by Trump's bureaucracy (true), while a Democratic Senate will refuse to confirm Trump's anti-gay and anti-abortion Judicial nominations, including any vacancies that may open up on the Supreme Court (also true).

At the same time, they probably will use social media accounts to try to drive down Latino turnout by arguing that the Congressional Democrats sold out Dreamers (as to which there is at least some merit).

If so, the vote in Congressional districts and Senate races is likely to come closer to mirroring that from 2016.  That strategy probably concedes that GOPers will lose any Congressional districts that voted more for Hillary Clinton than Trump. But under that result -- even one in which  Democrats "win" the number of ballots nationwide by something like 53%-47% -- the GOP nevertheless retains control of the House and Senate.

While as I pointed out several weeks ago, demographics alone should make the electorate less reddish, people shouldn't get carried away with over-optimism.

Saturday, March 17, 2018

Weekly Indicators for March 12 - 16 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

This week most of the data that has been decelerating turned in a more positive performance.

Friday, March 16, 2018

Liveblogging housing, industrial production, and JOLTS

 - by New Deal democrat

This is one of those days when it seems every piece of economic data in the whole world is getting reported simultaneously.

So as the data gets reported, I'll give you three quick takes.

Housing permits and starts for February

While this was a decline from January, so far housing is holding up very well in the face of higher interest rates.

Single family housing permits -- the least volatile of all the numbers -- declined m/m but December remains the expansion high. The series remains very positive.

Overall housing permits -- less volatile than starts -- declined to their lowest level since September, but January remains the expansion high, so this trend remains positive as well.

Housing starts declined m/m from January's expansion high. To take out most of the volatility, I look at the three month moving average. This is the second highest during the entire expansion after last month. So these remain very positive as well.

Finally, there is a category of housing which has been authorizaed but not yet started. January remains the expansion high, and February is second, equal to December.  This tells us there is a lot of construction in the pipeline.

Bottom line: m/m negative, but longer term trend still (somewhat surprisingly) still very positive.

Industrial production

This was also a very positive report.

The overall number was up 1.1%.
Manufacturing was us 1.3%
Mining -- the big reason for last month's decline -- was up nearly 5%.

The DOOOMERS' meme that hard numbers haven't replicated the Fed and ISM surveys refuses to die.  And yet YoY overall production is up nearly 5%, and manufacturing up nearly 3%. That seems pretty good to me.


This data is from January. Like housing, it was generally down m/m, but very positive.  I don't bother anymore with openings, which I consider not just soft, but easily gamed data. As to the hard data:

Hires -- the second highest, but for last October, in the expansion.

Quits -- the second highest of the expansion, except for December's.

Total separations -- the highest of the expansion (which is a positive, since these also start to decline prior to a recession).

Layoffs and discharges -- increased sharply to levels seen in last summer. This is the one negative, since these bottomed in midcycle during the last expansion.

All in all, the three economic reports today painted a picture of continuing positive trends.

Thursday, March 15, 2018

February update: real wages and real spending

 - by New Deal democrat

Now that we have February inflation, let's take an updated look at real wages and real spending.

First of all, real average hourly wages increased slightly in February, but are still -0.6% under their July peak:

But, because the total hours worked surged so much in February, real aggregate wage earnings, which had stalled since July, rose to a new record:

If it's not revised away, this means that the middle and working classes have more income to spend, without dipping more into savings.

Turning to retail spending, real retail sales declined for the third month in a row:

But note that the big surge in sales from November has been untouched, and means that real retail sales remain higher than at any point before then.

This is true even if we adjust for population:

Since population-adjusted real retail sales have been a long leading indicator for the economy, I'm not terribly concerned about the recent small decline at this point.

Wednesday, March 14, 2018

Real M1 and M2 growth the lowest since 2010

 - by New Deal democrat

In view of yesterday's inflation report, I take a look at the recent big deceleration in both real M1 and M2 over at XE.com.

Monday, March 12, 2018

Labor force participation, unemployment, and wages: an update

 - by New Deal democrat

About a year ago I wrote a series of posts on the relationship between the unemployment rate, labor force participation, and wage growth. Especially in view of last Friday's jobs report, which showed blockbuster hiring, but a continuation of tepid wage growth over 8 years into the expansion, now is a good time for an update.

To recapitulate, history shows that wage growth is lags the economy, and specifically only turns after the unemployment rate begins to decline. More specifically, since 1994, once the underemployment rate has fallen below about 9% (red, inverted in the graphs below), wage growth (blue) has begun to improve:

Meanwhile, the YoY% change in the prime age labor force participation rate turns about one year before wages (green):

On the other hand, the absolute *level* of prime age labor force participation only bottoms *after* wages have turned:

Here is the monthly graph through last Friday, whowing that all three metrics have continued to improve:

In historical context, last year I suggested that the traditional Phillips curve, which posited a relationship between lower unemployment and higher wage growth and inflation, is best seen as a special variant of a broader relationship between the labor force participation rate (i.e., the total of those both employed and unemployed). On a secular basis, the correlation has been that the YoY change in  labor force participation (blue in the graphs below) appears to lead improvement in wage growth (red) by about one year.  Here's the high-inflation, high labor bargaining power 1960s and 1970s: 

and there is the low inflation, low bargaining power era since 1988:

In both of these eras, generally participation led wage growth by about one year.

Last year I  also suggested that a more nuanced cyclical feedback mechanism appeared to be that too rapid an increase in participation will lead either to higher inflation (the 1960s and 1970s) or lower short term wage growth (the 1980s to present. I showed that via a variation on the misery index that double-weighted inflation, in which the only major departures were the Oil shocks of 1974, 1979, 1990, and 2008:

Here is an updated graph of wage growth (blue) and prime age labor force participation (green, right scale) through Friday:

In accord with my hypothesis last year, the continuing surge of participants into the labor force has acted to depress wage growth.

So, in sum, the trends remain positive, but an acceleration of wage growth probably won't happen until this surge subsides.

Sunday, March 11, 2018

The Grand Illusion 2.0

 - by New Deal democrat

Introductory note: this is a very long epistle. But I think my point needs to be made fully and at length. Before you go further, in fairness here is the TL:DR version:

  • Advocates of free trade and globalization were taken aback a week ago by the assumption by China's President Xi Jinping of rule for life.
  • This was because it runs completely contrary to their theory that free trade leads to economic liberalization, which in turn leads to political liberalization.
  • This theory has been repeatedly and thoroughly repudiated throughout history, most catastrophically be World War I.
  • That's because autocrats will use the gains of economic trade for their own ends, typically the pursuit of further political and military power.
  • Historically middle classes do not revolt against autocracy when they are prospering, but rather only after a period of rising expectations has been dashed by an economic downturn in which the autocratic elite unfairly forces all of the burden onto them.
  • But since these historical facts are nowhere to be found in the economic models, they are ignored as if they do not exist. We can only hope they do not once again lead to catastrophe.

First, let me pose a thought experiment.  Country A and Country B propose to enter into Agreement X. We have no idea at all what Agreement X is, but we know that the result will be that both Country A and Country B will each be richer by $1 Trillion each and every year thereafter.

Country A, being an egalitarian paradise, is going to share out the proceeds equally among its population of 250 million, with each person getting $4,000 per year.

The dictator of Country B is going to do the same with 1/2 of its $1 Trillion gain, making his population very happy, but -- because this is his personal aim -- he is going to spend the other $500 Billion each and every year in building up its military so that it can challenge and eventually vanquish Country A, and then keep all of the gains of Agreement X to itself.  

Should Country A enter into Agreement X? 

A week ago The Economist opined that "The West's Bet on China has Failed," stating that:
Last week China stepped from autonomy into dictatorship. That was when Xi Jinping ... let it be known that he will change China's constitution so that he can rule as president for as long as he chooses .... This is not just a big change for China but also strong evidence that the West's 25 year long bet on China has failed. 
After the collapse of the Soviet Union, the West welcomed [China] into the global economic order. Western leaders believed that by giving China a stake in institutions such as the World Trade Organization would bind it into the rules based system ... They hoped that economic integration would encourage China to evolve into a market economy and that, as its people grew wealthier, its people would come to yearn for democratic reforms ....
CNN's Fareed Zakaria recoiled in horror, writing in the Washington Post that
[W]hat’s happening in China ... is huge and consequential. China is making the most significant change to its political system in 35 years. 
For decades, China seemed to be getting more institutionalized.... But that trend has now been turned on its head. If term limits are abolished, which is now almost certain, Xi Jinping could stay China’s president, general secretary of the Communist Party and chairman of the Central Military Commission for the rest of his life. And he is just 64.
.... The real danger is that China is eliminating perhaps the central restraint in a system that provides staggering amounts of power to the country’s leaders. What will that do, over time, to the ambitions and appetites of leaders? “Power tends to corrupt,” Lord Acton famously wrote in 1887, “and absolute power corrupts absolutely.” Perhaps China will avoid this tendency, but it has been widespread throughout history.
If Zakaria felt blindsided, he should not have been. Because ten years ago, after he published "The Post-American World," arguing that because the US had successfully spread the ideals of liberal democracy across the world, other countries were competing for economic, industrial, and  cultural -- but not military -- power, I confronted him at the former TPM Cafe. 

For the truth is, the West's bet on China, so ruefully mourned by The Economist and Zakaria, was always likely to fail. That free trade leads to economic and political liberalism and to peace ---- championed by neoliberal economists and their political retinue -- has been a fantasy for over 100 years, and for 100 years it has been a lie. They would have known if their theories and equations could account for the likes of Kaiser Wilhelm II. But since their equations and theories are blind to the pursuit of power, they dismiss it -- at horrible cost to the world.

In an interview with David Frum, Minxin Pei, who a decade ago dissented, predicting that China would not transition towards true economic and political freedom, said it well:
[M]any people were too dazzled by the superficial changes, especially economic changes, to realize that the Communist Party’s objective is to stay in power, not to reform itself out of existence. Economic reform or, to be more exact, adopting some capitalist practices and embracing market in some areas, is only a means to a political end....  
[W]hen China was forced to keep the door [to liberalization] more open, it was in a weaker position relative to the forces outside—the West in general and the U.S. in particular. But when the conservative forces inside China gain strength while the West appears to be in decline, those forces are far more likely and able to close the door again, as is happening right now. So, while the logic of irresistible liberalization appears to be reasonable on the surface, it overlooks the underlying reality of power. 
I set set forth the fuller historical context a decade ago in my response to Zakaria, which I am taking the liberty of reposting in full immediately below. 

Over at TPM Cafe, this week Fareed Zakaria's new book, "The Post American World" is being discussed. In it, Zakaria repeats the theory of globalization's most toxic and unproven claim: that countries which participate in trade together do not make war upon one another. So if you want to prevent war, just participate in deep and interwoven trade with the other country and everything will be hunky-dory.
It's a lie.
The new and most dangerous twist to all this is that our great looming danger is Russia, China, and the rising oil dictatorships.... This is a worldview bereft of any historical perspective. Compared with any previous era, there is more economic integration and even comity among the world's major powers. The imbalance between the West and the rest is large, not complete but large and in most areas increasing. The newly emerging states want to grow within the existing world order, which John Ikenberry has nicely described as "easy to join and hard to overturn." The world is going our way, slowly and fitfully, with some detours. No great power has an alternative model of modern life that has any real attraction?
This is essentially the same argument that Thomas Friedman made in The Lexus and the Olive Tree' and reiterated even a short time ago in this liveblog:
You know in Lexus I wrote that no two countries would fight a war so long as they both had McDonald's. And I was really trying to give an example of how when a country gets a middle class big enough to sustain a McDonald's network, they generally want to focus on economic development. That is a sort of tipping point, rather than fighting wars.
This argument, repeated over and over on both necoconservative and neoliberal sites, and all over the corporate media, that free trade leads to middle classes leads to democracy leads to kumbayah, is pretty simple, and it is dangerously wrong. Or as Zakaria reviewer David Rieff summarizes:
he reads too much into into two indisputable facts of the current moment --- that there are fewer major wars taking place than in living memory and that there is a greater level of global economic integration than at any time in history.
The truth is, the free trade zealots also have spent too much of their careers seduced by neoclassical economics' favorite mythical beast, Homo economicus, the Rational Man; and not enough time reading history.
For a start, contrary to the free trade zealots, this is not the first period in world history in which there has been relatively "free" trade, nor is it the first time in which there has been "globalization." For example, as is pointed out in an article entitled European Social Security and Global Politics By Danny Pieters, European Institute for Social Security Conference
Globalisation is not a new phenomena. During the second part of the nineteenth century there was a strong move toward the liberalisation of international transactioins, and international trade expanded rapidly until the beginning of World War I
And just which country in Europe was undergoing the most rapid growth and industrialization during the perioed from 1870-1914? As this essay states, Germany
embarked upon an extensive education program; it specialised in technical ares and so there was a greater push in that direction. It produced more and better scientists, and so Germany began her industrial advance. Also, the French threat, even if it was superficial, spurred the Germans in authority into action, and made them make Germany stronger and superior.
German expansion was also helped by the expansion of the railway network, so that goods and mail could get from one place to another, and to more places, faster and more efficiently.
Needless to say,much like the mercantilist expanding autocracies now fawned over by so many of the free trade zealots, during this time Germany was a monarchy, ruled by the Kaiser.
Even worse, this isn't just the first time that economies have experience "globalization", it also isn't the first time that this exact same argument has been made. In his 1910 best-seller, "The Great Illusion" Norman Angell wrote that:
the universal assumption that a nation, in order to find outlets for expanding population and increasing industry, or simply to ensure the best conditions possible for its people, is necessarily pushed to territorial expansion and the exercise of political force against others.... It is assumed that a nation's relative prosperity is broadly determined by its political power; that nations being competing units, advantage in the last resort goes to the possessor of preponderant military force, the weaker goes to the wall, as in the other forms of the struggle for life. 
The author challenges this whole doctrine. He attempts to show that it belongs to a stage of development out of which we have passed that the commerce and industry of a people no longer depend upon the expansion of its political frontiers; that a nation's political and economic frontiers do not now necessarily coincide; that military power is socially and economically futile, and can have no relation to the prosperity of the people exercising it; that it is impossible for one nation to seize by force the wealth or trade of another -- to enrich itself by subjugating, or imposing its will by force on another; that in short, war, even when victorious, can no longer achieve those aims for which people strive.... 
There is quite simply no difference at all between the theses of Angell a century ago, and Friedman and Zakaria now.
And what happened only 4 years after "The Great Illusion" was published? Well, another book that Zakaria and Friedman ought to read is Vera Brittain's autobiography, "Testament of Youth". Vera Brittain was a comfortable affuent middle class girl who was accepted to Oxford University shortly before World War I broke out. By the time it was over, her brother, Edward; her fiance Roland Leighton; and every other young man she had been close to, had been killed. Brittain's book is a searing documentary about the utter destruction of an entire generation of British young men caused by the war.
Just how many people were killed by World War I?  One source puts just the number of military deaths at 10 million. Including the wounded, in some European countries over half of the entire generation of young men were casualties.  Another sourcesays:
the percentage of a country's population directly afflicted. During the course of World War One, eleven percent (11%) of France's entire population were killed or wounded! Eight percent (8%) of Great Britain's population were killed or wounded, and nine percent (9%) of Germany's pre-war population were killed or wounded! The United States, which did not enter the land war in strength until 1918, suffered one-third of one percent (0.37%) of its population killed or wounded.
Simply put, World War I is a thorough and devastating refutation of the argument that free trade leads to peace and democracy, Quite the contrary, had Zakaria and Friedman bothered to actually study history, they might have found out that revolutions typically do not occur in eras of increasing plenty. Rather, they occur in times where rising expectations have been dashed:
the "J-curve" theory says that when conditions improve for a relatively long period of time, — and this is followed by a short economic reversal — an intolerable gap occurs between the changes that the people expect (dashed line) and what they actually get (solid line). Davies predicts that this is when revolution will occur (arrow).
Support for this theory was found in a 1972 study of 84 nations. Researchers found a clear relationship between indications of political instability and economic frustration. "Frustrated countries" are those that had poor economic conditions — low economic growth, insufficient food, few telephones and physicians — while being acquainted with the higher living standards of industrialized, urbanized countries.
These studies show that frustration is more likely to develop from relative frustration — the gap between their expectations and the reality that does not live up to these expectations. People in poor countries isolated from the outside world do not realize how poor or frustrated they are. Their frustrations are accepted merely as part of living. In contrast, the people in poorer countries exposed to modern standards feel more "frustrated." To top this off, deprived people who have experienced some recent progress are more frustrated than those who experienced poverty and oppression.
In short, just as Germans were hardly big agitators for democracy during the time the German state was expanding, and autocracy was resulting in greater prosperity, so we should not expect that any autocratic states today that are profiting mightily from economic growth are suddenly going to turn democratic. To the contrary, just like the Kaiser's Germany, it is much easier to direct aggression elsewhere.
Democratic revolutions occur when previously rising expectations have been dashed, and the populace has no outlet for their anger and frustration. In democracies, governments can be changed (as in 1932); but in autocracies, the ruler's cronies are protected from the privations, and with no alternative avenue of recourse, and seeing the manifest injustice of the benefits of the system, the populace revolts.
For example, Taiwan's democratic reforms were sparked by the violence of the "Kaohsiung Incident" of 1979. Similarly, democracy finally came to South Korea in 1987 when workers finally rebelled against artificially low wages:
South Korea is hardly a model of a free economy. The hand of government planners in setting priorities and steering companies has been heavy. The low wages that helped fuel growth did not result from market forces. For 25 years, successive governments deliberately held down pay rates. They virtually barred strikes, jailed militant labor leaders, and decreed tough guidelines for wage increases. To block development of independent unions, companies created their own and installed leaders acceptable to the government. Says a Western diplomat in Seoul: ''Union leaders were practically appointed by the national security police.'' With democratic winds sweeping South Korea this summer, workers were emboldened to push for higher pay, independent unions, and the right to strike, 
[2018 update: Even the American Revolution had elements of this paradigm, as England reined in the colonist's rising fortunes following the French and Indian War by taxing them for the costs, expanding the territory of Quebec to include all of what is now the American northern Midwest, and prohibiting expansion beyond the Appalachians.]
It is a disgrace that we see these same discredited theses, this same Great Illusion, embraced by corporate media pundits so often. That free trade inevitably leads to peace and democracy is a Big and Dangerous Lie, to which World War 1 is the most spectacular and unequivocal counter-evidence.
There is no guarantee, alas, that we are not now on that same catastrophic path.

A more fundamental point is about human nature.  In any economic downturn, the powerful elites are going to try to deflect all of the suffering on the powerless masses.  In a representative democracy, eventually the majority will rebel at the ballot box and elect a party which promises to end their suffering.  [Update: It might be a left-wing party, like Syriza in Greece or FDR's New Deal democrats in the US, or it might be from the right-wing like AfD in Germany or Donald Trump.  ]
In an authoritarian state, however, no such safety valve exists.  That's why revolutions don't happen in an era of rising expectations.  They happen when rising expectations are dashed.  So long as China's economy continues to expand stoutly, expect no meaningful turbulence.  But someday China will have a recession, and then, dear reader, is when world history will get interesting.

So here we are a decade later, and the free-trade economists and their acolytes are gobsmacked by something that was not just predictable, but actually predicted,  because there is no place in their theories for actual human behavior as revealed in history. We can only hope that when the inevitable happens, China will not lash out as Kaiser Wilhelm did a century ago.

Saturday, March 10, 2018

Weekly Indicators for March 5 - 9 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

As anticipated, the rough patch in the coincident indicators has resolved to the postive, but there has been a little more deterioration among the long leading indicators.

Friday, March 9, 2018

February jobs report: a blowout! Except (sigh) for wages

- by New Deal democrat

  • +313,000 jobs added
  • U3 unemployment rate unchanged at 4.1%
  • U6 underemployment rate unchanged at 8.2%
Here are the headlines on wages and the chronic heightened underemployment:

Wages and participation rates
  • Not in Labor Force, but Want a Job Now: declined -40,000 from 5.171 million to 5.131 million   
  • Part time for economic reasons: rose 171,000 from 4.989 million to 5.160 million
  • Employment/population ratio ages 25-54: rose 0.3% from 79.0% to 79.3%
  • Average Weekly Earnings for Production and Nonsupervisory Personnel: rose $.06 from  $22.34 to $22.40, up +2.5% YoY.  (Note: you may be reading different information about wages elsewhere. They are citing average wages for all private workers. I use wages for nonsupervisory personnel, to come closer to the situation for ordinary workers.)      
Holding Trump accountable on manufacturing and mining jobs

 Trump specifically campaigned on bringing back manufacturing and mining jobs.  Is he keeping this promise?  
  • Manufacturing jobs rose by 31,000 for an average of 18,700/month in the past year vs. the last seven years of Obama's presidency in which an average of 10,300 manufacturing jobs were added each month.   
  • Coal mining jobs increased by 300 for an average of -17/month vs. the last seven years of Obama's presidency in which an average of -300 jobs were lost each month
December was revised upward by 15,000. January was also revised upward by 39,000, for a net change of +54,000.   

The more leading numbers in the report tell us about where the economy is likely to be a few months from now. These were mainly positive.
  • the average manufacturing workweek rose 0.2 hours from 40.8 hours to 41.0 hours (reversing last month's decline).  This is one of the 10 components of the LEI.
  • construction jobs increased by 61,000. YoY construction jobs are up +254,000.  
  • temporary jobs increased by 26,500. 
  • the number of people unemployed for 5 weeks or less increased by 228,000 from 2,280,000 to 2,508,000.  The post-recession low was set over two years ago at 2,095,000.
Other important coincident indicators help  us paint a more complete picture of the present:
  • Overtime rose from 3.5 to 3.6 hours.
  • Professional and business employment (generally higher- paying jobs) increased by  50,000 and  is up +495,000 YoY.

  • the index of aggregate hours worked in the economy rose by 0.9%.
  •  the index of aggregate payrolls rose by 0.6% .     
Other news included:            
  • the  alternate jobs number contained  in the more volatile household survey increased by  785,000  jobs.  This represents an increase of 1,924,000 jobs YoY vs. 2,281,000 in the establishment survey.      
  • Government jobs rose by 28,000.       
  • the overall employment to population ratio for all ages 16 and up rose 0.3% to 60.4  m/m  and is up 0.4% YoY.          
  • The  labor force participation  rate rose 0.3% to 63.0  m/m and is up 0.1% YoY  

This was a a blowout positive report as to nearly all metrics. All important categories of employment rose strongly, as well as aggregate hours and aggregate payrolls, the employment to population ratio and the labor force participation rate. Among prime age workers, the e/p ratio is now only -0.9% under its 2006 high, although it is still about 2% under its all time high from 1999. 

Even the "soft" data of the unemployment and underemployment rates is largely explained by the surge in labor force participation -- i.e., more people entering the jobs market to find work.

Negatives remain the persistently high number of people who are not even in the labor force but say they want a job now, and the increase in involuntary part-time employment.

Wage growth for ordinary workers remains little better than flaccid, up 2.5% YoY this month. Last month's much ballyhooed 2.9% YoY increase for all workers fell back to a 2.6% rate. In the past, a surge in labor force participation has meant a short-term deceleration in wage growth .

So in sum this was an excellent report. But it does nothing to assuage my longer term concern about what will happen to wages in the next recession.

Thursday, March 8, 2018

One third of the way to the 2020 Presidential election

 - by New Deal democrat

Today marks 16 months since the 2016 election, and 32 months before the one in 2020.  

We are one third of the way through.  Barring a major industrial or nuclear war, we are going to make it.

The only major legislative accomplishment so far is the pro-cyclical, lopsided tax cut giveaway to corporations and the wealthy.  Additionally a bunch of lifetime judicial appointments have been made. 

On the executive side, there have been a slew of directives, and a bunch of regulatory backsliding, chiefly at the EPA, and net neutrality.

In 2021, the executive directives can be quickly undone.  New federal court judgeships at the lower levels can be established equal in number to those appointed by the current executive. Anthony Kennedy. bless his soul, looks like he is not retiring. The tax cuts can be reversed using the same reconciliation process as was used to establish them (and the booty clawed back). New regulators can restore what was lost.

And the blue tsunami of voters born since 1974 will building higher and higher as the red wave recedes one funeral at a time.

Deep breaths. We  will get there.

Wednesday, March 7, 2018

Interest rates and jobs: a variation on the model

 - by New Deal democrat

Friday is nonfarm payrolls day, so in the absence of more noteworthy economic news, let me follow up on Monday's post in which I discussed "A simple model of interest rates and the jobs market."

In it, I suggested that:

1. a YoY increase in the Fed funds rate equal to the YoY% change in job growth has in the past almost infallibly been correlated with a recession within roughly 12 months.

2. the YoY change in the Fed funds rate also does a very good job forecasting the *rate* of YoY change in payrolls 12 to 24 months out.

One shortfall of that model is that there are two "false negatives" in the low interest rate environment of the 1950s, during which the YoY increases in interest rates by the Fed were relatively modest, and did not exceed the YoY change in payrolls until after the recessions had already begun.

I suspect that in a low interest rate environment, more modest increases in interest rates might have a more pronounced effect. For example, an increase in mortgage rates from 2% to 4% doubles the monthly interest payments on a mortgage (i.e., a 100% increase), whereas an increase from 8% to 10% only increase it by 25%. 

While I haven't explicitly looked at mortgage rates as of yet, what I did do is plot the simple rise in interest rates from their low points near the beginning of each expansion since the mid-1950s, and see if, during a period of Fed tightening, they always rose to exceed the YoY% change in job growth *before* the onset of all of the recessions since.  Here's what I got:

So the simplest answer is, yes they did. To be more precise, here is the number of months by which this metric led the onset of the last 8 recessions:

1957: 8 months
1960: 1 month
1970: 6 months (while payrolls decelerating) *(false positive for deep slowdown of 1966)
1973: 6 months
1980: 15 months
1982: 12 months* (interest rates never declined below YoY jobs growth)
1990: 17 months *(false positive for 1984 slowdown)
2001: 5 months *(false positive during 1994) 
2008: 34 months

Note that there are 3 significant false positives that occur when there have been two interest rate cycles during an expansion. I only get resonable numbers by re-setting the low in interest rates during those cycles. And since the YoY change in payrolls is a good mid-cycle indicator, by insisting that the intersection occur while YoY payroll growth is declining, I'm already conceding that it must occur later in an expansion.

Finally, there is still the problem of 1933-55, during which time interest rates barely budged.

So unfortunately it seems that this metric is of limited value. It does have some merit as a "yellow light," strongly cautioning that there is a heightened probability of a recession is within 18 months, with the "red light" suggesting the near certainty of a recession within 12 months only if/when the YoY increase in interest rates exceeds the (decelerating) YoY% growth in jobs. It also does seem to suggest something about the depth of the subsequent recessions, as the two "worst" values generated by the metric occur in advance of the 1982 and 2007 deep recessions.

So, where are we now?  Here:

By this metric, we are on the verge of activating the "yellow light." 

Tuesday, March 6, 2018

The significance of the 1948 recession

 - by New Deal democrat

The yield curve never inverted between the early 1930s and the mid 1950s. And yet there were four recessions during that time.

For that reason I am very leery of over-reliance on that metric as a necessary component of recession forecasting.

In particular, the biggest inflation that occurred ever since 1920 happened in 1947-48 -- an even bigger event than in the 1970s. The Fed pretty much sat on its hands. And yet there was a recession.

What would a case study of the 1948 recession show?  I take a look over at XE.com.

Monday, March 5, 2018

A simple model of interest rates and the jobs market

 - by New Deal democrat

Since we are still in an era of very low interest rates, and during the past such era of 1930-1955 several recessions including the very bad 1938 recession occurred without a yield curve inversion, I have been looking at alternative measures.

One such measure I described about a  month ago, which is simply that an increase in the Fed funds rate of at least 1.75%, but typically 2% or more, and particularly when that occurs within a single year, has usually been correlated with a subsequent recession.

Today I want to propose another model: a YoY increase in the Fed funds rate equal to the YoY% change in job growth has in the past almost infallibly been correlated with a recession within roughly 12 months.

So, to the graphs!  The first shows the relationship I describe in the above paragraph over the last 60+ years:

To give an even better view, the below graph subtracts the YoY change in the Fed funds rate from YoY payroll growth, and subtracts a further -0.5%, showing that even when the relationship gets that close, with the exception of 2002-03 (a near recession), a recession has always followed:

In other words, there is only one false positive with two false negatives in the 1950s.

Here is a close-up of what that relationship has looked like in the last several years:

Currently the spread is about +0.7%. Note that if the rate of YoY payrolls growth continues to decelerate at its pace from the last several years, and we get the three expected Fed funds hikes this year, we will probably cross the +0.5% threshold by year's end. 

We can coax even more from the model, because the YoY change in the Fed funds rate also does a very good job forecasting the *rate* of YoY change in payrolls 12 to 24 months out, as shown in the below graph (note that the Fed funds rate is inverted, so that a rise in that rate forecasts a deceleration in YoY jobs growth):

Now  here is a close-up of the last three years:

With rates at the "zero lower bound," the relationship did break down in that there was increasing YoY jobs growth while the Fed funds rate remained at zero, and jobs growth slowed down even as the Fed started to raise rates slowly. But if the longer term correlation holds, then the Fed rate hikes from last year should mean that jobs growth this year and into next year should decelerate at a faster rate than they have in 2015-17.  In other words, we could be under the +0.5% level in our model by midyear.