Weekly Indicators for September 15 -19 at XE.com

 - by New Deal democrat

My Weekly Indicators piece is up at XE.com.

At the beginning of this year, I forecast a deceleration of growth in the latter part of the year.  It may be starting to show up.

About recovery, the American people "get it"

 - by New Deal democrat

I wanted to pass this on, from Pew Research via Digby.

Asked about whether the American economy is in a recovery, and if so, how strong, here was the breakdown of the replies:

It strikes me that this is probably also a pretty good self-report on economic well-being over the last few years.  Most Americans' individual position has improved, but not as much as they would like or need.  A small minority has made out quite well, and a larger minority has been completely left behind.

This is the point Bonddad and I have been making for 5 years.  Yes, the economy is recovering, yes it is a positive.  It's just not good enough.  The American people get it.

August housing permits: apartments are still carrying the market

 - by New Deal democrat

I have a new post up at XE.com about this morning's housing report.

Most of the analysis seems to be slightly DOOOMish clickbait. In fact, while this report was poor month-over-month,  a longer-term look supports positivity about the coming months.

John Hinderaker: The Great Contrary Indicator

On September 3, 2009, John Hinderaker at Powerline wrote the following:

We’ll let it rest there: hyperinflation or default. One or the other is the inevitable result of the unprecedented irresponsibility of Barack Obama’s administration. Either one is a disaster, not so much for us, but for our children. Obama and his advisers are gambling, evidently, that we don’t care much what happens to our children and grandchildren, or to our country after we’re gone.

Yet today, we have this from Dr. Yardeni:

 

Since Mr. Hinderaker made his inflation prediction, global inflation has been tame to non-existent. (Invictus and I debunked this claim of hyperinflation when it was made.  See this article at the Huffington Post)

 

And the US default?

 

 

 

The budget gap is closing.

 

And then in 2010 he advised that you should buy gold:

 

This seems like a clue as to where the Obama administration intends to take the economy. If I’m not mistaken, Jimmy Carter did much the same thing: juice the currency, try to stimulate growth and worry about the inevitable inflation later. The problem, of course, is that the federal government’s policies are doing just about everything possible to suppress economic growth. Nothing the Fed can do will make up for an anti-growth, anti-business administration. But it can create inflation, and here’s betting it will. The moral of the story is, look for the dollar to decline sharply. Buy gold.

 

So -- how is that gold bet paying off?  According to today's Business Insider Gold Looks Like Death:

 

Remember gold?

We used to talk a lot about it around these parts, but we've pretty much stopped following it ever since the whole goldbug, Fed-hater thing got so thoroughly discredited.

Anyway, it's not looking so hot. In fact, it kind of looks like death.

And the dollar collapse:

 

 

Here's the deal: Mr. Hinderaker has been a great contrary indicator for the past 5 years.   Whatever he says, DO THE OPPOSITE.  He's that bad

 

 

 

 

 



The loosening OIl choke collar is helping real wage growth

 - by New Deal democrat

I have a new post up at XE.com.  Together with the trend of slowly rising wage growth, today's -0.2% CPI reading, fueled by the continued loosening of the Oil choke collar, is just what the doctor ordered.

John Hinderaker Can't Even Read A Graph

Now we have the headline "Income Stagnation Under Democrats."

Hinderaker posts this graphic from the Census, claiming it shows Democratic policies lead to a drop in incomes:

Except, of course, that isn't what the graph shows.  It shows the incomes rose in the 1980s and 1990s (Democrats and Republicans) and then moved sideways under Bush (who Hinderaker called a genius) and down under Obama.   In other words, it rose under a Republican and Democrat, stagnated under Bush and fell under Obama.  This is called chart reading, which Hinderaker obviously can't do.

And then there is this:

 

 

The reality is that as the labor force participation rate rose (largely due to women and baby boomers entering the labor force) incomes and the economy expanded.  But as the baby boomers started to retire (which is the primary reason for the drop in the LFPR) incomes started to stagnate.

 

So, Hinderaker can't even read a simple graph correctly.  Dear God, but this man is stupid.

John Hinderaker's Economic Incompetence In One Venn Diagram

Many thanks to both Economists View and Professor Krugman for linking to this piece.  If you'd like to read my more serious economic articles, please go over to the XE.com Currency Blog where most of my work is posted now.

I love when John Hinderaker tries to take down Paul Krugman.  One of the participants has a Nobel Prize in economics; the other has been consistently wrong about the economy for the better part of 10 years.  (In case you're wondering, the "Krugman is a hypocrite" argument was debunked here.   As usual, a simply internet search would have revealed that, but Hinderaker was never big on research.)

So, when Hinderaker used a Venn diagram from another blog, I made one of my own.  As you may know, Hinderaker was a big proponent of the argument that the Fed's QE would lead to a massive spike in inflation.  As I recently noted, Bloomberg calculated the cost of investing based on this advice.  Based on their calculations, the "inflation is just around the corner" trade would have lost an investor over $1 trillion dollars.  In honor of that little bit of data, I made the following diagram to show just how incompetent Hinderaker is at economics:

Weekly Indicators for September 8 - 12 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

Will the big decrease in interest rates this year give housing a second wind?  Housing permits will assume more than their usual importance when they are reported in the coming week.

Expect another upward revision of Q2 GDP: over 4.5%?

 - by New Deal democrat

You may remember 3 months ago when Q1 GDP was revised all the way down to -2.9%, from an initial report of +0.1%, the main culprit was a sudden and unexpected decline in health care costs.  The BEA acknowledged that this came from exactly one report:  the Census Bureau's Quarterly Services Report.

I wrote a post confirming something Dean Baker (?) had written:  namely, that the same thing had occurred 50 years ago when Medicare was inaugurated.  There was a one quarter sudden and anomalous decline in GDP.  But then it was followed by a surge in the next quarter.

Well, this morning the Quarterly Services Report for the 2nd quarter was released, and it shows a similar surge in Q2 compared with Q1.  Hospital services, which unexpectedly declined -1.3% seasonally adjusted from Q4 2013 to Q1 2014, rose by +2.6% in Q2 2014.  The larger aggregate of health care services, which isn't seasonally adjusted in the report, rose +3.0% in the 2nd Quarter, after declining -2.0% in the 1st.

In comparison, the Q1 to Q2 change in 2013 for health services was about 2.2%, and added .4% to GDP.

While I am no maven of the minutiae of how GDP is calculated, nevertheless since 2nd quarter 2014 GDP as presently revised only shows a +.05% contribution by health care, it appears that at very least 2Q 2014 GDP is likely to be revised upward to 4.5% or better.

Even if so, the bad news is that the combined GDP for the first half of 2014 would still only be about +1.2%.

The Conundrumette

 -by New Deal democrat

I have a new post up at XE.com.

The unusual big divergence between stock returns (booming) vs. bond yields (falling significantly since January of this year) is trying to tell us something.  But what is it?

Why has job growth outperformed GDP growth?

 - by New Deal democrat

In mt last post, I politely took issue with Dean Baker's claim that August's mediocre jobs number was not an outlier.  Rather, I pointed out, for the last 3 /12 years we have had an unusually strong trend in job growth compared with GDP growth.

The YoY percentage of jobs added since World War Two  has been about -1.5% less than the YoY percentage growth of real GDP.  In other words, if GDP is about 2%, about half of the time there has only been  0.5% job growth or more, and about half the time there has been less than 0.5% growth.  Since the beginning of 2011, however, GDP has grown gernerally between 1.5% and 2.5% a year, but job growth has also ben about 1.5% a year -- about 1% higher than that median historical trend.

Here's the graph of YoY jobs - YoY GDP adjusted by 1.5%, so that the long term median is 0, for the last 30 years:

So why have jobs, relatively speaking, so significantly outperformed GDP?  Here's my working hypothesis.

Here is a graph you've seen a number of times before.  This is a graph of initial jobless claims as a percentage of the entire civilian labor force, plus those who are not in the labor force but want a job now:

What this adjustment does is tell us what percentage of people who hold a job, or want a job, are laid off in any particular week. In this way it takes into account demographics and in particular, the large cohort of Boomers over 55 years old who are retiring in droves.

What you can clearly see is that this ratio is extremely low.  Relatively speaking, the rate of layoffs is equal to the lowest in the last 50 years.  Another way of looking at this data is that employers are running particularly tight ships.  Compared with the entire post-WW2 era, they have pared the number of workers they need down to the absolute minimum for the current level of work.

The next graph is the percentage of all jobs that are temporary jobs:

This graph is just the opposite of the initial jobless claims graph.  It is at an all-time high.

Putting this all together, we have an employment environment where, compared with the post-WW2 era, employers have exactly enough employees to cover a regular workload with no slack whatsoever.   When the workload increases, the existing workforce is not sufficient to handle it.  New workers, with a bias towards temporary workers (who aren't entitled to medical benefits and whose contract can be terminated at any time) need to be employed.  This compares with the earlier era where new work meant that the slack in the workloads of existing employees was pared down.  The net result is that increased activity (increased GDP) leads to a need for relatively more new hires.

One way to test that is to compare hours worked with jobs created.  Once existing workers are pushed to the limit, the only way to increase output is to hire more workers.  As it happens, we can test exactly that by comparing aggregate hours worked in the economy (blue) to total jobs (red), and norming each to their prior peak in 2007:

What we see is that aggregate hours increased more than jobs until the entire shortfall was made up by about the beginning of 2012.  Since that time, both series have moved in nearly identical trends.  While it's not a perfect fit, it suggests that at least since the beginning of 2012, current employees have been fully utilized.  Increased output has required additional workers.

It seems to me this is a good explanation for the relative outperformance of job growth vs. GDP growth in the last 3 1/2 years.

Powerline Blog Issues No Response to My Request For a Comment On Their Longstanding And Incorrect Inflation Arguments

Since the Federal Reserve engaged in QE, Powerline  blog has been one of many voices arguing inflation would result.  It hasn't:

Bloomberg wrote an article about the Fed naysayers yesterday that included this calculation:

If you agreed with all the academics, billionaires and politicians who denounced Federal Reserve monetary policy since the financial crisis, you missed $1 trillion of investment returns from buying and holding U.S. Treasuries.

That’s how much the government bonds have earned for investors since the end of 2008, when the Fed dropped interest rates close to zero and embarked on the first of three rounds of debt purchases to resuscitate an economy crippled by the worst recession since the Great Depression.

The resilience of Treasuries represents a rebuke to the chorus of skeptics from Stanford University’s John Taylor to billionaire hedge fund manager Paul Singer and U.S. House Speaker John Boehner, who predicted the Fed’s unprecedented stimulus would lead to runaway inflation and spell doom for the bond market. It also suggests investors see few signs the five-year-old expansion will produce the kind of price pressures that would compel Fed Chair Janet Yellen to side with the central bank’s hawkish officials as they consider when to raise rates.

I wrote an email to Powerline Feedback yesterday:

Gentlemen,

The writers at Powerline have uniformly argued the Fed’s policy of quantitative easing would lead to massive inflationary pressure. 

However, as pointed out in a recent Bloomberg article (see link below), if someone had followed this investment thesis (which would have led them to bet against the US Treasury Market) they would have lost a large amount of money.

Do you have any intention of issuing any type of “mea culpa” regarding your incorrect analysis?

http://www.bloomberg.com/news/2014-09-08/you-missed-1-trillion-return-agreeing-with-fed-naysayers.html

F. Hale Stewart JD, LLM

 

They have yet to write anything in response.

 

 

In which I politely disagree with Dean Baker about the employment report

 - by New Deal democrat

Last Friday Dean Baker wrote that Economists who understand economics didn't see the August Jobs Report as an Outlier, saying:

Actually, the numbers match the market very well. The economy grew at a 1.1 percent annual rate in the first half of the year. Faster growth in the second half of the year might bring the rate for the whole year to 2.0 percent. If we assume that productivity growth is 1.5 percent, this would imply an increase in the demand for labor of 0.5 percent. That translates into 700,000 jobs for the year or roughly 60,000 a month.

Let me state right here that, like Bill McBride a/k/a Calculated Risk, I think it most likely that August is simply an outlier.  As Jeff Miller pointed out on Sunday, the standard error in this series runs up to 100,000 a month, and as Bill pointed out, even in the best years for job growth, there has always been at least one faceplant.

You can probably see the issue here right off the bat:  If Dean is correct that August wasn't an outlier -- that if anything it was above trend at 142,000 -- then what about the last 7 months, in which 1.4 million jobs, or over 200,000 a month were added?  Were they all outliers?  In a row?  In fact, what about the last 3 1/2 years, as I'll show below.

To begin with, if we go back 65 years, all the way to 1948, when we can track both GDP and jobs, there have been 266 quarters in total.  When we compare real annualized job growth vs. real annualized GDP growth over those 266 quarters, the median difference is about 1.5%, meaning that in about half of those quarters, real GDP growth exceeded job growth by 1.5%, and in the other half real GDP growth was less than 1.5% higher than job growth.   Here's the graph - you'll just have to trust me on the count, unless you want to do it yourself!:

Here's a closer-in look at the last 30 years:

Two things to notice are (1) there is a lot of variability around that 1.5% median, and (2) since the beginning of 2011,   job growth has been well above trend in about 2/3 of the quarters, sometimes by over 2.5%.

Here's a slightly different way to look at the same thing.  This is the YoY% of real GDP growth (red) compared with the YoY% of job growth (blue):

You can see that job growth has typically been only about 0.5% to 1.0% less than real GDP growth for the last 3 1/2 years, in other words +0.5% to +1.0% higher than the long term trend that is Dean's benchmark.

So my question to Dean Baker is, respectfully, if August isn't the outlier, then what is your explanation for the job growth of ~8.2 million, or nearly 200,000 a month, for the last 3 1/2 years?

I do have a hypothesis, which I'll share in my next post.

Effects of age, the unemployment rate, and asset holdings on household income and welath

 - by New Deal democrat

Last Thursday the Federal Reserve came out with its Report on Consumer Finances for 2013.  This is the most in-depth cross-sectional look at the state of America's household balance sheets, so it is going to get a lot of play. Some of that discussion is going to be on point, and some of it will be misleading at best. So I thought in addition to giving you some value-added, that you probably won't read about elsewhere, I'd discuss a few ways the report is likely to be misinterpreted.

An important limitation: the survey badly lags

Before I begin in earnest, let me point out one important limitation of the study.  You are probably going to read a lot of analysis couched in the present progressive tense, as in, "income is declining."  That's not a true statement.  Because this survey is only conducted once every 3 years, the only comparison is between 1 year ago and 4 years ago.  The survey is unlikely to pick up a turning point that took place in 2012 (e.g., real median or average wages as measured in other reports).  For that, we'll have to wait for the 2016 report which will be published in 2017!  So you can see that this survey, while thorough, is badly lagging.

The economic rift in American society has been growing

So far what I have read hits the two biggest points:

• 1. Median income and wealth both declined compared with 2010 across cross sections
• 2. the divide between haves and have-nots is increasing.  Somewhere between the 50th and 75th percentile of income, a rift is developing. Balance sheets are improving roughly for the top 1/3 of Americans, and the higher the income percentile from there, the greater is the improvement. For roughly the bottom 2/3 of Americans, their incomes and wealth are declining.

For example, Digby highlighted the graph showing that the share of overall wealth owned by the top 3% grew. That for the next 7% is flat, and that for the bottom 90% shrank.

That wouldn't necessarily be so bad.  For example I'd rather own 9% of a $120 pie than 10% of a $100 pie.  The bigger problem is that, as shown in the graph below (2010 is left column, 2013 on right):

the bottom 90% has seen an outright decline in absolute wealth.

The millionaire next door is likely to also be known as "mom and dad"

As the above graph shows, the household at the 82.5th percentile is worth about $500,000.  the 95th percentile is worth just shy of $2 million. A reasonable guess is that 10% of all American households are worth $1 million.

Now let's see how wealth skews over age groups:

As I've said before, a 25 year old worth $250,000 is for all intents and purposes, rich.  A 65 year old worth $250,000 years old is no better than working class.

While the survey doesn't tell us what percent of millionaires are Boomers, the likelihood is that they are the lion's share.

While declining median wealth is widespread, demographics probably plays the biggest part

Next up, here is the graph of median incomes by age group:

Note that median income starts to drop off at age 55, and especially after the normal retirement age of approximately 65.

Since the number of people in the 25 to 54 age group has stagnated over the last 20 years, while the population over age 55 has surged in the same time period, as shown in this graph:

real median household income has declined as a simple matter of demographics.

It is interesting, and distressing, that median incomes have declined for declined drastically for those ages over 45-54 in particular.  I'd like to blame this all on the unemployment rate, but with the comparison period of 2010 (the peak in the unemployment rate was in 2009), it looks like there has been real hardship in this group in particular.  So demographics is not the only thing at work.  Still having a huge demographic retired into a lower income distribution has to be skewing the overall median figure more than anything else.

For wealth, asset classes made a huge difference

Although not a surprise, the report confirmed that, the more you relied on savings and on bonds, the more you suffered in the last few years.  Contrarily, if your main source of wealth was stocks, Happy Days are Here Again:

This is a graph of wealth, so it isn't just that CD's and bonds basically are paying nothing, it appears that people en masse pulled off of those asset groups.  It is likely that hose who could, rotated into stock mutual funds and ETF's.  Needless to say, the working class normally has its wealth ties up in housing (which lost value) and savings, whereas the wealthy have always had a far bigger share of wealth in investments like stocks. This only exacerbated the divergence in wealth.

The Federal Reserve report is further confirmation,  as Business Insider put it on Friday, that Piketty was right, as was the Occupy Wall Street movement. Until Washington is forced to respond more to the people than the plutocrats, we can expect the long-term trend to continue.

Weekly Indicators for September 1 - 5 at XE.com

 - by New Deal democrat

This week's post is up at XE.com.

Every now and then the nonfarm payrolls number just throws a spanner into the machine.  The weekly indicators don't suggest any slowdown has started at all.

A brief note about the Fed report on household wealth and income

 - by New Deal democrat

Yesterday the Fed released its report on 2013 household wealth and income.  The report only comes out once every three years, so the comparison is with 2010.

So far what I have read pretty accurately summarizes the report. But I want to add a few comments about items you probably won't read elsewhere, and some cautions about interpreting it.  I hope to have that up later today.

August jobs report: Jobs hit a speed bump

- by New Deal democrat

HEADLINES:

• 142,000 jobs added to the economy
• U3 unemployment rate declined from 6.2% to 6.1%

Wages and participation rates

• Not in Labor Force, but Want a Job Now: up 45,000 to 6.304 million
• Employment/population ratio ages 25-54: up 0.2% from 76.6% to 76.8% (NEW POST-RECESSION HIGH)
• Average Weekly Earnings for Production and Nonsupervisory Personnel: up $.06 (or +.3%) from $20.62 to $20.68, up 2.4% YoY

June was revised downward by -31,000 to 267,000. July was revised upward by 3,000 to 212,000.  The net revision was thus -28,000. 

Since the economic expansion is well established, in recent months my focus has shifted to wages and the chronic heightened unemployment.  The headline numbers for August show a little progress on wages, and mixed results on participation.

Those who want a job now, but weren't even counted in the workforce were 4.3 million at the height of the tech boom, and were at 7.0 million a couple of years ago.  They have actually risen for the first eight months of this year. As noted above they were 6.3 million in August.  This is almost certainly due to the cutoff in extended unemployment benefits by Congress at the end of last year.

On the other hand, the participation rate in the prime working age group has made up 40% of its loss from its pre-recession high.

After inflation, real hourly wages for nonsupervisory employees probably increased from July to August. The YoY change in average hourly earnings is +2.4%, somewhat better than the inflation rate.

Finally, while the unemployment rate fell, it was because 64,000 people left the work force.  This only partially reverses last month's good number, with the net change in the civilian labor force over the last two months rose by 265,000, while the number of new jobs in the same two month period rose by 148,000.

The more leading numbers in the report tell us about where the economy is likely to be a few months from now. These were mixed but with a positive bias.

• the average manufacturing workweek rose by +0.1 hours from 40.9 to 41.1.  This is one of the 10 components of the LEI, and will have a positive impact.


• construction jobs creased by 20,000. YoY construction jobs are up over 200,000, or about 4%.  This is good news.


• manufacturing jobs  were unchanged, and are up 168,000 YoY.


• temporary jobs - a leading indicator for jobs overall - increased by 13,000.


• the number of people unemployed for 5 weeks or less - a better leading indicator than initial jobless claims - increased by 22,000 to 2,609,000 compared with December's 2,255,000 low.

Other important coincident indicators help us paint a more complete picture of the present:

• The average workweek for all nonsupervisory workers was unchanged at 33.0 hours.


• Overtime hours was also unchanged at 3.4 hours.


• the index of aggregate hours worked in the economy grew by 0.1% from 108.7 to 108.8. 


• The broad U-6 unemployment rate, that includes discouraged workers decreased from 12.2% to 12.0%.


• Part time jobs for economic reasons decreased by -234,000.

Other news included:

• the alternate jobs number contained in the more volatile household survey increased by only 16,000 jobs.  The household survey jobs numbers had been lagging the establishment survey numbers, but as expected this difference has now been almost entirely made up, with the household survey showing a 2,189,000 increase in jobs YoY vs. 2,482,000 in the establishment survey. 


• Government jobs increased by 8,000.

• the overall employment to population ratio for all ages 16 and above was unchanged at 59.0% , and has risen by +0.4% YoY. The labor force participation rate fell from 62.9% to 62.8%, and has fallen by -0.4% YoY (but remember, this includes droves of retiring Boomers).

Relatively speaking, this was a poor report in comparison with the last 6 months.  But I wouldn't treat it as anything more than a speed bump. Most of the leading parts of the report were positive.  IN other words, this doesn't seem to herald a change in trend.

We did get a good number on wage growth, and we did get a good number on the prime age participation rate.  On the other hand, those who have dropped out of the labor force but would like to be employed remains signficiantly higher than it was at the end of last year.

No, Meteor Blades, household income does NOT measure the earnings of everyone in the household

 - by New Deal democrat

Real median income measures the INCOME of everyone in the household.

For example, if an 80 year old gets a pension payment, or interest payments on savings or bonds, that is included, even though it is not earnings. Since there are a lot more people over 55, and particularly over 65 now, as a percentage of the population, and they have lower income than prime working age households, real median household income has been in a secular decline.

That's why real median household income has mainly been telling us since 2000 that Boomers are leaving the work force,and now they are retiring in droves. Secondarily, it is a proxy for the employment to population ratio, as increased unemployment means lower income.

This may be the month unemployment finally falls below 6%

 - by New Deal democrat

I have a new post up at XE.com.

As you probably remember from past posts of mine, the ratio of initial jobless claims to the population is a pretty decent short leading indicator for the direction of the unemployment rate.

With July and August initial jobless claims in the vicinity of 300,000 and even less, we should finally cross to below the 6% threshold - i.e., a more "normal" unemployment rate - in the next several months.  Maybe even this Friday.

Weekly Indicators for August 25 - 29 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

This was one of the most universally positive weeks I have ever seen. Only one series was negative and one neutral. Everything else was positive, several strongly so.