Sunday, April 23, 2017

A thought for Sunday: the economy is on autopilot. Pray that it stays that way

 - by New Deal democrat

It's Sunday, so I get to step out from nerdy analysis, and opine as I please.

Back in 2014, when there was another GOP "wave" election in the Congress, I wrote that the silver lining was that we were at the best point in the economic cycle for it to function on autopilot for the next 24 months. In other words, almost all of the long term indicators were positive, so if all the Congress did in 2015-16 was agree to continue to pay the country's bills, we would probably be OK.  And we were.

So, a little over 3 months into the Trump Administration, what action has it taken to materially change the economic trajectory?

Basically, nothing. Yes, a bunch of executive orders have been signed promising to undo Obama regulations, and the telecoms have gotten the right to sell all of your data, but in terms of actual action, the economy is still on autopilot.

All of the mid-cycle indicators have made their highs, and a couple of the long leading indicators have vacillated between neutral and negative, and a few more of them are weakening, but are still positive. If the economy stays on autopilot, it probably doesn't have a bad accident until at least the middle of next year -- although I do expect things like job and real wage growth, while still positive, to weaken.

So, the good news is that if Trump and the GOP Congress continue to be unable to form a majority to enact actual policy, we're not in any serious economic danger for now.

The bad news is that something might happen within the next week.  If stopgap funding is not passed, at least a partial government shutdown seems likely. Actually welching on our debts is apparently still a few months off.

And Obama's negotiating with the hostage-takers at the time of the 2011 debt ceiling debacle is coming back to bit us in the butt, now that it serves as a precedent. First Trump threatened to cut off funding for Obamacare.  The Democrats responded by insisting that its statutory funding be codified in the debt ceiling resolution (something that probably a lot of GOPers silently want to happen as well). Now Trump has threatened to shut down the government and stop paying its bills if he doesn't get all of his legislative wishes, like a border wall and a big tax cut for the wealthy, as part of the deal.

Since the odds of a 2/3's majority in both Houses of Congress overriding any Trump veto are essentially zero, the Full Faith and Credit of the United States is in the hands of an ignorant narcissist. One week from now, the economy might be taken off autopilot and deliberately steered into a mountainside.

For the record, I see no reason for Democrats to go along with any of this. The GOP is in nominal controls of both Houses of Congress, and there is a nominally GOP president.  Time to put on their big boy pants and govern.  If they won't do that, there is no reasonable rationale for trying to negotiate a less awful, but still awful, outcome.

Saturday, April 22, 2017

Weekly Indicators for April 17 - 21 at

 - by New Deal democrat

My Weekly Indicators post is up at

No big change this week from the recent story, although one long leading indicator did flip negative this week, and another edged a little more towards neutral.

Friday, April 21, 2017

No, consumer debt service payments aren't signalling recession

 - by New Deal democrat

When I see an article trumpeting an oncoming recession, I will usually take at least a quick look to see if maybe there is an indicator that I've been missing or discounting. Or if it is just the usual cherry-picking of data never relied upon before, and probably not to be relied upon again once it reverses.

So this morning I read that there was a "Gathering Storm of Recession Indicators."
One of the datapoints caught my eye: consumer debt service payments as a percentage of disposable personal income.  Here's the graph in context:

I immediately focused on the limited time shown by the graph:  the last 8 years, with a nice red line showing how the value now is the value then.

I wondered if maybe I was missing something.  After all, this data series comes from the same quarterly report that gives us several other measures of household debt service that I've been following for 10 years, and which have, with one exception, risen into a recession, during and after which they turn down:

Both are pretty much going sideways as of the last report.  Nothing exciting happening there.

So here's what happens when I take the reference graph and follow it all the way back to its beginning:

Consumer debt service as a percentage of disposable personal income has been *declining* in advance of 3 of the 4 recessions since the reports were initiated.  In the 4th case, the rising debt level was much higher than it is now.


Hey, pretty red line though!

Thursday, April 20, 2017

Real wages and spending: I don't think consumers will roll over that easily

 - by New Deal democrat

This is the second part of a post about "hard data" and consumer spending.

 Yesterday I noted that self-reported consumer spending, as measured by Gallup, has been running 10% or better YoY since the beginning of February, consistent with's earnings growth, but in contrast to a small slump in retail sales as reported for the last two months.

In fairness, real personal consumption expenditures have turned down slightly in the last several months:

Since this measures spending, there is clearly a divergence between this measure  and Gallup.

Another contrary argument that the slump in consumer spending is real, is that the cause has been the decline in real wages since last July:

But over the last 50 years, a downturn in real wages has frequently not meant recession.  Consumers can cope by refinancing debt at lower rates (not available now), by cashing in appreciating assets, if they have them (e.g., stocks or housing equity), or saving less, before they cut back saving.  While there was a slight downturn in the savings rate in 2016, it was less than half of that we saw in 1998 and 2004 (and similar downturns in earlier cycles dnot shown in the below graph):

In the past, consumers have not caved in without saving less first.  It could always be different this time, but my suspicion is that we will see a much more substantial  decline in the savings rate before we see a real, sustained downturn in spending.

Maybe Jazz Shaw and John Hinderaker Should Read a Report Before Promoting its Result, Part II

     Several days ago, both John Hinderaker and Jazz Shaw promoted a story from the Washington Examiner, which in turn covered a new Harvard Business Report study on the effect of San Francisco's $15 minimum wage increase on the restaurant industry.  Yesterday, I observed that the report contained a key passage that essentially countered Mr. Shaw's and Mr. Hinderaker's assertion that "basic economics says the increase in the minimum wage is bad."  Today, I want to look at the actual results of the report, because a nuanced reading shows that neither Mr. Shaw nor Mr. Hinderaker's points are validated.

     Here is the first of two excerpts:

This paper presents several new findings. First, we provide suggestive evidence that higher minimum wage increases overall exit rates among restaurants, where a $1 increase in the minimum wage leads to approximately a 4 to 10 percent increase in the likelihood of exit, although statistical significance falls with the inclusion of time-varying county-level characteristics and city-specific time trends. This is qualitatively consistent but smaller than what Aaronson et al. (forthcoming) find; they show that a 10 percent raise in the minimum wage increases firm exit by approximately 24 percent from a base of 5.7 percent. Differences in sample and specifications may account for the differences between our study and theirs. 

Next, we examine heterogeneous impacts of the minimum wage on restaurant exit by restaurant quality. The textbook competitive labor market model assumes identical workers and firms who therefore are equally likely to share in the minimum-wage generated employment and profit losses. However, models that depart from the standard competitive model to allow for heterogeneous workers and firms suggest that a minimum wage increase would cause the lowest productivity firms to exit the market (Albrecht & Axell, 1984; Eckstein & Wolpin, 1990; Flinn, 2006). We show that there is, in fact, considerable and predictable heterogeneity in the effects of the minimum wage, and that the impact on exit is concentrated among lower quality restaurants, which are already closer to the margin of exit. This suggests that the ability of firms to adjust to minimum wage changes could differ depending on firm quality. Finally, we provide evidence that higher minimum wages deter entry, and hastens the time to exit among poorly rated restaurants.

     The report's conclusion is hardly breathtaking.  According to the report, somewhere between 4 and 10 restaurants per hundred will close as a result of the increase in the minimum wage.  And, that number may fall when other variables are added to the mix.  In addition, so far only the lower rated restaurants are impacted.  And considering the minimum wage is just going into effect, it's possible the techniques used by higher rated restaurants to limit the impact will be passed down to the lower rate restaurants -- which is a standard development in the market economy.

     In fact, the findings are consistent with the literature.  As this report conceded: even studies that identify negative impacts find fairly modest effects overall, suggesting that firms adjust to higher labor costs in other ways.   Most economists would call a 4-10% closure rate (which has the potential to be lower when other factors are considered) of marginally efficient restaurants modest.

     And a final point: the authors make no mention of San Francisco's restaurant bubble.  That means that we could simply be seeing correlation, no causation.

     What can we conclude from this little exercise:

    First: Jazz Shaw doesn't read for comprehension.
    Second: Jazz Shaw shouldn't be allowed to write about economics.
    Third: Jazz Shaw will continue to do so, largely because he thinks he's an expert.

     And so, we will continue to point out just how wrong he is.