A thought for Sunday: for now the economy remains on automatic pilot --and that's good

 - by New Deal democrat

How much, if any, of the economy, has been influenced by the Trump/Ryan GOP government in Washington to date?  With one exception, not much I think.

First of all, while the jobs report was certainly good, was no better than the average report from 2014 or 2015 -- or 4 of the last 8 months, for that matter:

And it wasn't just foreseeable, it was forecast.  For the last 10 years, the nonpartisan Conference Board has published a monthly "Employment Trends Index," an index of leading indicators for jobs.  Here's what it looked like as of Friday:

Notice that there was a jump in the leading index beginning last summer. In the last few months we have seen those leading components feed through into actual job creation.

You know, the leading indicators really do lead, and I've been writing about the economy entering a period of "Indian Summer" for about half a year now.

Secondly, now that the Trump/Ryan regime is halfway through their "first 100 days," what economic policies of any significance have been enacted?  The answer is, none.  All of the Executive Orders have primarily impacted immigration and border controls. No legislation of note has landed on Trump's desk.

The ACA funding repeal hasn't been enacted yet, and may not ever make it through Congress, in particular, the Senate.  Even if it does, while the consequences will be enormous over the next few years, there won't be any immediate economic impact, as increased premiums for older citizens counterbalance the end of the individual mandate, and the unraveling of the marketplace will not only take time, but it won't be until the millions more uninsured start showing up in emergency rooms of  hospitals that the effects are really felt.

So, for now the economy remains on automatic pilot, just as it has been at least since the end of 2014.  And the underlying conditions remain favorable for the next 6 - 12 months.

Finally, there is one exception, where the election appears to have made a difference.  Here is a graph from Bloomberg that confirms what Gallup has been showing since November: while Democrats' economic confidence has declined somewhat -- but only back to it lows for the last couple of years -- GOPers' confidence has surged higher:

That continues to translate into very good readings -- over 10% higher YoY -- in Gallup's daily consumer spending metric (yes, correlation is not causation, but I am unable to think of any other cause):

Given the propensity to save vs. spend, I do not believe that redistribution of income and wealth higher is going to have anything other than bad effects over the longer term as measured by the next few years.  Thousands of people will needlessly die because of the implosion of the health care marketplace. When the next downturn inevitably comes, the Trump/Ryan regime will have no effective palliatives, and no desire to alleviate suffering in any event. And all hell is likely to break loose when the US debt ceiling needs to be raised in a few months.  There are no signs that the House extreme right-wing "Freedom Caucus" is going to change their implacable opposition, and there is no incentive whatsoever for the Democrats to bail the GOP out. 

But that is over the next 2 - 4 years.  For now, automatic pilot means continued job gains and nominal wage growth.

Weekly Indicators for March 6 - 10 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

Unsurprisingly, in addition to the employment report, the big news this week was the jump in long term interest rates.

February jobs report: hitting on all cylinders but wages

- by New Deal democrat

HEADLINES:

• +236,000 jobs added
• U3 unemployment rate down -0.1% from 4.8% to 4.7%
• U6 underemployment rate down -0.2% from 9.4% to 9.2%

Here are the headlines on wages and the chronic heightened underemployment:

Wages and participation rates

• Not in Labor Force, but Want a Job Now:  down -142,000 from 5.739 million to 5.597 million   
• Part time for economic reasons: down -136,000 from 5.840 million to 5.704 million
• Employment/population ratio ages 25-54: up +0.1% from 78.2% to 78.3%
• Average Weekly Earnings for Production and Nonsupervisory Personnel: up $.04 from $21.82 to $21.86,  up +2.5% YoY.  (Note: you may be reading different information about wages elsewhere. They are citing average wages for all private workers. I use wages for nonsupervisory personnel, to come closer to the situation for ordinary workers.)

December was revised downward by -2,000, and January was revised upward by +11,000, for a net change of +9,000. 

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

• the average manufacturing workweek was unchanged at 40.8 hours.  This is one of the 10 components of the LEI.
 
• construction jobs increased by +58,000. YoY construction jobs are up +219,000.  
 
• manufacturing jobs increased by +28,000, and after being down YoY for a year, have now turned the corner again and are up +7,000 YoY

• temporary jobs increased by +3,100.


• the number of people unemployed for 5 weeks or less increased by +98,000 from 2,468,000 to 2,566,000.  The post-recession low was set over 1 year ago at 2,095,000.

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

• Overtime rose +0.1 from 3.2 to 3.3 hours.
• Professional and business employment (generally higher- paying jobs) increased by +37,000 and are up +597,000 YoY, an acceleration over the last year's pace.


• the index of aggregate hours worked in the economy rose by 0.2 from  106.4 to 106.6 

•  the index of aggregate payrolls -rose by 0.6 from 132.4 to 133.0. 

Other news included:         

• the alternate jobs number contained  in the more volatile household survey increased by  +447,000 jobs.  This represents an increase  of 1,485,000  jobs YoY vs. 2,,349,000 in the establishment survey.    
   
• Government jobs rose by +8,000.     

• the overall employment  to  population ratio  for all ages 16 and up rose from  59.9%  to 60.0 m/m  and is up +0.2% YoY.    
• The  labor force participation  rate rose  from 62.9% to 63.0%  and is up +0.1%  YoY (remember, this includes droves of retiring Bsoomers).     

 SUMMARY 

This was a very good report in almost all respects, including the end of the manufacturing jobs recession, and a slight acceleration in better-paying professional and business jobs.

The few warts included the fact that none of the broader measures of labor market slack made new lows (although they did decline), and short term unemployment - a leading indicator - has not made a new low in 15 months.

But most of all, aside from some continued slack, the big shortfall in the economy as experienced by most Americans is the seemingly unending paltry wage growth.  Once again, adjusted for inflation, there has likely been no growth whatsoever in real wages YoY.  Nearly 8 years into an expansion, this ought to be totally unacceptable, and should be ringing alarm bells about what might happen to wages when the next recession inevitably hits.

  

A quick primer on interest rates and rate hikes

 - by New Deal democrat

With increasing speculation that the Fed will again raise interest rates this month, I thought I would take a look at how long term rates, and the yield curve, react.

As most everybody who follows this stuff knows, in the last 60 years the yield curve has always inverted before the onset of a recession -- which presumably means that it narrows before it inverts.

But *how* does it narrow?  Do long term interest rates come down, do short term rates go up, or is there some of each?

Let's go to the graphs. Below are the yields on 10 year treasuries (blue), the Fed funds rate (green), and YoY consumer inflation (red), first from 1962 to 1983:

and from 1983 to the present:

There are a few trends that have remained true during both the earlier, inflationary era, and the more recent disinflationary and deflationary era.

First, all three generally move in the same direction, i.e., both long and short term interest rates tend to broadly correlate with the inflation rate.

Second, in terms of volatility:

 - long term interest rates are least volatile

 - the YoY inflation rate is next

 - the Fed funds rate is the most volatile.

Finally, in each case over the last 60 years, before a recession the yield curve has inverted because the Fed funds rate rose to and overtook long term rates. In the inflationary era, both continued to rise into the recession. In the more recent era, long term rates have been flat or declined slightly once there was an inversion.

Contrarily, the few times that long term rates declined to the level of the Fed funds rate (1986, 1994, 1998) it did *not* signal a recession, but rather a correction in a strong economy.

So let's take a look at the last 12 months:

Since the end of June, long term rates have actually risen more than short term rates, and have risen to over 2.5% again this week.  This is the sign of a relatively strong economy, at least over the shorter term 6 - 12 months.  Short rates have a long ways to go before they overtake long term rates.  Of course, if long term rates rise high enough, that will act to choke off the housing market and will set up longer term weakness.  But we're not there yet.

Why the economy looks good for the next 3 - 9 months

 -by New Deal democrat

I take an extended look at the short leading indicators over at XE.com.

International Economic Week in Review: Good News Abounds

   This week’s news continued in a positive trend.  All signs from the EU point to an uptick in overall activity.  Canada continues to grow modestly but is still dealing with negative business investment.  Japanese inflation was positive this month – a very welcome development for a country trying to undo decades of deflation.  And finally, the UK continues to confound those (myself included) who predicted a post-Brexit recession.

   EU news continued its positive trend.  Most important were the Markit numbers: the composite reading was 56, a 70-month high.  The service sector was also near a 5-year high with a 55.5 reading.  New orders and business activity increased, as did employment.  Rising prices were the only negative.  The manufacturing number rose .2 to 55.4; both production and new orders were higher.  But like the service report, prices were a problem, with some commodities described as “sellers markets.  Unemployment was steady at 9.6%; loan growth and money both increased.  Thanks to a 9.2% increase in energy prices, CPI rose 2% Y/Y.  And while retail sales declined .1% M/M, they increased 1.2% Y/Y, which continues this data series near 4-year continuous increase:

EU news turned the corner in 4Q16; nothing since has cast any aspersions on that change in direction and magnitude.

     The Bank of Canada maintained rates at .5%.  Their announcement offered this following brief summation of the Canadian economy:

In Canada, recent consumption and housing indicators suggest growth in the fourth quarter of 2016 may have been slightly stronger than expected. However, exports continue to face the ongoing competitiveness challenges described in the January MPR. The Canadian dollar and bond yields remain near levels observed at that time. While there have been recent gains in employment, subdued growth in wages and hours worked continue to reflect persistent economic slack in Canada, in contrast to the United States.

This week’s released of 4Q Canadian GDP supports this view.  While household spending rose .6%, business investment contracted again, this time by 2.1%.  Non-residential structure spending was off 5.9% while intellectual property investment declined 1.9%.  The 9-quarter contraction in business investment indicates that business sentiment is still muted.  On the plus, the Canadian dollars near five year low relative to the US dollar should help to spur exports in the coming quarters:

     News from Japan was positive.  Most important was the .4% Y/Y increase in CPI.  For a country that has not only suffered from deflation for decades but is also throwing the kitchen sink at the economy to solve the problem, this was welcome news.  While industrial production was off .8%, this was the first decrease in 6 months:

And the 35-month high in the Markit manufacturing number (it rose from 52.7-53.5), indicates industrial activity will increase in the coming months.  Moreover, production rose 3.2% Y/Y.  Unemployment was remarkably low, decreasing .1% to 3%.  And the Japanese consumer continues to spend, helping to raise retail sales 1%.  Finally, the yen’s low levels should help to spur exports over the first half of the year:

     The monthly releases from Markit were the only economic numbers from the UK.  Manufacturing was off slightly, but it still registered a positive 54.6 thanks to an increase in production and new export orders.  The low level of the sterling relative to the dollar and euro is clearly helping.  The UK service sector is still expanding: the headline number decreased from 54.5-53.3.  Activity and new work are still positive, although rising cost pressures are starting to hit bottom lines.

    

     

    

US Equity and Economic Review: Great Fundamentals and Technicals

      On Tuesday, the BEA released the second estimate of 4Q GDP.  While the 1.9% headline number was uninspiring, the 6.6% decline in exports was the primary cause.  Personal consumption expenditures rose 3%, helped by a very impressive 11.5% rise in durable goods purchases. A 9% uptick in residential building along with a 1.9 boost in equipment investment contributed to overall investment increasing 9%.  As this following graph shows, the huge Q/Q drop in exports more than offset the positive contributions from personal spending and investment:

 Also, note that an export decline of this magnitude only occurred in 3 other quarters over the last 5 years.

     The BEA also released personal income numbers this week.  The chained disposable income and personal consumption expenditures both declined.  However, this is only 1 month of data in an otherwise bullish data series.  And the 1-month contraction stands in stark contrast with the Conference Board’s consumer confidence number rising to a 15-year high. 

     Durable goods increased 1.8%, but transport orders were the sole reason for the increase.  The ex-transport number was -.2.  But on the plus side, non-defense capital goods orders rose an impressive 3.6%, which continues this data series’ recent uptick in activity:

However, the durable goods data series continues its move sideways between the 220 and 240 million level, where it’s been for the last 4 years:

     Finally, ISM released their manufacturing and service numbers this month.  The manufacturing number increased 1.7 to 57.7; new orders rose 4.7 while production increased 1.5.  Prices, however, are a still elevated 68.  The service sector headline number increased 1.1 to 57.6 with both new orders and employment growing.  Both data series contain a positive anecdotal comments section.  The combined reading of both numbers is for continued growth and perhaps some acceleration in business activity in the next few months.    

     Economic Conclusion: this weeks’ news was positive.  The ISM manufacturing and service sector readings were the week’s strongest news; they indicate U.S. business is doing well.  Although the 4Q GDP headline number was disappointing, the internals were far less so.  Best of all, U.S. business is spending on investment again, which is a welcome development.  Durable goods orders continue to move sideways – which continues its three year holding-pattern trajectory.  While we’d prefer to see this statistic increase, the 3-year printing between $220 and $240 million still indicates the economy is moderately healthy. 

     Market Overview: the market has performed very well since the election:

The market’s total increase is about 15% -- which would be a great return for an entire year.  Better still, the chart is technically sound.  There’s a first rally from 207-227, following by a multiple month consolidation between 222-230.  This allowed the market to consolidate gains before moving higher in early February.  There are, as always, counter-arguments that the rally is near its end, which are clear on the weekly chart:

The percentage of stocks about the 200 and 50-day EMAs are near multiple year highs while the MACD and RSI are both over-extended. 

     The post-election rally is occurring against a solid and improving economic backdrop.  Business and consumer confidence rose after the election.  Business owners believe the new administration will be very pro-business, with an agenda to lower taxes and regulations.  Consumers also believe Trump will be positive for the economy.  Just as importantly, 4Q corporate earnings – the mother’s milk of stock valuations – were very positive:

As of Wednesday, March 1st, we have seen Q4 results from 484 S&P 500 members or 98.7% of the index’s total membership. Total earnings for these 484 index members are up +7.4% on +4.9% higher revenues, with 68.4% beating EPS estimates and 54.1% coming ahead of top-line expectations. The proportion of companies beating both EPS and revenue estimates is 40.3%.

And while earnings have been positive, the market remains expensive, with a high current and forward PE ratio.

     So – that does this mean going forward?   As we have been for the last 18-24 months, the market is between growing earnings and an expanding economy on one hand and an expensive valuation on the other.

    

US Bond Market Week in Review: Rates Are Increasing In March

      The Fed Chorus calling for rate hikes is growing in number and intensity.  In fact, there is now near-unanimous calls for a rate increase in the near future.  Fed Chair Yellen all but stated that the markets should expect a rate hike in March:

Federal Reserve Chair Janet Yellen capped a week of rising expectations about an imminent interest-rate increase by explicitly supporting a hike in mid-March if U.S. economic progress persists. “At our meeting later this month, the Committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate,” Yellen said in the text of a speech Friday at the Executives’ Club of Chicago.

San Francisco Fed President Williams – whose bank has provided key research on the current natural rate of interest – is now in the hawkish camp as is the previously dovish Brainard.  NY Fed chair Dudley is on board as is Dallas President Kaplan and, Philly Fed President Harker.  In short, barring a cataclysmic economic development between now mid-March, a rate hike appears a foregone conclusion. 

     Given the strength of recent data and the current low-rate environment, it’s difficult to see any central banker not arguing for at least 1 rate hike this year.  As for prices, most indexes are either slightly above the Fed’s 2% target or fast approaching that benchmark:

The above table is from the Cleveland Fed’s “inflation central” page; it clearly shows that the Y/Y pace of change of the BLS’s CPI gauge, along with the bank’s trimmed mean measure, are all above 2%.  And Wednesday’s personal income report had PCE price indexes right below the 2% level:

The top chart shows that the core rate (in red) continues to be just below 2%.  But the overall measure (in blue) shows.  The bottom chart illustrates the that energy prices are the primary reason; they’re playing statistical “catch-up” after several years of dragging price indexes lower.       

     With the exception of labor utilization, all major employment metrics are at, near, or slightly above full employment:

The right side of the chart shows that employer behavior statistics are now above levels recorded at the height of the previous expansion.  This is consistent with the recent Beige Book noting that some employers are having difficulties finding employees.  But the left side of the chart shows that labor utilization is below previous highs which is consistent with the declining labor force participation rate and higher levels of labor under-utilization for workers with lower educational attainment. 

     Currently, the effective Federal Funds rate is .66% while San Francisco Fed research indicates that the natural rate of interest is about 1%.  This gives the Fed room to increase rates at least 25 basis points while note raising rates so far as to thwart economic growth.  That means we can expect a hike to the 1% this month.    

Weekly Indicators for February 27 - March 3 at XE.com

 - by New Deal democrat

My Weekly Indicators post is up at XE.com.

While the short leading indicators remain very positive, there are lot of neutral readings of both long leading indicators and coincident indicators.

More on money supply - could both fall into negative territory shortly?

 - by New Deal democrat

I have a follow-up post at XE.com about real M1 and M2.  Since last August both have really gone flat.

How serious is the deceleration in real money supply?

 - by New Deal democrat

Last week in my weekly column I noted that real M2 has decelerated close to the point where it would stop being a positive for the economy.  Why?  I explain that in a lot more detail over at XE.com.

Do "high pressure" low unemployment economies lead to more capitalinvestment?

 - by New Deal democrat

The Atlanta Fed's Macroblog has an interesting article today on whether a "high pressure" low unemployment economy leads to more capital investment. At least based on surveys, they answer in the negative, with companies pulling out the old chestnut of being unable to find qualified help "(at the wage we want to pay").

But the article reports on one survey only, and does not delve into any long term historical data. So of cuorse I did.

Here's what I found.  Annual data on real private fixed nonresidential data, and U-3 unemployment, can both be found back to 1948.

The first graph compares the YoY% change in investment vs. the YoY% change in the unemployment rate:

There is a high correlation, but there is no apparent leading relationship. In fact they look coincident. At best it appears that investment continues to expand even as the unemployment rate holds steady in mature expansions.

So how about when we measure by how "high pressure" the job market is? In the below graph I subtracted the unemployment rate from 6%, meaning that only unemployment rates lower than 6% show as positive numbers, with the lower the unemployment rate showing as the higher the number:

Lo and behold, it seems pretty clear that the unemployment rate doesn't lead capital investment at all. In fact, it appears that the reverse is true! Correlation is not causation, but one thing that seems obvious is  that low unemployment does not cause higher capital investment.

This is just a preliminary look. If I can find quarterly data going back a long enough time, obviously that would be better than annual data. 

I suspect that both investment and unemployment are primarily reacting to a third thing: namely, interest rates. So what we should be looking for is a sustained period of a "high pressure" economy with relatively low interest rates. Of the two possible "sustained high pressure" periods, the 1960s and 1990s, only the latter has relatively low interest rates. And there we do find that capital investment remained robust for a lengthy period of time.  So the best case scenario appears to be that a sustained "high pressure" low unemployment economy with relatively low interest rates, will have relatively higher sustained capital investment.

No, commercial and industrial loans are not a leading indicator

 - by New Deal democrat

There are a number of Doomer sites I typically read, among other reasons because a few of them do link to interesting data series that turn out to be useful.  One such site is Wolf Street, where this morning I read the following:

C&I loans are a sign of what businesses of all sizes are doing – from the small company that is borrowing to buy a piece of equipment to the largest behemoth that is funding its inventories. These loans show whether companies in aggregate are expanding their investments or pulling in their horns.
....
This chart covers C&I loans going back to 1988, covering the last three recessions. The turning points are circled in red:

The turning point during the Financial Crisis was unique – a sudden deep collapse in credit, when the banking system began to seize, rather than a classic turning point that evolved over time, as the prior two turning points exemplified.

The timing of a turning point may not be perfectly aligned with the beginning of a recession, but it’s close.

Now, I was pretty sure that what happened during the Great Recession was actually pretty typical, but I had to go back and check.

So here is what C&I loans look like from 1948 to 1968:

And from 1968 to 1988:

Now we have expanded the number of recessions from 3 to 11.  And what do we find?  That in addition to 1991 and 2001, loans only turned down one other time in advance of a recession: in 1948. They turned down concurrent with the outset in 1972. The other 7 times, they only turned down after the recession started, if at all!  

So much for a leading or concurrent indicator.

But, wait a minute, isn't the fact that they recently turned down still noteworthy?

Well, let's take a look at that too. So here is the m/m % change since 1988:

From 1948 to 1968:

From 1968 to 1988:

When we look at the complete record, we see sporadic small down months in the midst of nearly all expansions.

Here for the umpteenth time is the lesson: beware any claim that only covers the last few cycles, especially when the data series has a much longer history.

But just to show you how these data expeditions can be useful, look what I found when I decided to include the rate of delinquencies on C&I loans (red):

That, my friends, just like the unemployment rate, is a leading indicator for downturns in addition to being a lagging one for upturns.  Only 3 cycles, so caution is warranted. After rising during the energy-led shallow industrial recession, delinquencies are now going sideways.

Larry Summers: genius economist, failure at Psychology 101

 - by New Deal democrat

One of my recurring themes is how macroeconomic theory, no matter how elegant mathematically, consistently errs because it fails to take into account basic psychology -- i.e., how the human animal actually works.

A big component of this failure is that humans, like other primates and apparently like just about every other social species, are hard-wired to inflict punishment on "winners" from inequitable distributions, even at cost to themselves. For a hilarious example of this, see what happens when an experimenter rewards one monkey with a cucumber while feeding another a delicious grape.

One such failure to take into account elementary psychology was on display in an article a few days ago, wherein Larry Summers, in the course of lambasting the rubes for trying to undermine global trade, concluded:

A strategy of returning to the protectionism of the past and seeking to thwart the growth of other nations is untenable and would likely lead to a downward spiral in the global economy. The right approach is to maintain openness while finding ways to help workers at home who are displaced by technical progress, trade or other challenges.

To which the appropriate response is something like: "Well, you f*****g genius, how many decades have you had to study the problem??? What have you ever proposed?"

Since the real answer to that question is "nothing," we know that you actually don't care.  And there, the genius economist runs headlong into freshman level psychology.

Because, even if his defense of globalization is accurate, what the suffering middle/working classes have done is to serve notice that Summers' cherished economic progress will be destroyed until the benefits are equitably shared. There will be no "maintaining openness" until "help[ing] workers at home" is accomplished first.

In other words, the masses are saying, "Do we have your attention now?!?" Reading Summers in this article and Brad DeLong in virtually every article in the last several months, I would say, "yes, we do."

See, that animal behavior works!

My Weekly Columns Are Up At XE.com

International Week in Review

Bond Market Week in Review

Equity and Economic Market Week in Review

Weekly Indicators for February 20 -24 at XE.com

 - by New Deal democrat

My Weekly Indicator post is up at XE.com.

The economic indicators for the next 6 to 8 months are turning even stronger. But real M2 . . . .

The Joke That is the Republicans Health Care Plan

Politico is reporting that they have a draft document of the Republican health care plan.  The details are laughable.

Let's review the "three-legged stool" that is the ACA.  To cover people with pre-existing conditions, we needed to expand the pool of insureds.  This led to the individual mandate.  And to help people buy insurance, the government provided subsidies.

How do the Republicans deal with this?

The legislation would take down the foundation of Obamacare, including the unpopular individual mandate, subsidies based on people’s income, and all of the law’s taxes. It would significantly roll back Medicaid spending and give states money to create high-risk pools for some people with pre-existing conditions. Some elements would be effective right away; others not until 2020.

...

In place of the Obamacare subsidies, the House bill starting in 2020 would give tax credits — based on age instead of income. For a person under age 30, the credit would be $2,000. That amount would double for beneficiaries older than 60, according to the proposal. A related document notes that HHS Secretary Tom Price wants the subsidies to be slightly less generous for most age groups.

Subsidies are the only reason why a majority of the current insureds can buy insurance.  Without them, most people will be driven from the market.  For example, in the program's second year, 90% of the participants qualified for some type of subsidy.  The $2000 tax credit will only pay far -- at most -- a few months of coverage.   Removing the subsidies means people will have to pay for insurance entirely out of pocket -- which most current participants can't do.  So, they're gone from the market. And if people can't buy insurance, they have to pay a 30% penalty when they re-up their coverage.  This penalty will guarantee that those who couldn't buy coverage before most certainly won't buy coverage again.

And high-risk pools -- an idea that has bever worked -- are back.

So, the Republicans clearly want people to not have health insurance.   A

Yet Another Economic Failure from Jazz Shaw of Hot Air

     You have to give Ed Morrissey and Jazz Shaw of Hot Air some credit; despite a multiple year run of being completely wrong about all things economic and financial, they each continue to believe they have sufficient analytical capabilities to inform their readers on those topics.  By now, most people would realize that they have no business writing stories in either discipline.  But neither Shaw nor Morrissey have the requisite amount of self-awareness to make such an observation.

     The latest comes from Shaw, who breathlessly proclaims, "The popularity of Starbucks has plunged since they decided to take on politics."  But, let's take a look to see if that's hurt sales, shall we?  Here's a look at annual sales from Morningstar.com:

For those of you paying attention, you'll notice that revenue continues to increase Y/Y.  For Mr. Shaw, I would simply point out that this is exactly what companies are supposed to do.  

This ended today's lesson for Mr. Shaw.  Please realize that you have no idea what you're doing when it comes to economics and finance.  

Housing: waiting for the pinch from higher interest rates

 - by New Deal democrat

Over the last few months, new home sales have diverged significantly from housing permits and starts. It's possible that the recent higher mortgage rates have shown up already in sales, but not yet in permits or starts.

My updated look at housing sales, prices, and inventory is up at XE.com.

Do healthier longevity and better disability benefits explain the long term decline in labor force participation?

 - by New Deal democrat

A few weeks ago I took another deep dive into the Labor Force Participation Rate.  There are a few loose ends I wanted to clean up (at least partially). 

One of the most noteworthy things about the LFPR in the long term is that, for men, it has been declining relentlessly at the rate of -0.3% YoY (+/-0.3%) for over 60 years! Here's the graph, normed to 100 in 1948, showing the long term decline (blue) and also normed to 100 in 1948, showing the YoY% change +0.3% (red):

Once we add +0.3% to the YoY change, the LFPR always stays very close to 100.

But what is the *reason* for this very steady decline that has already lasted a lifetime.

I want to lay down a hypothesis for further examination later.  I believe the secular decline in the LFPR for men, paradoxically, can be explained by two improvements in disability benefits and health:

1. expansions to the definition of disability; and

2. (a) better health care, leading to (b) an increased life span.

Here's the thesis: 60 years ago, men (whose life expectancy from age 20 was only to about 67 years old to begin with) went from abled to disabled to dead over a shorter period of time.  Now at age 20 they can expect to live to about age 76, and if they get disabled, better health care will keep them alive for a much longer period of time.  And more conditions can qualify them for disability.  This means that a greater percentage of men qualify for disability, and once on it, they survive beyond working age. (Note that if somebody dies at say age 50 while on disability, they - ahem - are no longer part of the population).

That hypothesis would explain the long term and relentless decline in the LFPR for men.

And there is data in support.  To begin with, the life span of males who make it to age 20 has increased by about 1 year over every decade:

And a much higher percentage of former workers are on disability compared with 35 years ago at least:

While applications for disability are sensitive to the business cycle, the percentage of awards (after a decline in the early 1980s) have been rising for 30 years:

Coverage at the St. Louis FRED only starts in 2008, but the current business cycle fits the description (note: not seasonally adjusted):

Following the recession, the number of men on disability who left the labor force declined almost trivially compared with the number of men not on disability who left the labor force.  Those on disability bottomed first (2010-11) compared with the able-bodied (2011-12), and surpassed its 2008 level by 2015, whereas able bodied men not in the labor force just pulled even with their 2008 level in 2016.

Obviously more work needs to be done to flesh out this hypothesis, but I think it is a good fit for the data.

Prof. Brad DeLong must think that Chinese robots work more cheaply than American ones

 - by New Deal democrat

Profs. Brad DeLong and Jared Bernstein continue to dispute whether the loss of American factory jobs is primarily a matter of efficiency or primarily a matter of offshoring.

Yesterday Prof. DeLong continued to beat the drum for the role of efficiency in the loss of American factory jobs:

[T]he big deal in terms of the changing shape of the American workforce--and, quite plausibly, changing life chances, the collapse of upward mobility, and wage stagnation--is technology: rampant improvement in manufacturing technology coupled with limited demand, for while nearly all of us want one few of us want too and only a minuscule proportion of us want three refrigerators ....

....  Globalization's big effect has been to enable the construction of intercontinental value chains and to create a much finer global division of labor. It has greatly weakened the bargaining power of unskilled manufacturing workers here in the United States, yes. But has it done the same to semi-skilled and skilled manufacturing workers? ....Unskilled manufacturing jobs are not good jobs. Semi-skilled and skilled manufacturing jobs are. I think that odds are at least 50-50 that Larry [Summers] has gotten the sign of the effects of globalization on bargaining power wrong for those manufacturing jobs that are worth keeping.

Note initially by the way that DeLong appears to be addressing why *wages* should have stagnated or worse. But a loss of bargaining power shouldn't necessarily mean fewer *jobs.*

More simply put: there are lots of Chinese and other asian robots that are much more efficient than American robots.  Otherwise why would you need a robot-factory supplier half the way around the world as opposed to the robot-factory around the corner?

This morning Prof. Bernstein counters:

The data do not support the claim that there’s been an acceleration in labor-replacing technology displacing US workers. To the contrary, measures of capital investment and especially and most persuasively, productivity growth, have slowed, trends that point in the opposite direction..... . . .  If automation were increasingly displacing workers, we’d be seeing more output produced in fewer labor hours, aka, faster productivity growth.  But we see the opposite.

 I think we are at the point where we can validly say to DeLong:  Who should I believe?  You or my lying eyes?  If DeLong is correct, all of those empty American factories are an illusion.  They are busily humming away, but now they are full of robots rather than humans. (Yes, that is hyperbole, but essentially valid.)

Put another way, if DeLong is correct, and American workers have simply been replaced by American robots, then factories have been made more efficient and thus producers' supply curves should have shifted to the right (I.e., they are willing to produce the same or more at lower cost). Thus they should be supplying more per capita to consumers.

And yet that is not what industrial production, or manufacturing production per capita show:

After great strides in the 1990s, except for one year or so, industrial production has declined. Eight years after the end of the Great Recession, manufacturing production per capita  (red in the graph above) in particular is still down more than 10% from its peak. 

There is simply no getting around that production has left America. Are foreign*robots* also cheaper?!?