Tuesday, September 18, 2018

A hypothesis for Prof. Krugman: the transmission method was FEAR

 - by New Deal democrat

In his recent column disagreeing with Ben Bernanke, Paul Krugman asks for an explanation as to how a financial panic could lead to years thereafter of a slow recovery. Specifically, Krugman says that he "really really wants to hear about the transmission mechanism."

After all, the financial panic eased in 2009. And yet, outside of the very noteworthy exceptions of corporate profits generally and Wall Street bank profits specifically, the economic recovery was lethargic.

Now, to a great extent, the debate between "credit event" and "housing event" is somewhat a semantic one.  You simply don't get a housing bubble unless there is a credit bubble to enable it. Similarly, absent a credit bubble in consumer lending for either housing (the 2000s) or appliances and furniture (the 1920s), you don't get a big consumer downturn (see, e.g., 2001, in which consumers sailed right through a brief and shallow recession brought on in large part by a stock market bubble. See also the quick late 1980s recovery from the 1987 stock market crash).

But if you are looking for a transmission mechanism that lasted after 2009, as usual you have to look beyond narrow-minded neoclassical economy orthodoxy. Because from a behavioral point of view, the answer looks pretty simple: FEAR.

Behavioral economists have shown that people in general react twice as strongly to the fear of a loss vs. the anticipation of an equivalent gain. A good example in the everyday economy is that consumers cut back spending twice as sharply in the face of an oil price spike, as they loosen their spending in the face of a steep decline in gas prices.

It is crystal clear that the financial panic of September 2008 instilled fear in the vast mass of households. I believe that there is very good evidence that it persisted for most of this decade.

To begin with, here is a graph of consumer confidence as measured by the University of Michigan:

I have zoomed in on 2007-2015, because i want to emphasize that consumer confidence did not rebound meaningfully at all once it crashed in 2008, until about 2014. Furthermore, any time there was a whiff of renewed crisis during that timeframe, confidence plummeted, in the case of the 2011 "debt ceiling debacle," all the way back to its bottom, but also in response to the Deepwater Horizon massive oil spill (2010), the "fiscal cliff" (end of 2012) and the GOP's government shutdown (2013). 

That, ladies and gentlemen, is fear.

Meanwhile, households didn't just deleverage out of debt during the 2008 financial panic, but they continued to deleverage and deleverage and deleverage all the way until late 2014 -- well after housing prices had bottomed (red in the graph below):

and they haven't meaningfully increased their exposure to debt since.

Further, there was a housing boom from 1986-88 without a credit bubble. Afterward house prices declined 10% into the early 1990s:

But the below graph of the personal savings rate shows that, unlike the 1990s, when the household savings rate went into a sustained decline, as household debt levels increased (see first graph above), following the great recession, the savings rate maintained its higher level, with the exception of 2012-13 when a one year 2% rebate of Social Security withholding taxes that resulted in higher spending, which resulted in a one year decline in saving when it expired:

So, I believe a good case can be made that the "transmission mechanism" that Krugman seeks is that the trauma of the 2008 financial crisis instilled a continuing sense of fear in consumers that there might be a repeat, leading to a shunning of debt and a resulting more subdued increase in the consumption that is 70% of the U.S. economy.

Monday, September 17, 2018

A detailed look at Industrial Production during this expansion

 - by New Deal democrat

In the past week there's been a little highbrow relitigation of the drivers of the "Great Recession" between Paul Krugman and Ben Bernanke. Bernanke plumps for it having been a "credit event" -- and as to the crisis of 2008, he is clearly correct -- while Krugman says it was primarily a "housing event," although Krugman also acknowledges that he is mainly speaking of the aftermath from 2009 onward. 

Since neither the 10% decline in housing prices between 1989 and 1992, nor the NASDAQ internet bubble of 1999-2000 managed to cause the worst downturn in 75 years, my own view is that it was precisely because there was a credit bubble in the biggest asset that is owned by a majority of Americans -- for which there was no financial help forthcoming to the middle class -- that the effects were so longstanding. Had the government -- as it did for the 1930s Dust Bowl -- bought up or crammed down existing mortgages, and took repayment of the loans out of housing appreciation whenever the owners eventually sold, it is likely that the consumer rebound from the recession bottom would have been much more "V"-ish.

But neither Krugman nor Bernanke, so far as I can tell, mentions a third important reason for the slowness of the recovery: the second installment of the China shock.  Because it is crystal clear that businesses decided, once demand picked up beginning in late 2009, to move plants and hiring overseas.

This is plain when we look at how employment recovered. Services employment recovered in relatively "V"-ish fashion: two years down and three years up. Even goods employment ex-manufacturing came back in more delayed fashion, and is at 97% of peak 2007 levels. But manufacturing employment only began to turn very late and, at 92.5% of peak 2007 levels, is still far behind:

When we look at industrial production itself, a similar pattern unfolds: mining production, led by fracking, took off quickly, while manufacturing industrial production turned more slowly, and has never recovered all the way back to where it was in 2007. In other words, IT'S NOT JUST ROBOTS!!!

At the beginning of this year, I said that a big question for 2018 would be whether the US economy was booming. At that time, I concluded it was not because, while unemployment was very low, wage measures were lackluster, and industrial production had not reached a sustained level of at least 4% that typified the 1960s or late 1990s.

Well, while wages have improved a little, they are still lackluster. But industrial production, measured as a whole, has finally exceeded 4% YoY, at 4.9%, as of August:

But, alas, it turns out that this surge in production is also narrow. When we sort out production between manufacturing and mining, here's what we get:

Manufacturing production growth exceeded 5% per year for almost all of the 1960s, and for much of the 1990s. But even now it is only up 3.1% YoY, while mining has exceed 10% growth YoY for much of the past 10 years.

In short, the "boom" in industrial production is really just an energy sector boom. US manufacturing is only showing mediocre growth.

Saturday, September 15, 2018

Weekly Indicators for September 10 -14 at Seeking Alpha

 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

An anomalous surge in demand deposits led to one of the 5 biggest weekly jumps in M1 money supply ever as reported by the Federal Reserve this week.

By clicking on the link and reading, you help reward me for my work by putting a penny or two in my pocket.

Friday, September 14, 2018

Subdued inflation helps gains in real average and aggregate wages

 - by New Deal democrat 

With the consumer price report yesterday morning, let's conclude this weeklong focus on jobs and wages by updating real average and aggregate wages.

Through July 2018, consumer prices are up 2.7% YoY, while wages for non-managerial workers are up 2.8%. Thus real wages have finally grown, ever so slightly, YoY: 

In the longer view, real wages have still been flat -- up only 0.5% -- for 2 1/2 years:

But because employment and hours have increased, real *aggregate* wage have continued to grow:

Real aggregate wages -- the total earned by the American working and middle class -- are now up 26.1% from their October 2009 bottom.
Finally, because consumer spending tends to slightly lead employment, let's compare YoY growth in real retail sales, first measured quarterly (red), with that in real aggregate payrolls (blue):

Since we are two months into the next quarter, here's the monthly close-up on the last 10 years (excluding this morning's decline of -0.1% in real retail sales): 

 Since late last year real retail sales growth has accelerated YoY, and again further this morning, as last August's -0.3% monthly number was replaced by the less negative -0.1% this morning, bringig the YoY% change up to +3.8%.  So we should expect the recent string of good employment reports to continue for at least a few more months.

Thursday, September 13, 2018

August JOLTS report: thriving jobs market, and still-thriving Taboo against raising wages

- by New Deal democrat

Tuesday's JOLTS report once again confirmed the very good employment report from one month ago:
  • Quits made a new all-time high
  • Hires are just below their expansion high of two months ago
  • Total separations made a new expansion high
  • Layoffs and discharges improved, but not to their expansion low made in March
  • Job openings made yet another all-time high

Let's update where the report might tell us we are in the cycle, remaining mindful of the fact that we only have 18 years of data. To do that, I am varying my past presentations to focus instead on hiring, quits, layoffs, and openings as a percentage of the labor force.  Here's what they look like since the inception of the series (layoffs and discharges are inverted at the 1.5% level, so that higher readings show fewer layoffs than normal, and lower readings show more:

Note the data is averaged quarterly to cut down on noise.

During the last expansion:
  • Hires peaked first, from December 2004 through September 2005
  • Quits peaked next, in September 2005
  • Layoffs and Discharges peaked next, from October 2005 through September 2006
  • Openings peaked last, in Spril 2007
By contrast during and after the last recession:
  • Layoffs and Discharges troughed first, from January through April 2009
  • Hiring troughed next, in March and June 2009
  • Openings troughed next, in August 2009
  • Quits troughed last, in August 2009 and again in February 2010
Here's what the four metrics look like on a monthly basis for the last five years (note: Quits and Layoffs and Discharges scaled on right): 

While only Quits made a new expansion high, the trend in quits and Openings has been very positive, while that of actual Hirs and Layoffs has been more mutedly so.

Next, here's an update to the simple metric of "hiring leads firing," (actually, "total separations"). Here's the long term relationship since 2000, quarterly:

Here is the monthly update for the past two years measured YoY:

In the 2000s business cycle, hiring and then firing both turned down well in advance of the recession. Both are still advancing, but the YoY% rate of growth is decelerating.

Finally, let's compare job openings with actual hires and quits. As you probably recall, I am not a fan of job openings as "hard data." They can reflect trolling for resumes, and presumably reflect a desire to hire at the wage the employer prefers. In the below graph, the *rate* of each activity is normed to zero at its July 2018 value:

As I noted a month ago when I first presented this graph, while the rate of job openings is at an all time high, the rate of actual hires isn't even at its normal rate during the several best years of the last, relatively anemic, expansion. Meanwhile one month ago quits tied their best level of 2001 (at the end of the tech boom).

In other words, as we saw when we looked at the NFIB data earlier this week, the employer taboo against raising wages is continuing. In response, employees have reacted by quitting at high rates to seek better jobs elsewhere.

So in summary, the July JOLTS report continues to show a thriving employment market, but a market that is not in wage equilibrium, as employers are failing to offer the wages that employees demand to fill openings.