Monday, March 18, 2019

The government shutdown may have caused a mini-recession


 - by New Deal democrat

Aside from being a monumentally poor policy outcome, and aside from the hardship it caused nearly a million workers, the government shutdown may also have caused a general contraction in production, sales, and income, and a slowdown in employment, that if it were longer would qualify as a recession.
Because the affected three months straddle Q4 2018 and Q1 2019, both quarters will likely show positive real GDP growth, it won’t be a recession. Let’s call it a mini-recession.
Although shorthand for a recession is two quarters of GDP contraction, that wasn’t the case for 2001, and the NBER has indicated that a general downturn in production, employment, sales, and income are the crucial criteria. So let’s look at each.
Industrial production declined significantly in December, and the small rebound in January was not enough to overcome that downturn. This is especially true of the manufacturing component:
The same is also true of real retail sales:
But lest you think that retail sales were an outlier, here are general business sales (including manufacturers’ and wholesalers’ sales)(BLUE) which also peaked in November, and inventories (red):
I included both because sales lead inventories, as is shown for the 2015-16 “shallow industrial recession” in the graph.
The NBER pays attention to “real personal income less transfer payments.” Since we don’t have the deflator for January, nor the amount of transfer payments, I am making use of CPI as a placeholder for the deflator:
These increased strongly in December, but declined in January.
Finally, here is employment:
No decline here, but one of the three lowest monthly readings in February. And of course, this is well within the range of being revised to a negative over the next several months.
Put the four series together, and you get a picture of an economy that in terms of production, employment, income, and sales suddenly contracted in December and January.
Assuming these series bounce back no later than March - which I expect to happen - the downturn isn’t deep enough nor long enough to qualify as a recession. But the government shutdown may have done significantly more damage than was projected at the time. And this highlights how poor pubic policy, whether it comes from the Fed, the Congress, or the Administration, can very quickly topple a slowing economy into outright recession.

Sunday, March 17, 2019

Preventing Presidential autocracy: thoughts on reining in Executive power


 - by New Deal democrat

 Matt Yglesias posted a jarring tweet this past week when he wrote:


He elaborated by linking to a long-form article he wrote four years ago, explaining his position, where in relevant part, he wrote:
America's constitutional democracy is going to collapse. 
Some day ... there is going to be a collapse of the legal and political order and its replacement by something else. If we're lucky, it won't be violent. If we're very lucky, it will lead us to tackle the underlying problems and result in a better, more robust, political system. If we're less lucky, well, then, something worse will happen.
.... 
In a 1990 essay, the late Yale political scientist Juan Linz observed that "aside from the United States, only Chile has managed a century and a half of relatively undisturbed constitutional continuity under presidential government — but Chilean democracy broke down in the 1970s."
Yglesias — and Linz — saved me a lot of work. Because I had long ago heard that the US was the only Presidential democracy that hadn’t succumbed to autocratic rule. That was precisely Linz’s finding. At this point the only other democracies that I know of that come close are Costa Rica (since the last coup of 1948) and the Fourth and Fifth French Republics (since 1945).

Historically, the problem has been that, over time, in any Presidential system, the President accretes more and more power (vs. a corrupt, ineffective, and/or deadlocked Legislature) until the Legislature degenerates into a toothless rubber-stamp, or else is disbanded by a President turned autocrat.

The US has not been immune. The first six Presidents, through John Quincy Adams, saw themselves as “Chief Magistrates,” only vetoing laws they thought were unconstitutional, and at least approximating a meritocracy in their limited number of appointments.  That began to change with Andrew Jackson, who vetoed any legislation that did not exactly conform to his wishes, and initiated the “spoils system” of appointing only political backers to government posts.

With the vast expansion of the bureaucracy during the 20th Century, Presidents obtained much more power via all of the appointments they were able to make. And following the Second World War, the large and permanent global military footprint enabled lots of chances for the Commander in Chief to flex his muscle.

Now we are getting very close to the final crossroads. Obama committed troops to Syria after the Congress completely gave up their war-making authority, preferring to sit on the sidelines and snipe. Trump’s declaration of an emergency simply because he could not get what he wanted out of Congress, if upheld by the Supreme Court, all but ensures that government by Executive Decree, that can only be overruled by a 2/3’s majority of both Houses of Congress, will probably quite soon become the norm.

In fact, Trump’s refusal of the GOP’s compromise proposal is almost certainly because, now that he has found this powerful new toy, he intends to use it more.

Once Presidential Emergency Edicts become more routine, unless this or any future President’s party fails to seat at least 1/3 + 1 in both Houses of Congress, why even bother convening?   

The bottom line is, I agree with Yglesias. We are on the way to autocratic Presidential rule unless the power of the Presidency is definitively reined in.

So, how should the Executive be reined in? Obviously, this must be via Constitutional changes. Below are my considered opinions for how to do that.

The mixed Presidential-parliamentary system used, for example, in France, in which some Executive powers are vested in a “Premier” or “Prime Minister” who is a member of the Legislature seem to be the best remedy. In the US, there are seven Presidential powers that ought to be either limited, or devolved in whole or in part to the Congress or its Legislative head:

1. Appointment of rule-making authorities in the bureaucracy (vs. adjudicating authorities, whose appointments would remain with the President). For example, the SEC both makes rules for corporate governance, and enforces those rules. The President ought to be completely taken out of the former, Legislative, role. Those regulators should be appointed solely by Congress.

2. Aside from full declaration of war, or the need for an emergency response, devolution of the authority for taking of limited military action. Thus, for example, if the Congress were to refuse to declare war, then any commitment of troops to Syria would be the sole authority of the Legislative head. (This would make Congress far more responsive to popular skepticism of any such adventure). This is in accord with the manifest intention of the Consitution originally, in which *all* types of hostilities, including limited ones such as a “Writ of Reprisal” were vested in the Congress.

3. The 2/3’s majority requirement to overcome a veto gives the President too much Legislative power. The requirement, if not outright eliminated, ought to be reduced to something like 60%. And in any case, a sustained veto should only delay implementation of a law duly passed by Congress for two years, so that whether the law should go forward or not becomes a campaign issue in the next Congressional elections.

4. The Legislative head should be able to be removed in a no-confidence vote just as in Parliamentary systems, although a majority negative vote in both Houses of Congress might be required.

5. Unless specifically embodied in the language of Treaties, the President should not be able to single-handedly terminate them (just as the President cannot unilaterally terminate laws with which he disagrees).

6. The President should not be able to pardon any member of his own Administration for any acts committed before or during that person’s service during the Administration, nor for any acts undertaken in support of the President, or in conspiracy with the President.

7. No emergency declared by any President should be allowed to last longer than the time necessary for Congress to convene and debate the alleged emergency, e.g., 60 days.

I know I’m just typing some words on a keyboard for a few readers. But the bottom line is, government by Presidential Edict looks like it is looming in our near future. Parliamentary democracies are far less susceptible to such autocratic power grabs than Presidential systems have been. Two hundred years of such history ought to be enough to learn the lesson. The remedy must be a clear circumscribing of Presidential authority, with an effective counterweight in the Congress.

Saturday, March 16, 2019

Weekly Indicators for March 11 - 15 at Seeking Alpha


 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

The rebound after the government shutdown has lifted the nowcast into slightly positive territory.  Still, it seems clear at this point that the shutdown caused the already-weakening economy to skirt with recession during December and January.

In my opinion Dean Baker is correct. Recessions aren’t as sneaky as Austin Goolsbee claims in his NYT article yesterday. What the *possible* “mini-recession” of December and January has in common with the very shallow 2001 recession is that both feature a weakening economy that is then hit with exogenous events, including poor government policy (the “China shock,” Trump’s trade wars, the government shutdown) and also in 2001, the September 11 terrorist attacks.

But as Baker points out, 2001 highlighted the bursting of a stock market bubble, apparent in the long leading indicator of corporate profits. Other long leading indicators had also flashed warning signals:

  • Housing had also declined over -10%, as measured by the long leading indicator of single family housing permits.
  • Long term interest rates had climbed over 2% from their 1998 lows. 
  • Real M1 had fallen by almost -7%
  • The yield curve had inverted.
  • Bank lending had gotten tighter.
  • Real retail sales per capita had peaked a year before.
Really not sneaky at all.

UPDATE: If you don’t want to go behind the NYT’s paywall, here is what Goolsbee said, via the trusty commenter Anne at Economist’s View. Goolsbee’s position is actually pretty close to what I’ve written above. Small shocks like poor government decisions can take a weak economy and tip it into recession, although Goolsbee focuses on consumer confidence.

Friday, March 15, 2019

Industrial production weak, while JOLTS employment remains strong


 - by New Deal democrat

I’ll have more to say next week, but for now here are the headlines on this morning’s data.

Taken together, production and employment are the King and Queen of coincident indicators - certainly in terms of how the NBER scores expansions and recessions. Both February industrial production and January JOLTS for employment were reported this morning, and delivered differing messages.
First, industrial production for February was weak. While total production gained slightly (+0.1%), manufacturing production declined for the second month in a row:


Here is what that same data looks like measured YoY:
There may have been a production boom last summer, but it’s over now.
If industrial production is the King of Coincident Indicators, then employment is the Queen. The JOLTS report for January, which included substantial revisions for all of 2018, included an all-time high in the number of quits (red), and an improvement in hires (BLUE):


Not shown, but layoffs and discharges made a new 12 month low, and openings were just below theirs. If there is a fly in the ointment, it is that since midyear 2018, there has been very little improvement in all of the JOLTS metrics except for layoffs and discharges.
Basically, production and employment taken together show deceleration since summer of 2018, with production actually contracting slightly while employment continues to improve.

Initial jobless claims not at warning levels yet


 - by New Deal democrat

With the economy slowing so markedly, suddenly there is a lot I can post about!
So here is a quick note about initial jobless claims. They are a short leading indicator, and at least as smoothed over a 4 week or monthly average, they aren’t too noisy.
I have two ways of looking at them:
1. The four week moving average rises more than 10% above its low point almost once a year. But by the time it is 15% above its low, a recession is usually imminent or may even have begun. So my cutoff point is 12%, above which there is a significantly increased chance of an oncoming recession. In September, this average hit its expansion low of 206,000:

If the 4 week moving average rises above 230,600, this metric is triggered. It did hit this number last month likely due to the government shutdown, but I am discounting that.
2. If the monthly average turns higher YoY for two consecutive months, that usually gives a short warning that a recession is about to begin. As the below graph shows, it was higher YoY in February:

If it averages higher than 228,600 for March, it would hit this point. For the first two weeks of March, it is 226,000:

Triggering one metric results in a yellow flag “caution”; hitting both results in a red flag “warning.”
Although we are close in both metrics, neither has been triggered yet.

Thursday, March 14, 2019

Leading scenes from the February jobs report


 - by New Deal democrat

Let me catch up with some details from last Friday’s employment report.

As a preliminary matter, the overwhelming take was that the poor +20,000 gain was “nothing to see here, just an outlier.” The problem with that take is that, for all of 2018, the average monthly gain in jobs was just over +200,000 a month. January came in more than 100,000 above that, at +311,000 jobs, and yet I don’t recall anyone taking the same position, that it was just an “outlier” to the positive side then! Here’s a graph, from which the 2018 average of 204,500 monthly jobs gain has been subtracted, so that the variance from that average shows as positive or negative:    

So, yes, it’s true that February was a bigger outlier, to the downside, than January was, to the upside, but both were outliers. If you average the two months together, you get +165,500 jobs per month, a significant downdraft from the 2018 average.

Moving on, last week I said to pay attention to three leading sectors of jobs: temporary jobs, construction, and manufacturing. In the past I’ve shown that at least 2 of the 3 sectors contract for a number of months before any recession begins. Here’s what all three sectors look like from January 2018 to the present:


We had a contraction in temp jobs in January, from revisions, and a contraction in construction in February, after an outsized January gain. Manufacturing hung on with a small gain.

Here’s the same information graphed as the YoY% change, first over the past 8 years:

The 2015-16 “shallow industrial recession” clearly stands out as a pocket of weakness.

Now here’s a close-up since the beginning of 2018:


All three show decelerating YoY gains since roughly the beginning of last autumn.
Last week I also said that I expected the YoY pace of job gains to start decelerating. Only one month, of course, but it did do that:

 
YoY job gains are at the lowest in over 6 months.

Finally, let’s take a look at two more leading metrics contained in the jobs report.

First, the manufacturing work week:

Historically, this starts deteriorating before manufacturing jobs. It is presently down -0.6 hours from its peak in summer of last year. In the past a decline of -0.5 hours has typically been associated with at least a slowdown, and by the time the decline hits 1.0 hours you are on the cusp of a recession.

Next, short term unemployment of less than 5 weeks. This is one of the “short leading indicators” listed by Prof. Geoffrey Moore:

Typically if the three month average is less than 5% above its low, the expansion is intact. If that average is more than 10% above its low, a recession is near or may have just begun. Presently the three month average is 6% above its recent low. Take this with a grain of salt, because it includes the government shutdown month of January.

The bottom line is that, even averaging January with February, all of the leading employment indicators show some deterioration, but none of them are at a point where I would expect them to be if a recession were imminent.