Saturday, April 23, 2016

Weekly Indicators for April 19 - 22 at

 - by New Deal democrat

My Weekly Indicator post is up at .  There's been a change in a number of trends in the last few weeks, all but one of them in the same direction.

Friday, April 22, 2016

Consumer Expenditures Survey: incomes rose sharply from June 2014-June 2015

 - by New Deal democrat

A major piece of data came out last week that has been totally unreported in the media and econoblogosphere:  the Consumer Expenditures Survey (CES) for June 2014- June 2015.
This is the first CES report to include the period of rapidly declining gas prices. And at least on initial examination, to my nerdy eyes, it's a stunner.

The CES income data has been the source of most of the reporting over the last few years indicating that the vast majority of workers have seen a real decline in wages.  For example, using the CES data, the NELP reported last August that real wages had declined across the board since the end of the recession in June 2009:

And in a report just a few weeks ago, the Pew Foundation showed the inflation-adjusted  CES income and expenditures through June 2014 iinto this graph:

This has been in stark contrast to the Consumer Population Survey, which is the source of the monthly unemployment rate and labor participation numbers, which has shown an increase since 2013, including a sharp increase in the last 18 months, and virtually all other measures of labor compensation:

According to last year's CES report, from June 2009 through June 2014 median wages had declined -3.9%, as shown in the below chart:

This year's report shows that, as of June 2015, workers had made it all, or virtually all, back. According to my calculations, after falling nearly -7% from June 2009 through June 2014, in 2015 incomes in real terms were only 1% below their 2009 high ($62,138 vs. $62,857 in 2009 dollars). The bullet points:
  • average  annual expenditures up +5.9% YoY (up +5.7% after inflation)
  • average annual income up +6.6% YoY (up +6.4% after inflation)
Here are income and by quintiles as shown in the CES table:

The second lowest quintile continues to be the worst performing quintile, and along with the lowest, is the most affected by the big increases in rent. NOTE: I do not believe these are directly comparable to the NELP's quintiles, since they divide by job category).

I'm still going through the report, and the lengthy disconnect between the two surveys (CES vs. CPS) on income is something I want to examine in more detail. But if my calculations are correct, the CES has now joined the CPS in showing that the economic expansion finally started really benefitting average workers in the last couple of years.    

Junk Bonds Are Rallying

We'll be doing our regular monthly economic review on Thursday, April 28th at 3PM CST.  You can sign up at this link.

Thursday, April 21, 2016

The best measure of labor market recoveries: March 2016 update

 - by New Deal democrat

In my opinion the best measure of how average Americans are doing in an economic expansion isn't jobs, and it isn't wages per hour.  Rather, it is real aggregate wage growth.  This is calculated as follows: 
  • average wages per hour for nonsupervisory workers
  • times aggregate hours worked in the economy
  • deflated by the consumer price index
This tells us how much more money average Americans are taking home compared with the worst point in the last recession.

Why do I believe that this is the best measure of labor market progress?  Let me give you a few examples.

First, compare an economy that creates 1 million 40 hour a week jobs at $10/hour, with an economy that creates 2 million jobs at 10 hours a week at $10/hour.  If we were to count by job creation, the second economy would be better.  But that's clearly  not the case.  The second economy is paying out only half of the cold hard cash to workers as the first.

Next, let's compare two economies that both create 1 million 40 hour a week jobs, but one pays $10/hour and the other pays $12/hour.  Clearly the second economy is better.  It is paying workers 20% more than the first.

Finally, let's compare two economies that create 1 million 40 hour a week jobs at $10/hour.  In the first economy, there are 3% annual raises, but inflation is rising 4%.  In the second, there are 2% annual raises, but inflation is rising 1%.  Again, even though the second economy is giving less raises, it is the better one -- those workers are seeing their lot improve in real, inflation-adjusted terms, whereas the workers in the first economy are actually losing ground.

In each case, the economy creating more jobs, or more hourly employment, is inferior to the economy  that pays more in real wages to its workers,  In other words, the best measure of a labor market recovery is that economy which doles out the biggest increase in real aggregate wages.

In short, at the end of the analysis, people generally work not for hours, and not for jobs themselves, but for the cold hard cash that is put in their pockets.  That's why I believe that real aggregate wage growth is the best measure of a labor market recovery.

With that introduction, here are real aggregate wages for the entire past 50 years: 

IMPORTANT NOTE:  This graph shows *aggregate* real wages.  It is not divided by households or per capita, so this measure doesn't try to convey how much improved individuals' lots might be.  It conveys how much more income has become available to the middle/working class as a whole. For that, we can divide by population to see real wage growth per capita:

So how does the current expansion compare with past ones?  Here is the graph, normed to 100 at the post-recession bottom in real aggregate wages in October 2009:

To compare, here is a chart I created last year showing the real aggregate wage growth in every economic expansion beginning with 1964:

If you want to see the graphs for each expansion, just click here

Because the above chart was created 8 months ago, the result for the current expansion has changed. Since the bottom 77  months ago, real aggregate wages have improved by 19.5%, an average of .25% per month. Four of the past 7 recoveries have been better.  Three were worse.  Wage growth per month is still anemic, although better than the George W. Bush expansion, .  This recovery has been helped by a big increase in the total number of additional hours worked. 

Finally, here is how it compares with the much-vaunted labor recovery of St. Ronald Reagan:

Currently the Obama labor market recovery has almost completely equalled the Reagan recovery 77 months in.  If there is continued improvement for the next 6-12 months, it is likely to surpass Reagan's record.

Wednesday, April 20, 2016

Worth repreating: Boomer retirements and wage growth

 - by New Deal democrat

In case you haven't already seen this elsewhere, the below report comes from the San Francisco Fed:

Here is the average of 4 measures of wage growth for the last 10 years, showing that while there has been improvement off the bottom a few years ago, it is still pretty patheric:

The SF Fed says:
While elevated flows out of full-time employment to not being in the labor force normally contribute positively to median wage growth, this contribution is being attenuated by the retirement of the baby boom. As baby boomers have begun to retire, the fraction of exits occurring from above the median wage has gotten larger, reflecting the relatively high earnings of older workers. The exits from full-time employment of older, higher-paid retirees have also pushed down wage growth. Furthermore, with so many of this generation still to retire, the so-called Silver Tsunami will be a drag on aggregate wage growth for some time. 
Overall, our results suggest that changes in the composition of employment have had a significant impact on wage dynamics over the past seven years.... As the labor market has recovered, ... [c]ompositional changes are now a drag on aggregate wage growth. Decomposing this drag, we show [that] the size of the Great Recession and the addition of the aging of the baby boom mean this time is different.
Here is their graph showing the regular cyclical effects of wage growth, and the depression in growth caused by the "silver tsunami" of retirments:

Of course, the replacement of retiring workers by younger workers is always present.  To simplify, imaging that each year's demographic cohort were exactly the same, and that everybody worked for 40 years.  Then each year 2.5% of the workforce would retire, and 2.5% younger people would enter. But because the yearly Boomer cohorts are larger, an outsized share of the workforce is retiring each year, and an equally large demographic of young MIllennials (and now even post-Millennials) is entering.

While it obvioiusly isn't the cause for all of the poor wage growth -- the depth of the slack in the labor force, and the dominant employer bargaining power are very potent explanations -- nevertheless  there is clearly some unusual downward bias to wage growth due to supersized demographic turnover.

The big news in yesterday's housing report was in the February revisions

 - by New Deal democrat

I have a post about yesterday's housing report, and its effect on my outlook through the first quarter of next year, up at  As the title implies, the big news wasn't in the relatively poor March numbers at all.

Tuesday, April 19, 2016

Bonddad Tuesday Linkfest

We'll be doing our regular monthly economic review on Thursday, April 28th at 3PM CST.  You can sign up at this link.

Oil is Still in a Short-Term Uptrend

Leaving the EU Would Cost the UK 6% of GDP (FT)

The idea of Britain negotiating a deal to have full access to the European single market while not being a member of the EU is “complete fantasy”, George Osborne has said, as he stepped up the attack on the “economically illiterate” Leave camp.

On Monday the Treasury published its long-awaited estimates of what the long-term consequences of leaving the EU would be for the UK economy. Launching the Treasury document alongside other cabinet ministers in Bristol, the chancellor claimed the UK economy would be 6 per cent smaller if the country was to quit the bloc, leaving Britain with diminished influence and less trade.

A British exit would leave a £36bn hole in the public finances equivalent to 8p on the basic rate of income tax, Mr Osborne said.

  • 35 S&P 500 companies have reported earnings thus far, according to S&P CapIQ's most recent earnings report.
  • 71% have reported earnings better than Street expectations. 
  • Collectively, the S&P 500 has reported a +8.2% EPS surprise.
  • Of those companies that have announced earnings, 49% have shown double-digit or better Y/Y growth.Overall, EPS growth thus far is -8.3%.95 companies report this week, including Intel, Yahoo and McDonald's.
  • Thus far, consumer discretionary companies have outperformed (11.3% growth), and materials companies are lagging (-17.8%).

Take a look at the overall growth rates, and you can see kind of a similar situation, where growth was relatively OK and then fell apart in the Great Recession. And then we've had these really great-looking growth numbers for auto sales that have everybody so excited. For example, in 2012, we grew as fast as 13%. Well, that was related to the recovery, not to some great new demand for automobiles, and since then we've fallen back a little bit and growth in 2015 was about 5.5% or so.

Well, now, looking ahead, we don't see any particular reason for automobiles to grow any faster than overall population growth and maybe a little business growth. So, we expect 1% to 3% growth out of the auto industry in the years ahead, not the same big 13% we got in 2012. Nothing to worry about, but again, a slower growth rate than people have been anticipating.

Monday, April 18, 2016

The new parsimony

 - by New Deal democrat

I came across the below graph showing that relationship of average household net worth with average debt vs. the personal savings rate from the NY Fed last week (h/t The Conversable Economist): 

The important point was that the relationship has changed since the Great Recession.  Even though there has been a big increase in average household net worth thanks in particular to the rebound in house prices, the personal savings rate remains elevated compared with its prior history.

This is evidence of something President Obama said during a recent interview, namely, that "Some people are still recovering from the trauma of what happened in 2007-2008,”

That traumatic fundamental change in behavior, a new parsimony, is also apparent in the ratios of  household debt to disposable personal income:

The Great Recession caused households to deleverage away a 30 year rise in obligations in just 5 years, and there is no sign of debt levels increasing even now.

A similarly dramatic reversal appears when we measure household (and business) debt against GDP:

Household, business, and non-financial debt all rose as a share of GDP for at least 50 years (!) before abruptly reversing course during the Great Recession -- and as of the last measure, both household debt and non-financial debt were still declining.

For those of you not old enough to remember, in the 1960s and 70s, as both inflation and interest  rates almost relentlessly increased, the mantra was to take out debt now, at lower interest rates, and pay it back with cheaper dollars, i.e., pay back today's debt with tomorrow's inflated dollars.  In the 1980s and 90s, ever more debt could be financed at the same monthly payments, as interest rates on the payments decreased.

Despite even lower interest rates since 2008, however, households have actually been reducing debt.  This is a new behavior, and I believe it is fair to say that it has been induced by trauma.  Further, just as the generation scarred by the market crash of 1929 and the Great Depression remained savers for the rest of their lives, I expect the generation that has learned this behavior to remain parsimonious for a long time to come.  If anything, debt levels compared with GDP will probably continue to decrease until the post-Millennial generation that does not remember the Great Recession becomes the dominant cohort  several decades from now.

Bonddad Monday Linkfest

We'll be doing our regular monthly economic review on Thursday, April 28th at 3PM CST.  You can sign up at this link.

Almost three years ago, former US Treasury Secretary Larry Summers revived Alvin Hansen’s “secular stagnation” hypothesis, emphasizing demand-side constraints. By contrast, in Robert Gordon’s engaging and erudite book The Rise and Fall of American Growth, the focus is on long-term supply-side factors – in particular, the nature of innovation. Thomas Piketty, in his best-selling tome Capital in the Twenty-First Century, describes the rise of inequality that is resulting from low GDP growth. Joseph E. Stiglitz’s book Re-Writing the Rules of the American Economy: An Agenda for Growth and Shared Prosperity blames political choices for both slowing growth and rising inequality.

These accounts differ in emphasis, but they are not contradictory. On the contrary, while Summers, Gordon, Piketty, and Stiglitz each examines the issue from a different perspective, their ideas are complementary – and even mutually reinforcing.

Summers’s Keynesian argument is that the problem is a chronic aggregate-demand shortfall: Desired investment lags behind desired savings, even at near-zero nominal interest rates, resulting in a chronic liquidity trap. Today’s near-zero—even slightly negative—short-term policy interest rates do not mean that longer-term rates, which are more relevant to investment financing, have also hit zero. But the yield curve in the major advanced economies is very flat, with both real and nominal longer-term rates at historic lows.

There may be many reasons for this, but Gordon describes one possibility: The underlying pace of innovation has slowed, leading to lower expected returns on investment and thus forcing down interest rates. And it is the investment needed to translate new knowledge into actual innovation that links the supply and demand sides and generates growth.

Both of these theories can be connected with Piketty’s arguments about the dynamics of capital accumulation. Implicit in Piketty’s thesis is that capital can be substituted for labor relatively easily. When capital grows faster than labor and GDP, the rate of return will fall over time, but proportionately less than growth in the amount of capital. The result is a redistribution of income from labor to those who own capital.

Summers actually proposed a new form of the production function, whereby the progress of intelligent machines makes capital a perfect substitute for segments of the labor force. An increasing concentration of income at the top, combined with top earners’ high propensity to save, then leads to the chronic shortfall of aggregate demand that characterizes secular stagnation. Stiglitz makes the case that policy bias also contributes to income concentration.

Gordon’s thesis is more about a kind of “satiation” in rapid technological progress, which depresses expected returns and thus helps to explain the chronic lack of sufficient investment. But, at the end of his book, he makes median income the real indicator of economic performance. In Gordon’s 2015-2040 projection, annual growth in median income in the United States is only 0.4%, compared to average income growth of 0.8%, reflecting continuously rising inequality. (Compare this to 1.82% annual growth in median income from 1920 to 2014.)

There's plenty of national wealth to support the debt

Total retail sales fell by 0.3 percent in March, despite rising sales in nine of the thirteen broad categories for which sales are broken out. Exauto retail sales were up 0.2 percent while control retail sales, a direct input into the GDP data on consumer spending, were up 0.1 percent.  While the headline numbers on the March report came in below expectations, there were upward revisions to prior estimates for sales in January and February. With the revisions, annualized growth in control
retail sales for Q1 as a whole came in faster than growth in Q4 2015. 


Over time, we have come to attach increasingly less meaning to the retail sales data, at least the initial print for any given month. Those initial estimates are subject to large revision. But, no matter how one feels about the soundness of the data, they should be wary of drawing broad conclusions about overall consumer spending based on the retail sales data. As we have been noting for some time now, falling prices for gasoline and other goods have made the nominal retail sales numbers look misleadingly weak over the past several months. Additionally, control retail sales capture less than one-quarter of all consumer spending as reported in the GDP data while the retail sales data do not capture spending on services. As such, the monthly retail sales data give only a limited view on the overall state of U.S. consumers.

Still, growth in inflation-adjusted total consumer spending in Q1 will be slower than that seen in Q4  2015 and it is fair to ask whether something is amiss with U.S. consumers. We do not think this to be the case. Labor market conditions continue to improve, underpinning steady growth in disposable personal income. At the same time, household net worth hit a new record high in Q4 2015, fueled mainly by rising housing equity.  What many fail to consider, however, is that household debt levels remain high relative to household income, as seen below. While low-interest rates make it easier for consumers to service debt, our view is high levels of debt mean consumers are hesitant to take on new debt. As seen below, growth in total household debt remains well below historical norms, and clearly consumers are not resorting to debt in order to finance consumption. While we are seeing some growth in discretionary consumer spending, we are also seeing consumers pare down debt and build up savings, neither of which should be seen as a bad thing. As such, we have a much more constructive view of consumer fundamentals than implied by the retail sales data

Sunday, April 17, 2016

Weekly US Equity, US Bond Market and International Columns Are Up At

US Equity Week in Review

US Bond Market Week in Review

International Week in Review

Memo to Hot Air and Powerline: The US Textile Industry Was Dying Long Before the California Wage Hike

The Hot Air and Powerline blogs have latched onto an LA Times story that notes clothing manufacturers are leaving the area due to the increase in the minimum wage.  Both argue this fact is demonstrable proof that a minimum wage increase is bad.

What this really shows is the complete ignorance of Steve Hayward and Jazz Shaw.  First, a very brief history of the US Textile industry: it started to die a slow and painful death about 50 years ago when Taiwan and other Asian countries started their respective "export our way to growth" programs.  Starting in the 1960s, Taiwan opened up its borders to capital investment.  They requested only two concessions from their investors: that Taiwanese be trained in the new industries and that the invested capital remain in the country.  Thanks to their then lower standard of living, they were easily able to offer cheaper goods which were then exported to the U.S..  To the uninitiated (like Mr. Shaw and Hayward) this is called "comparative advantage), and it's a very basic concept in international economics -- yet another economic subject area both are completely ignorant of.

The only reason there is any textile industry left in the US is due to some level of protectionism and political favoritism.  Want proof?  Here's a chart from the FRED system showing textile employment at the national level:

Total textile employment dropped by 50% during Bush IIs tenure (gee -- I wonder if Mr. Shaw or Hayward ever wrote about that?).

And here are two charts from the BLS showing textile employment for Los Angeles:

The top chart shows total LA textile employment.  It follows the national trend noted above.  The lower chart shows total LA garment manufacturing employment.  It dropped from about 45,000 in 2000 to its current level of ~41,000 -- an over 50% drop that occurred far before the increase in California's minimum wage.

The US textile industry has been on its last legs for the last 20+ years.  The charts above show that Bush II was far more responsible for its demise than California.  And, most importantly, this industry has been dying a slow and painful death for the better part of 50 years.