Saturday, January 12, 2019

Weekly Indicators for January 6 - 10 at Seeking Alpha

 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

Recent gyrations have changed both the short and long term forecast. Once again, it shows that the biggest problem is that most forecasters simply project existing trends forward.

As usual, reading the article should be informative for you, and helps reward me with a little pocket change for my efforts.

Friday, January 11, 2019

Real hourly and aggregate wage growth in 2018: very good, thanks to declining gas prices

 - by New Deal democrat

Now that December inflation has been reported as down -0.1%, with YoY consumer inflation a paltry +1.9%, let's update what that means for real wage growth in 2018.

Nominally, wages for nonsupervisory workers grew +0.4% in December. With inflation flat, that means real wages grew +0.5%: 

The good news is that real hourly wages are at their highest level in 45 years, having finally surpassed their levels from the late 1970s. The bad news is that they are nevertheless below their peak level in 1972-73!

On a YoY basis, real wages rose 1.4% for all of 2018:

Since 1999, the change in real wages has almost explusively been determined by the price of gas. Gas prices have fallen over -20% in the last three months, and that has made all the difference in real as opposed to nominal wages.

Finally, real aggregate wages (i.e., the total amount of wages, in real terms, paid to non-managerial workers) have now risen 27.9% from their bottom in October 2009:

The total advance during this expansion, while good, is nevertheless still exceeded by that of  the 1960s (+31.2% since the series began in 1964) and 1990s (+33.8%).

On the other hand, growth in real aggregate wages had averaged 2.5% in this expansion, varying from 1% to 8% depending on what has happened with gas prices:

In 2018, real aggregate wages grew +3.1%, the best level of the past 10 years.

In sum, the growth in both real and nominal wages was probably the best part of the economy in 2018 for average Americans.

Thursday, January 10, 2019

Gaming out the government shutdown

 - by New Deal democrat

There isn't any significant economic news today, and there have been some developments of note in the standoff about Trump's border "wall," so let me update my thoughts on this.

A week ago Sunday, I wrote that Pelosi should opt for a "maximalist" strategy of making affirmative demands for Democratic objectives, as well as taking GOP "hostages" like agricultural subsidies, as bargaining chips to use to come to a deal with Trump and the GOP, rather than an "accommodationist" strategy of simply opening the government as previously agreed to by the GOP (a deal that Trump had reneged on).

Well, Pelosi chose the "accommodationist" strategy, so where are we?

There are 4 possible outcomes:

1. Trump capitulates. This is only going to happen if large portions of Trump's own base abandon him, as they did with the child separations at the border.

2. Pelosi and the Dems capitulate. If negotiations are off the table, and Trump's base doesn't turn against him, this is the more likely outcome.

3. Trump, the GOP, and the Dems negotiate a deal.  This happens if all sides can claim "victory." Trump gets appropriations for something he can call a "wall," and Democrats get something - like the DREAM Act - they can call victory as well. Since Trump has a demonstrated history of reneging on deals after pocketing concessions, any proposed deal is going to have to get around this procedural issue.

4. The Dems and the GOP negotiate a veto-proof deal. If Trump's base does not turn on him, but Congressional GOPers fear for their re-election chances in 2020, there is at least a slim possibility that they could cut a deal that overrides a Trump veto.

Now let's review where we are.

As I anticipated, since Pelosi was unable to obtain a 2/3's majority in the House, Trump is standing pat, and so is McConnell, since he has nothing to gain by trying to override a veto unless the House will do so as well.

So at the moment we are stuck in a "win-lose" capitulation scenario, with both sides becoming more and more entrenched as each is aware that its base will be furious with capitulation. In movie terms, this is a game of chicken where both drivers are speeding towards a cliff.

Right now, actually going over the cliff looks like the most likely scenario. "Going over the cliff" means that more and more government services shut down, and more and more pain is inflicted on an ever-increasing number of people. The shutdown will continue until there is so much widespread pain inflicted on average Americans that they scream for both sides to make it end, without really caring who caves in.

The first and most likely place for pain to be felt is airline travel, which is already starting. As more TSA security either fail to show up or outright quit, air travel will become very unpleasant. Slowdowns by overstressed air traffic controllers and by pilots aren't unlikely either. But that is probably not enough.

The more likely sources of the widespread pain are either (more likely) tax refund checks and/or Social Security checks stop going out; or (less likely) a widespread outbreak of food-borne illness  due to lack of FDA inspections.

But let's be clear on something unpopular: if we do go over the cliff, it is because *all* of the parties, including the Democrats, are willing to see widespread pain inflicted on ordinary Americans, rather than be seen to be capitulating.  As an aside, let's also be clear that there is a large faction of the GOP -- what Digby and Atrios call "E Coli conservatives" - who are perfectly happy with this, since they favor a return to 1859 anyway, minus the messy slavery bit.

In this case, the plurality if not majority of people are not going to care about apportioning blame. They are going to want "both sides" to give something up to get the government open. That probably means that the Democrats get nothing affirmative, but the funding for Trump's "wall" is cut back.  This comes closest to scenario #2, although it does involves some capitulation by Trump as well.

I've seen some commentary that suggests Trump will declare an "emergency" and claim victory even if the move is immeidately torpedoed by Congress and/or tied up in the Curts. The issue I have with this theory is, I see no reason why Trump would sign any funding bills while the challenges are pending, unless portions of his base abandon him. So I don't see how we avoid the "going over the cliff" part.

Since the one condition under which Trump will blink is if enough of his own base abandons him on this issue, #4 is the least likely scenario, because in those circumstances, Trump himself will capitulate.

Scenario #3 - the scenario for which I advocated - is less likely than the "going over the cliff" scenario, but more likely than #4.  At the moment, the only people pursuing this are a handful of GOP Senators. Here's a tweet on this from yesterday. I've included the retweet by Markos Moulitsas so that you can be assured that I am not the only one guilty of purity apostasy:

The biggest problem with scenario #3 is that, in between the agreement and Trump's signature, Lou Dobbs, Sean Hannity, and Stephen Miller are sure to try to reach him and rail against compromise. To get around that, in the past I've suggested making use of -- with as much hoopla as possible --  the "President's Room" in the Capital Building, and ensuring that the House and Senate both approve the deal before the President leaves the room, all the while he has to be chaperoned by the likes of Sens. Schumer and Graham to distract him (Pro tip: Kim Jung Un showed the way to do this). The only other possibility is to insist that, e.g., the DREAM Act be passed and signed first, with its taking effect contingent on the second bill appropriating $$$ for a wall, also being passed.

But, unfortunately, to recapitulate my point, so long as we are in a win-lose game of capitulation chicken, a large chunk of Americans are going to have to suffer some real pain before this impasse gets resolved, and so long as the point is that of wall vs. no wall, Democrats are not going to gain anything affirmative out of it.

Wednesday, January 9, 2019

November JOLTS report shows surprising (relative) weakness

- by New Deal democrat

The JOLTS report on labor is noteworthy and helpful because it breaks down the jobs market into a more granular look at hiring, firing, and voluntary quits. Its drawback is that the data only goes back less than 20 years, so from the point of view of looking at the economic cycle, it has to be taken with a large dose of salt.

With that disclaimer out of the way, Monday's JOLTS report for November was surprisingly soft relative to the strength of the overall jobs gain for that month, as it show most of the series continuing to decline from their August peaks (in the case of hires, October):
  • Quits declined for the 3rd month in a row, and are about 7% off peak.
  • Hires declined were about 3% off their peak set one month ago.
  • Total separations are off 5% from August.
  • Job openings are a little less than 5% below August.
  • Layoffs and Discharges are up 7% from their recent low (a bad thing), and had one of their three worst months in the last year.

Let's update where the report might tell us we are in the cycle.

First, below is a graph, averaged quarterly through the third quarter, of the *rates* of hiring, quits, layoffs, and openings as a percentage of the labor force since the inception of the series (layoffs and discharges are inverted at the 3% level, so that higher readings show fewer layoffs than normal, and lower readings show more):

During the 2000s 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
Now here's what the four metrics look like on a monthly basis for the last five years: 

As indicated above, job openings, quits, and hires all surged higher through August of this year. In the three months since then there's been at least a temporary downturn.
Next, here's an update to the simple metric of "hiring leads firing," (actually, "total separations"). Here's the long term relationship since 2000 through Q3 of this year: 

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. Time will tell whether the recent decline in separations is just noise, or the start of a more significant downtrend. If it is significant, that would be a break from the pattern in the 2000s expansion. 

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 100 at its August 2018 value, since that has been the recent peak:

When I first presented this graph, I noted that while the rate of job openings is at an all time high, the rate of actual hires has only just reached its normal rate during the several best years of the 2000s expansion, and is below its rate at the end of the 1990s expansion. 

Through August both hires and quits have accelerated, with hiring decisively above its level from the last expansion -- although, as you can see in the first graph above, the *rate* of hiring remains below that of the 2000s expansion. My take has been that employees have reacted to the employer taboo against raising wages by quitting at high rates to seek better jobs elsewhere. If the dam is finally breaking, we should see the hiring rate increase, and quit rate level off. Since hires are the only metric that have made a new high since August, and have declined the least since that high, this may be happening.  

In summary, the November JOLTS report showed an employment market backing off its best levels. Is this the start of a trend? While my expectation is that this will start to cool down during the first six months of this year as a slowdown begins to take hold, in the near term that is balanced by the simple fact that the JOLTS report for December when it is released next month is going to reflect the roughly 300,000 net jobs gained last month, and so is likely to be equally strong.

Tuesday, January 8, 2019

My forecast for H1 2018 ...

 - by New Deal democrat

... is up at Seeking Alpha.

I've been using the "K.I.S.S." method for nearly a decade, and it has been flawless so far.

As usual, clicking on the link and reading, in addition to hopefully being educational for you, helps reward me with a little $$$ for my efforts.

Monday, January 7, 2019

Good news from the employment report: workers are finally getting raises!

 - by New Deal democrat

When it comes to jobs, if there is one trend that really set apart 2018 from any prior year of this expansion, it is that ordinary workers are finally getting decent raises.

Let's start by looking at the monthly % change in average hourly wages for non-managerial workers for the entire duration of this expansion. Since this has averaged about +0.2%/month, I've subtracted that so that any month above 0 is an above average increase in nominal hourly pay for ordinary workers:

Look at the far right. In ten of the last twelve months, average hourly wages have increased by more than the norm for this expansion.

As a result, YoY nominal wage growth in the last two months has been a little over 3.3%:

Average hourly wage growth accelerated YoY during almost all of 2018. The prrevious high mark of this expansion before late 2017 had been +2.7% YoY.

It certainly appears that employers have finally gotten the message, and the "taboo against raising wages" has been broken -- for now.

Note that from the long term view, Happy Days are not quite Here Again. Here's a graph of the YoY% increase in nominal (blue) and real (red) average wages for non-managerial workers over the last 35 years:

Note that nominal wage have continued to fall, or at least falter, for at least several years after the end of each of the recessions during this period. There have been several reasons for that, but the bottom line is that the "underemployment rate" has to fall to a certain level to put any kind of floor under wage growth. After that nominal wages growth tends to increase until the next recession starts.

But, even with the recent very low unemployment and underemployment rates, nominal wages have still not grown at the 4%+ rates of the last several expansions.

Real, inflation-adjusted wages (red) are of course a whole other story. Since the turn of the Millennium these mainly have had to do with fluctuations in the price of gas. The big "pop" in real wages in 2014-15 was when gas prices declined from close to $4/gallon to under $2/gallon. In the last few months there has been a similar dynamic.

In December, nominal non-managerial wages grew +0.4%.  Because of the government shutdown, CPI may not be reported timely. But we can estimate, since gas prices declined over -10% in December alone. In the past, this has been associated with a decline in overall CPI from -0.3% to -0.5%. This suggests that real, inflation-adjusted wages probably grew at close to +0.8% in December, bringing the YoY gain for all of 2018 to about 2%.

This is almost unalloyed good news.