A thought for Sunday: of heartlessness, confidence and conviction

 - by New Deal democrat

First of all, let me join in full in the following from Calculated Risk:

These are not normal times, and I can't just post economic data and remain silent on other issues.
Mr. Trump's executive order is un-American, not Christian, and hopefully unconstitutional. This is a shameful act and no good person can remain silent.

I believe that the sheer heartlessness of Trump's Order is a feature, not a bug.  It is designed for maximum media coverage in order to show his supporters that he is delivering on his promises.

It is likely that in a longer timeframe this will backfire, as the cruelty of separating families, turning away children, and refusing entry to people who already had legal permission to live here via visas and even green cards, turns people against Trump and his enablers.

Once upon a time, for academic reasons I read the same book that Trump was rumored to have by his bedside in NYC: the english translation of the full text of Adolf Hitler's speeches. Hitler's argument for getting ordinary Germans to go along with his extreme anti-Semitic agenda was masterful. It went in essence like this: "I know that there are a very few good Jews, and you may know a few of them.  But the vast majority of Jews, who you don't know, are evil.  In order to get rid of the vast majority of evil Jews, we have to sweep up a few of the good ones. So don't worry, we will take care of it."  By getting people to overlook their own experience with Jews they knew, he prevailed.

In contrast - for example - gay rights triumphed when enough people knew gays in their ordinary lives, and realized that they were no different from anybody else. So they were unable to see any valid reason to discriminate against them.

This ban is much more like the second situation than the first. Hitler argued that he might have to inflict hardship on a few good people in order (allegedly) to get to the mass of bad apples.  Trump is inflicting a lot of harm on a mass of good people in order (allegedly) to get to a few bad apples.

And we haven't even gotten to the point yet when the same heartlessness is going to be inflicted on DREAMers.

Second, a few days ago I pointed out that economic confidence has actually spiked again in the week after Trump's inauguration. But that does not appear to be translating into actual spending so far.  In fact it is possible that the opposite is happening.

Here is a look at  Gallup's economic confidence measure since its inception:

See that big downward spike in 2011?  That's the debt ceiling debacle, where Congress threatened to default on debts the US had already incurred.  Lots of economic data headed south at the same time, leading to ECRI saying (incorrectly) that a recession was imminent.

But consumer spending by Gallup held up throughout. Notice the *absence* of any observable movement in 2011 in that measure:

That consumers told Gallup they were still spending as before was my first sign that ECRI was wrong.

Now here is that same consumer spending graph over the last two years:

If you don't see any substantial upward movement particularly at the end, you would be correct.  Consumer spending is very seasonal, with a big peak in the Christmas season, and a smaller bounce for back-to-school sales.

While December spending by consumers was up YoY, so far January is flat.

http://www.gallup.com/poll/201584/consumers-set-nine-year-high-december-spending.aspx

So while there has been a big spike in confidence (very partisan, as GOP confidence has risen more sharply than the decline shown by Democrats), so far it appears not to have translated into conviction via actual spending.

Weekly Indicators for January 23 - 27at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

Midrange indicators remain strong. Long leading indicators are very mixed, and what is going on with consumer spending?

Q4 GDP: and the news from the long leading indicators is . . .

 - by New Deal democrat

I discuss the two long leading indicators found in this morning's GDP release, as well as further information from housing, over at XE.com.

In case you thought Trump was imploding . . .

 - by New Deal democrat

For those of you who may be cocooned in the liberal blogosphere, I'm afraid I must administer a cold slap in the face. 

Here is the graph of Gallup's Economic Confidence Survey from its inception nearly 10 years ago.  Notice that spike to new highs right at the end?

Let's zoom in for a closer look, as in the last 3 months:

The first surge of +10% in confidence happened right after the November elections Democrats got less confident, but nearly 40% of GOPers became increasingly confident in the economy.

The second surge of +10% (from +8 to +18) happened starting on January 20.

Trump is solidifying his support.

Dear Prof. DeLong: wherein I say you are wrong, trade agreements have harmed manufacturing employment. I: Germany actually undercuts your case

 - by New Deal democrat

Prof. Brad DeLong in an article earlier this week made a bold claim:  that "US trade agreements have not substantially harmed manufacturing employment. Period."    I am making the equally bold claim that he is wrong.  There are at least two major points in his article that I believe are plainly incorrect.

First, in making his case that US manufacturing jobs have disappeared because of efficiency and the strg dollar, Prof. Brad DeLong invokes comparisons to Germany.  Let me quote him at length: 

Germany is widely believed to have a first-rate manufacturing sector, yet it has seen the same pattern as the US 

Consider a country that has, everyone agrees, done everything right as far as nurturing its manufacturing sector is concerned: Germany 

....  One possible baseline, given how many people hold up Germany as a model for the way it has protected its manufacturing, is to assume that under the best policies, the US would have matched Germany. It would have shed about 50 percent of its manufacturing job share since 1971, rather than the 62 percent that we did shed. That would have given the US today manufacturing employment equal to 12.2 percent rather than 8.6 percent of nonfarm employment. That represents a gap between reality and one theoretical alternative world of 5.4 million manufacturing jobs. Call that the excess shrinkage of US manufacturing.

Respectfully, Professor, your comparison with Germany is a misleading one. Let's start with a comparison of the number of manufacturing jobs in Germany vs. the United States since 1975:

The only reason that both are conquerable starting in the 1970s is because Germany's %age collapsed in tne early 1990s, as part of the integration of Soviet East Germany into the unified country. Take that away and the experience in the two countries isn't even close. Since 1995, Germany has only lost about 10% of its manufacturing jobs. The US at its worst after the Great Recession lost over 1/3 since 1995.

So it is more accurate, using your own yardstick,to  call that addition 2/3 loss of manufacturing jobs "the excess shrinkage of US manufacturing." 

To be fair, DeLong does mention the integration of East Germany into the whole, but he never explains why this doesn't spoil his comparison. What Germany did wasn't on par with NAFTA.  It was on par with admitting Mexico as a state in the US!  Yeah, I think if Mexico were admitted as a US state, manufacturing employment in the newly united whole would be a lot lower.

And what DeLong does say about East Germany actually *undercuts* his argument:

When those artificial supports for bad businesses disappeared, did East Germany's workers move on to more productive work? Yes, most of them did. Many moved to West Germany and its more robust economy. Some, however, did not. And enough wound up on the dole that the sociological aftershocks are still being felt today: Even 25 years later, unemployment in the former East Germany is 3 percentage points higher than unemployment in the former West Germany. But consider this too: An East Germany that was only 40 percent as well off as West Germany in 1989 is now 80 percent as well off as West Germany. It is very hard to say that the  shedding of inefficient, unproductive, and low-wage manufacturing jobs was a minus for East Germans. 

In the first place, those 3% additional unemployed might disagree with you.  But to return to my Mexico analogy, if 20 years after admitting Mexico as a US state, Mexico had improved from 40% to 80% as well off as the pre-existing US isn't the issue. The issue under this circumstance is, whether or not the pre-existing US was better off.

In other words, take East Germany out of the equation, and focus solely on the areas of former West Germany, and maybe you've got a point.

In fact, when we take a broader view of manufacturing employment in other countries, we see that Germany is the outlier among "strong labor" countries:

Italy, France, Japan, and Canada all have had far less a loss of manufacturing jobs than the US.

Bottom line: That 2/3's of the loss of manufacturing jobs in the US is in excess of Germany is strong evidence that Germany has NOT had the same pattern as the US.  It actually undercuts Prof. DeLong's position.

Site note

 - by New Deal democrat

My apologies for the lack of posting this week.  The proprietor of this here site is enjoying a cruise to an Undisclosed Location, and I have been involved full-time in a real-life project that needed a bunch of decisions right away.

Fortunately, basically nothing has happened so far in the world of nerdy economic data, so its not like you missed anything important.

Hopefully later today regular boring nerdiness will resume.

Newt Gingrich is right

 - by New Deal democrat

Yeah, I know, stopped clock and all that.

But Newt Gingrich summed up what is going to matter for a Trump Presidency and GOP Congressional dominance:

“Ultimately this is about governing,” said former House Speaker Newt Gingrich, who has advised Mr. Trump. “There are two things he’s got to do between now and 2020: He has to keep America safe and create a lot of jobs. That’s what he promised in his speech. If he does those two things, everything else is noise.”

“The average American isn’t paying attention to this stuff,” he added. “They are going to look around in late 2019 and early 2020 and ask themselves if they are doing better. If the answer’s yes, they are going to say, ‘Cool, give me some more.’”

It is fair to say Trump specifically promised the Americans who voted for him 5 main things:

1. he will crack down on asylum seekers (Muslims)

2. he will deport illegals, and build a bigger wall between the US and Mexico

3. he will bring back manufacturing jobs

4. he will repeal Obamacare

5. he will not make cuts to Social Security and Medicare

I suspect he is going to make good on #1, 2, and 4.

It is a bad time to be a Muslim or illegal immigrant.  In particular, it is a very bad time to be a "DREAMer" who signed up for DACA.  Unless the Obama Administration destroyed the data on the way out the door, the easiest way for Trump to make good on deporting illegals, is to knock on every door of the 800,000 DREAMers who signed up for DACA, and deport them and every other member of their families.  It is going to be absolutely heartrending for those who had no say in their being here illegally, and have only known the US as their home for the last 10, 20, or even 30 years.

Similarly, repealing Obamacare may or may not be a disaster depending on whether or not the repeal is delayed, and what if anything the "replacement" is.

I suspect he is going to fail at bringing back manufacturing jobs. During Obama's years, until 2015, these were growing at about 100,000 or so a year:

If Trump fails to add about 10,000 manufacturing jobs a month, his working class voters are not going to be happy.  That's without even considering the fact that he and Congress are likely to have to deal with a recession during his term.

On #5, we know what Paul Ryan wants to do.  Is Trump going to honor his promise, or betray his voters?

It is safe to say that if he fails at #3 and #5, he and his GOP Congress will be swept away, and I do not think most Americans want DREAMers deported even if they dislike illegal immigration.

As a progressive -- as a New Deal democrat -- I believe the next 2 to 4 years are going to be awful for American society, and for the world in general.  But at the end of the day, Newt Gingrich is right.  And I believe those currently in power are going to fail dismally at governance as they will be judged by the American people.

Real aggregate wage growth: Barack Obama's final record

 - by New Deal democrat

Particularly in view of the massive protests yesterday, which were probably the biggest grassroots protests in US history since the 1960s, there is much to be written about the deep and intense division in this country, both economically and politically.  I anticipate writing about this in depth in the near future.

But before that, let's take one last look at one important aspect of Obama's economic record.

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: 

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 several years ago showing the real aggregate wage growth in every economic expansion beginning with 1964:

* start of series

The most recent trough for aggregate real wages was in October 2009.  So  far, real wages grew 20.7%, or just shy of .25% per month, as of July, 81 months after the last bottom.

As  shown in the above chart, four of the past 7 recoveries have been better.  Three were worse. The peak so far in this wage recovery is only 0.1% lower than Carter's, and 0.9% lower than Reagan's.  

Obama's wage recovery is the second longest on record, surpassed only by Clinton's, but it is also the second weakest in terms of monthly wage growth, beating only George W. Bush's.  The  peak in Reagan's wage recovery, at +21.6%, actually happened during George H.W. Bush's presidency. The peak so far in Obama's recovery is 20.7%, but there may be further improvement this year.

In short, Obama finished his term with about average real aggregate wage growth -- not spectacular, but not awful either.

Weekly Indicators for January 16 - 20 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

Consumer spending measures have really softened. Two of the three I track are almost certainly affected by online purchases vs. brick and mortar.  But not Gallup's poll of consumers, which also has turned soft. It's at least a valid concern whether this is a reflection of gas prices finally affecting real wage growth enough to begin to bite.

The labor force participation rate vs. the unemployment rate

 - by New Deal democrat

This is the third of four installments looking at whether and by how much people get drawn into the labor force as economic expansions progress.  This is part of a broader look at how close we might be to "full employment."

In the first installment, I showed that if we norm for the long term secular trends, both men's and women's participation in the labor force does go up during economic expansions; i.e., as the economy improves, more and more people who aren't interested in working decide that they do want a job.

In the second installment, I showed that wage growth appears to have very little if any value in forecasting or even correlating with increased labor force participation.  If anything, the correlation appears to run the other way:  increased labor force participation correlates with lower real wages at least over the longer term, but not in any consistent way.

Now let's take a look at whether tightness in the labor market as shown by the unemployment rate correlates with an increase in labor force participation.  Because the U-3 rate has a much longer history than the broader U-6 underemployment rate, that is what I am using.  Note also that for purposes of scale (this will be important later) I am dividing the YoY change in the unemployment rate by 4.

Here is the YoY% change in labor force participation for men, +0.3% to norm for the secular declining trend, compared with the unemployment rate (inverted so that a decrease in the rate shows as an increase in the graph). I've split this up into three time series better to show the relationship.  First, here is 1950-64:

1964-1990:

1989-present:

In the 1950s, there is no discernible correlation.  But beginning in the 1960s, and all the way up until the present, there does appear to be a significant correlation between a decrease in the unemployment rate and an increase in men's participation in the labor force.

Now here is women's participation, -0.3% through the 1990s to norm for the secular trend of their entry into the labor force during that time.  First, here is 1950-1965:

1965-1995:

1996-present:

With the exceptions of the late 1950s-early 1960s, and the recovery since the Great Recession, once again there does appear to be a significant correlation between a decrease in the unemployment rate and an increase in women's participation in the labor force (but note the poor relatinship in the present expansion, which will be dealt with in the last installment).

Remember that I told you to keep the division of the YoY change in the unemployment rate by 4 in mind?  That's because the above graphs suggest that, although it is a very noisy relationship, a back of the envelope estimate is that for every 1% change in the unemployment rate, there is a .25% change in the labor force participation rate for both men and women.

Not only is there a significant correlation between the unemployment rate and labor force participation, but it appears from the above graphs that the unemployment rate *leads* labor force participation by 1-2 years.  This is also shown  when we compare the difference in the YoY change in the two: 

Compared with trend, the LFPR outperforms later in the expansion as the unemployment rate flattens and then begins to rise, while it under performs relative to trend when the unemployment rate begins to turn down early in a recovery.

In the last few months, the unemployment rate has declined to new lows.  That suggests that in the next 12-24 months, the LFPR will increase compared with trend.  If the unemployment rate were to decline another 1% to 3.5%, thereafter we should expect roughly another +.25% YoY increase in the LFPR compared with trend, which translates into a very slight nominal increase.

But this relationship, while important, isn't the end of the story.  Because we still have the issue of retiring Boomers, and we still have the fact that women's labor force participation barely budged for 6 years after the end of the Great Recession.  A year ago I wrote a series on the "child care cost crush." So in the final installment, I will take a look at these issues.

December housing permits report: good news

 - by New Deal democrat

The December housing permits report this morning portends good news for the economy in 2017 for several reasons.

This post is up over at XE.com.

Gas prices push inflation above Fed target

 - by New Deal democrat

Looks like we are shortly going to find out whether 2% inflation is the Fed's "target," or whether it is really a ceiling.  My bet is on ceiling.

Why? Both headline and core YoY inflation are already above 2% as of this morning's December report.

My fuller discussion of the implications for 2017 is up at XE.com.

The Bank of England May be Facing Inflation in the Near Future

This is over at xe.com

Real wage growth vs. labor force participation

 - by New Deal democrat

This is the second of four installments looking at whether and by how much people who are out of the labor force decide to seek employment as an economic expansion continues.  This is part of a broader issue of how close we are to full employment.

In the first installment, I showed that once we separate labor force participation into men and women, then we see two separate but equally stable long term trends.  Men's participation has declilned at a fairly steady -0.3% YoY over the long term, while women's participation increased by about +0.5% YoY over from 1955 to the late 1990s.  Once we account for that secular trend, in both cases we find that within any given business *cycle,* both men's and women's participation has increased compared with that trend as the economy improves, and deteriorates compared with the long term trend during and around recessions.

In short, as an economy improves, people are drawn off the sidelines into the labor pool.

In this installment, I'll look at whether this increase in participation correlates with real wage growth.

Once again, I'll separate men's and women's participation.  Here is the YoY% change in men's participation, +0.3%, compare with the YoY% change in real wage growth (green) from 1955 to the present:

There is no particular correlation. In particular if anything real wage growth and  participation go in  opposite directions during the early 1970s, almost all of the 1980s, the mid 2000s and around the end of the Great Recession. 

Here is the same graph for women, first subtracting -0.5% YoY from 1955 through the late 1990s:

and with no adjustment YoY thereafter:

Once again, it is hard to see any definitive relationship. Throughout the 1970s, and again in the later 1990s, there is almost an inverse relationship, although since about 2002 there may be some broad and noisy convergence.

If anything, over the long term there may be a slight correlation between an increase in labor force participation and decreasing real wages! 

The above graph shows the overall age 25-54 participation rate for both sexes, inverted (so an increase in participation shows up as a decrease on the graph) compared with real wages. Note that the period showing the biggest jump in participation (the 1970s) showed the biggest YoY declines in real wages, while the periods with the biggest declines in participation (the several years after each of the last 3 recessions) coincide with the subsequent recoveries showing the biggest real wage gains. 

So, the hypothesis that, as real wages improve, more and more people will be drawn into the labor force is tenuous at best. If anything, the relationship may be the opposite, and causation run the other way. In any event, surprisingly watching real wages does not appear to give us any insight as to what may happen with labor force participation. 

In the next  installment,  I will look at the relationship between labor force participation and the unemployment rate.

Measuring the effect of the economy on labor force participation

 - by New Deal democrat

One of the big conundrums during this expansion has been why the labor participation rate has remained so low.

As a refresher, among the entire population age 16 and over, the Census Bureau divides people into "employed," "unemployed," and "not in the labor force."   Among the nearly 100 million people who are "not in the labor force" at all, every month the Census Bureau asks them if they want a job now.  Consistently, month after month and year after year, over 90% of these nearly 100 million people tell the Census Bureau that they *DON'T* want a job now (due to, e.g., being in school or retirement).  As of last month, those who are out of the labor force, but want a job now totaled about 5.6 million people.  Even in the tech boom of the late 1990s, at least 4.4 million people fit this description:

Last week I asked "how close are we to full employment?" and answered that it looked like we were about 1.5% away.

But a broader question is, as the economy improves, are people who aren't in the labor force enticed to enter it, by better wages or an easier ability to find a job?  That's what I'm looking at this week.  Today I'll set the table with a brief overall look.  Later this week I'll take a look separately at how much improving wages matter, and how much a lower unemployment rate matters.

Let me start by looking at two overall graphs.  First, here is the labor force participation rate vs. real wages for the last 50+ years:

Second, here is the labor force participation rate (inverted) vs. the unemployment rate for the last 50+ years. The  LFPR is inverted because presumably we mainly want to see if decreased unemployment is associated with an increase in particpation:

There's nothing useful here! The LFPR goes up until the mid-1990s, then sideways, then takes a dive during the "great recession."   Meanwhile the unemployment rate zigzags up and down, and real wages go up, then down from 1974 to 1995, then zigzag up and down and up again.

Part of what is going on is the different long-term trends of men and women in the labor force.  The participation rate for men in the labor force has been falling, more or less steadily, since the 1950s.  Meanwhile women entered the workforce by the millions between the 1950s and 1990s, but their participation rate has held steady and then fallen slightly since then. A second more recent issue is the ongoing retirment of the Baby Boomers:

But the big thing to notice for my purposes is that once we separate out men and women, we see that the increasing/decreasing trend for each holds basically steady for decades.  In the 60 years since 1955, men's participation has fallen by a little over 18%, or -0.3% per year on average. In  the 45 years between 1955 and 2000, women's participation rotse by about 25%, or a little over +0.5% per year, before basically leveling out. 

Thus, if we look at each year-over-year, and factor in the above long-term trends, then we ought to be able to tease out the cyclical change.  Here's what we find for men (participation YoY -0.3%):

and for women (participation YoY +0.5%):

Now we can see that, although it is a little nosiy, the labor force participation for both men and women increases compared with trend during economic expansions, and then decrease around recessions.

Armed with this information, in part 2 I'll compare this with real wages.  In part 3 I'll compare with unemployment.  Finally in part 4 I'll take a brief look at child care issues and the effect of the retiring Boomers.

My Weekly Columns Are Up At XE

US Equity Week in Review

US Bond Market Week in Review

International Week in Review

Barack Obama: a noble failure

 - by New Deal democrat

Let me preface this essay by saying that I voted for Barack Obama twice, in both 2008 and 2012. In fact in 2008 I supported him in the primary against Hillary Clinton, who I believed had a ceiling of support at about 52% or 53% even under even under the most favorable of circumstances (which certainly seems correct now!). I believed Obama was simply more capable of winning the Presidency, and I believed he could overcome his weaknesses and grow into the job.  By and large he did, but it took 5 full years before he finally gave up on his central, failed approached to governance.  I believe that failure is going to cause him to be ranked, over time, in the bottom half of all Presidents.

"There is no red or blue America," Barack Obama declared in the 2004 convention speech that first brought him fame.  His presidency was largely based on that premise.  I think very few people would agree with that statement now.  This worldview was epitomised in his 2009 Inaugural Address: 

On this day, we gather because we have chosen hope over fear, unity of purpose over conflict and discord.On this day, we come to proclaim an end to the petty grievances and false promises, the recriminations and worn-out dogmas, that for far too long have strangled our politics. 

....[E]verywhere we look, there is work to be done. The state of the economy calls for action, bold and swift, and we will act .... 
....
What the cynics fail to understand is that the ground has shifted beneath them — that the stale political arguments that have consumed us for so long no longer apply.
For we know that our patchwork heritage is a strength, not a weakness.... [W]e cannot help but believe that the old hatreds shall someday pass; that the lines of tribe shall soon dissolve ....

But on that very same day in 2009, Mitch McConnell and other GOP leaders also met, and resolved a strategy of total intransigence, to deny Barack Obama any bipartisan victories whatsoever.

Asked about that strategy early on, Obama replied that if Republicans would not come to the table with him, then they would miss the chance to have their imprint of the solutions to big problems. Rather than be shut out, they would negotiate with him for bipartisan Great Solutions.

Eight years later, on the eve of the inauguration of Donald Trump, a man who more than half of all Americans believe lacks the basic temperament to be President, the strategy of complete intransigence must be judged a spectacular success.   Obama's entire governing philosophy is in shambles. Few people now would agree with Obama's inaugural proclamation that old political battles are over, or that "the lines of tribe" have dissolved.

Barack Obama achieved three notable domestic victories in his time in office:  the 2009 stimulus, Obamacare, and his "evolution" on gay marriage which helped lay the groundwork for the apparent success -- so far -- of that ruling. Internationally he got American troops out of Iraq, brokered a nuclear deal with Iran, an agreement on global warming, and kept significant numbers of American "boots on the ground" being committed to any new conflict anywhere.

But while Obama acknowledged in his 2009 inauguration speech that the economy was in crisis, he aimed  a firehouse of money at the financial sector, while leaving homeowners helpless. The "TARP" program was barely implemented at all; mortgage cramdown bankruptcy legislation, which he asked be delayed in 2008, he declined to press at all once he took office.

As a result, Wall Street and corporate America rebounded to record profits quickly. Jobs came a little later, but even now after 8 years few would argue that we have returned to full employment.  And wages languished for years, even now only growing at 2.5% a year for nonsupervisory personnel. 

Meanwhile he failed at a basic task of administration: nominating and having confirmed candidates for hundreds of Federal vacancies, including not just judgeships, but also several appointments to the Federal Reserve, and *every one* of the nine administrators of the Postal Service.  All of these will be gleefully filled by his adversaries after January 21. 

And should any of the Supreme Court's liberal justices -- or even Justice Kennedy -- pass away or retire from the bench in the next 4 years, the odds are very good that 5 hardline conservative jurists will roll back Obama's victory on gay rights, along with abortion rights and perhaps even going so far as to reinstate the Lochner ruling which essentially declared all Federal economic welfare legislation unconstitutional.

Great presidents do not see their signature legislation repealed within 30 days of their departure from office.  And nobody with working brain cells would deny that the nation of red and blue states is further apart than ever, with people actually making choices about where they want to live based on the political leanings of the state and locality. Great presidents do not see the number of elected offices held by members of their party shrink to near 100 year lows.

Meanwhile Trump also promises to roll back all of Obama's international deals. And TPP, the Trans-Pacific Partnership trade deal, didn't even survive to January 20, dying at the ballot box on November 8.

The root cause for all of this misfortune is that Barack Obama consistently overestimated the power of his charisma, and underestimated the  determination of his opposition.  He thought that the merits of his proposals and accomplishments would sell themselves. Thus as early as summer 2009, he allowed  the argument about his healthcare legislation to be ceded to "tea party" protesters who appeared at Congressional town halls. 

Trump takes to Twitter to use it as a megaphone when he at least temporarily saved 800 jobs at Carrier.  Obama never made sure Americans understood that Obamacare had given coverage to some 20 million people, and that medical cost growth had slowed.

In 2010 retiring democratic Representative Marion Berry of Arkansas captured Obama's quintessential shortcoming in one devastating vignette:  

 “[Barack Obama] just kept telling us how good it was going to be. The president himself, when that was brought up in one group, said, ‘Well, the big difference here and in ’94 was you’ve got me.’”

Disaster ensured. And ensued again in 2014 as well. And most especially in 2016, with the essential continuation of the United States as a republic more at risk than at any time since 1861.

Barack Obama had noble ideals, and a noble concept of the politics of governance. But his goals were scotched, and his accomplishments are all on the verge of extinguishment. He is well known for taking the "long view," but sadly for him - and for us - in the long view history will likely judge Barack Obama's presidency a noble failure.  

Weekly Indicators for January 9 - 13 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

Short term indicators are almost uniformly positive. Meanwhile the "Trump election effect" is fading.

How close are we to "full employment"?

 - by New Deal democrat

Paul Krugman ignited a small kerfluffle this week when he suggested that we are close enough to full employment that any fiscal stimulus would lead to "crowding out."  Jared Bernstein disagreed.

I think Bernstein is correct.  We aren't yet at full employment. 

One way to look at this is to compare the UNemployment rate (U3) with the UNDERemployment rate (U6):

In the above graph, we see that in the last two expansions, the U6 rate was at its current 9.5% rate, when U3 was about 5.3%.  In other words, our current situation is akin to what we had at 5.3% unemployment in the last two expansions -- not a recession rate to be sure, but not full employment either.

An even better way, I think, is to look at two perennially lackluster employment series:  "Not in the Labor Force, but Want a Job Now" and "Part Time for Economic Reasons."

In the below graphs I show how they compare with the official unemployment rate during this expansion vs. the prior two expansions (the "part time" series only goes back to 1994).

Here is Not in Labor Force, but Want a Job Now:

During the best years of both expansions since 1994, about 4.6 million people +/-300,000, put themselves in this category. As of December 2016, this was at about 5.6 million people -- or 1 million over periods of full employment.

Here is Part Time for Economic Reasons:

During the best years of the 1990s expansion, a little over 3 million people put themselves in this category.  During the weaker 2000s expansion, it was a little over 4 million.  This too as of December 2016 stood at about 5.6 million people.

In other words, to get to the best years of even the weaker 2000s expansion, we would need 1 million people who want a job to enter the workforce, plus another 1.5 million part-timers to find full time employment.

As of last month, the civilian labor force was 159,640,000 people.  Thus we need a little over 1.5% improvement in the employment situation (2.5 million of 160 million) to get to what constituted full employment in the last two expansions.

Corporate profits lead stock prices, year-end 2016 update

 -by New Deal democrat

Corporate profits, as a long leading indicator, tend to lead stock prices, which are a short leading indicator. I've updated this analysis through year-end 2016,  This post is up at XE.com.

As an aside, I will post my forecast for the second half of 2017 once Q4 GDP, which will include the long leading indicators of private residential investment and proprietors' income, is reported in two weeks.

Gas prices set to drive inflation over Fed's target

 - by New Deal democrat

In case you hadn't already noticed, that big decline in gas prices you saw at the pump has come to an end.  At the moment gas prices are up about 20% YoY.  Thus gas prices are one of my five graphs to watch in 2017.

Which means, this is a good time to revive a back-of-the-envelope calculation I used to do when gas prices of $4 would act as a choke collar on economic growth.

The calculation goes like this:  core inflation has reliably run at +0.1% or +0.2% a month.  Almost all of the variability in the remaining number is due to gas prices. Based on past experience, take the change in gas prices in any given month, divide it by 10, and add that to the underlying core inflation rate.  That will give you the non-seasonally-adjusted inflation rate for any given month, +/-0.1%.

Here's what that looks like over the last year. Blue is the average change in gas prices in the month divided by 10, red the non-seasonally-adjusted inflation rate, and green the seasonally adjusted inflation rate:

Note that gas prices rose in December 2016, unlike December 2015.  That suggests that December 2016 inflation, after seasonal adjustment, is likely to be about +0.2%. Since December 2015 was -0.3%, that will raise the YoY inflation rate from 1.7% to over 2%.

Since consumer inflation bottomed in February of last year, here's what consumer inflation looks like since then:

From February through November, consumer prices rose +1.9%. An additional +0.2% will make that +2.1% for 10 months -- above the Fed's 2% target.  So unless we have a big miss in the next employment report, I expect the Fed to chase this inflation with a rate hike.

My forecast for the first half of 2017

 -by New Deal democrat

My forecast for the economy through the middle of the year is Up at XE.com.

Taiwan Isn't Large Enough to Meaningfully Leverage Against China

China has a GDP of a little over 11 Trillion dollars while Taiwan's is 523 billion.  China is over 20 times as large as Taiwan.  It simply isn't large enough to leverage against China.

We see the same thing when we look at the most recent trade information from the Census Bureau:

Our balance of trade with China is 22x larger than that with Taiwan (top panel).  Our exports to China are 5x larger than those with Taiwan.

Trying to use Taiwan against China is a fool's errand from the start.

Why John Taylor -- a Leading Candidate to Replace Yellen -- Shouldn't Be Fed President

From Bloomberg:

With just over a year remaining on Janet Yellen's current term as chair of the Federal Reserve, comments from three of her potential successors at this this weekend's annual American Economic Association meeting are noteworthy. Glenn Hubbard of Columbia University, along with Stanford University’s John Taylor and Kevin Warsh, are all seen by Fed watchers as potential future chairs should President-elect Donald Trump decide not to re-nominate Yellen. All three criticized the U.S. central bank for trying to do too much, and suggested interest rates would be higher if they were in charge.

There are two reasons Taylor should not lead the Fed:

1.) He is the leading proponent of having the Fed use mechanical rules to determine policy.  Taylor authored the "Taylor Rule," an equation that he believes should completely govern the Fed's interest rate policy. The rule is very useful as a basis for policy discussion.  Despite that benefit, Taylor's argument assumes his equation is infallible -- that it will always be correct in any circumstance.  That assumption is incorrect; nothing, especially in economics, is that simple.  There is always "another hand" that should offer policy guidance.  And binding the Fed's hands would have prevented them from engaging in the extraordinary measures during and after the Great Recession.

2.) Taylor continually compared the Obama recovery to the Reagan recovery, an economic apples to oranges comparison.  The Federal Reserve caused the recession preceding Reagan: They increased interest rates to wring inflation out of the economy -- a policy that worked brilliantly.  Once rates started to move lower, the economy faced little to no structural headwind to naturally slow economic growth.  Perhaps just as important, Reagan's tenure began just as the baby-boomers were beginning their peak earnings time in life.  This started a long period when the labor force participation rate increased, adding additional stimulus to the economy. 

Obama's recovery was preceded by an entirely different precursor: a debt-deflation recession and recovery.  This is an entirely different economic scenario then that faced by Reagan and one that leads to a far slower recovery.  In a post-debt deflation economy, consumers are burdened by debt values that, ins some cases, are higher than asset values, leading to slower spending as consumers allocate additional resources to paying down debt rather than other goods.  The de-leveraging process can take years, acting as a slight to large drag on economic growth.  And unlike Reagan, Obama faced a declining LFPR as the baby boomers started to retire, which also lowered GDP growth.

Taylor has yet to acknowledge either fact in his analysis.  There are two possible reasons for his oversight.  1.) He is unaware of the difference between the recoveries.  Given Taylor's stature, this is highly doubtful.  But it this is the reason is is automatically disqualifying because it belies a profound ignorance of economic history.  2.) He is aware of the differences, but for political reasons refused to acknowledge them.  This is the more likely reason.  Taylor is a University of Chicago economist; he is inherently biased against government action and activist policy.  However, if this is the reason, it is also disqualifying because it indicates he is more interested in political outcomes than positive economic outcomes.

Five graphs for 2017: #1, real wages and real consumer spending

 - by New Deal democrat

In the last week I have described 5 relationships that bear particular watching in 2017.

#5 is the price of gas.

#4 is the value of the US$

#3 is mortgage rates and residential construction
#2 is inflation and the Fed funds rate.

The overall theme is that 2017 is likely to be a rather typical year of late cycle inflation, possibly also featuring a trade war.

The number one graph I am looking at this year is how consumers are affected by, and deal with, this late cycle inflationary environment.

In the absence of special factors, like spouses entering the workforce in the 1980s, or the housing bubble of the early 2000s, when real wages stagnate, so does real consumer spending (as expressed by real retail sales per capita) with a bit of a lag (red).

Here is the long-term look through 2000 using the former retail sales series (first graph) and the new retail sales series which began in the early 1990s (second graph): 

Here are the same two graphs expressed as a YoY%:

When not just one but both stagnate, that is a signal for an oncoming consumer recession.

During this entire expansion, nominal wages for nonsupervisory employees have not grown faster than 2.6% YoY. Since we are still adding jobs faster than the labor force is growing, there ought to be at least a little further improvement than that.  But in the last 9 months alone consumer prices have increased by 1.9%, causing real wages to stagnate (blue in the graph below).

For 2017 I don't see any special factor at play, unless there is a tax cut that applies to middle and working class earners enough to boost spending.

So the #1 graph for 2017 is real wages and real conusmer spending:

Here is the same graph YoY:

I will be following this to see whether real wages stagnate or decline, and if so, does real spending follow suit, laying the groundwork for the next recession.  

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