Category Archives: Economics

Slow Economic Growth

Three important things to see in today’s jobs report

The monthly jobs report creates a flood of exciting news stories.  Most of these discuss small fluctuations in its many numbers, most of which are just statistical noise. Here are three things you need to know about job and wage growth. They are the key trends seldom mentioned in the news.

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The annual Budget Games begin: Trump vs. Congress to control spending

Summary: Now that the Anything But Issues election is over, the media realize that there are issues other than racism and sexism — and debates other than those over the ephemera that dominated the election. Alexander Bolton of The Hill kicks off serious coverage of the Trump administration with “Deficits could stand in the way of Trump’s agenda“. It’s a powerful sequel to yesterday’s post, See the warnings about Trump’s infrastructure plan. It’s betraying populism.

Remember all those GOP tirades about Obama’s deficits?

The GOP majority seems unlikely to allow the fantastic deficits necessary to fund Trump’s promised hat trick of programs: more money for America’s already massive military, rebuilding America’s infrastructure, and tax cuts for the rich. Unfortunately for the 1%, the Federal government doesn’t spend enough on the poor to feasibly balance the budget on their backs. Congress seems likely to fully fund only increases for the military (fertilizing the MIC money tree) and tax cuts for their 1% paymasters.

Net impact on America: zero, leaving only debts for the future — much like the Reagan and Bush Jr. deficits. The tax cuts of those two Presidents came close to wrecking the government’s solvency. Third time’s the charm!

When reading this, remember that a properly led Congress is the most powerful branch of the Federal government. A President inexperienced in managing Congress further boosts their power.

Excerpt from “Deficits could stand in the way of Trump’s agenda
by Alexander Bolton at The Hill.

“Trump called during the campaign for a $1 trillion infrastructure package, $5 trillion in tax cuts, increases in military spending and the repeal ObamaCare, which could cost more than $350 billion over 10 years. At the same time, the president-elect has promised “not to touch” Social Security or make cuts to Medicare.

“…’We did not hear anything about entitlement reform from either of the candidates, and that’s a serious issue,’ said Michael Sargent, a research associate at The Heritage Foundation. ‘You cannot address the growth in spending without addressing entitlement issues.’

”…Congressional Republicans assailed President Obama early in his tenure over soaring federal deficits, which exceeded $1 trillion dollars during his first four years in office. Debt reduction was the main focus of GOP leaders after they took back control of the House in 2010.

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See the warnings about Trump’s infrastructure plan. It’s betraying populism.

Summary: US stocks have risen since the election on expectations that Trump will bring massive debt-financed infrastructure spending and tax cuts for the rich (with droplets for everyone else). As we learned from the Reagan and Bush Jr. programs, we should beware the details. These articles warn what to expect, giving us time to fight back.

Donald Trump digging

Donald Trump breaking ground for new hotel in Washington, 23 July 2014. Photo: Evan Vucci, STF/AP.

“Like [Andrew] Jackson’s populism, we’re going to build an entirely new political movement,” he says. “It’s everything related to jobs. The conservatives are going to go crazy. I’m the guy pushing a trillion-dollar infrastructure plan. With negative interest rates throughout the world, it’s the greatest opportunity to rebuild everything. Ship yards, iron works, get them all jacked up. We’re just going to throw it up against the wall and see if it sticks. It will be as exciting as the 1930s, greater than the Reagan revolution — conservatives, plus populists, in an economic nationalist movement.”
— Steve Bannon, Trump’s Chief Strategist, in The Hollywood Reporter.

This massive infrastructure plan sounds alluring, like debt-funded tax cuts. Ronald A. Klain warns us about the probably results: “Trump’s big infrastructure plan? It’s a trap.” To understand why, see the details in “Trump Versus Clinton On Infrastructure” by Peter Navarro (prof of economics and public policy at UC-Irwin) and Wilbur Ross (billionaire LBO entrepreneur) — both senior advisors to Trump. Paul Krugman gives the summary (read it in full).

Trumpists are touting the idea of a big infrastructure build, and some Democrats are making conciliatory noises about working with the new regime on that front. But remember who you’re dealing with: if you invest anything with this guy, be it money or reputation, you are at great risk of being scammed. So, what do we know about the Trump infrastructure plan, such as it is?

“Crucially, it’s not a plan to borrow $1 trillion and spend it on much-needed projects — which would be the straightforward, obvious thing to do. It is, instead, supposed to involve having private investors do the work both of raising money and building the projects — with the aid of a huge tax credit that gives them back 82 percent of the equity they put in. To compensate for the small sliver of additional equity and the interest on their borrowing, the private investors then have to somehow make profits on the assets they end up owning.

“You should immediately ask three questions about all of this. … All of these questions could be avoided by doing things the straightforward way: if you think we should build more infrastructure, then build more infrastructure, and never mind the complicated private equity/tax credits stuff. You could try to come up with some justification for the complexity of the scheme, but one simple answer would be that it’s not about investment, it’s about ripping off taxpayers.

We have recent experience with this strip-mining of the public for private gain: the privatization of education, including the student loan business. Rana Foroohar reviews seven new books about this at the New York Review of Books.

“When the financial industry — banks, hedge funds, loan companies, private equity — gets too involved in any particular activity of the economy or society, it’s usually time to worry. The financial sector, which represents a mere 4% of jobs in this country but takes a quarter of all private sector profits, is like the proverbial Las Vegas casino — it always wins, and usually leaves a trail of losers behind.

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The Important But Hidden News In The Jobs Report

SummarySlow Economic Growth

  • Jobs continued their trend: a long period of slow growth, second weakest since 1961 (2001-07 was worse).
  • Worker’s wages continued their slow growth, weekly wages up 2.1% YoY for private sector hourly workers.
  • Slow growth doesn’t create the imbalances & inflation that cause recession. This could run for another year, and perhaps longer.
  • Such slow non-inflationary growth makes raising rates a risky play for the Fed. I doubt they will be so bold.
  • In this slow growth environment paying big valuations for stocks is risky gamble.

The monthly employment report is the most important economic report. It is central to our consumer-led economy, relatively accurate, and frequent (unlike GDP). The November report frustrates both bulls and bears. Still more slow growth in jobs and wages. No signs of boom, no signs of bust, no signs of inflation. Boring, but rich with implications for investors.

As usual, the chart tells the tale. This is the YoY percent change in jobs from the Establishment Survey, not seasonally adjusted (NSA). The purple line is the 1.6% growth reported today. Growth peaked at 2.3% in February 2015 and has slowed steadily since — but gently. Click to enlarge.

Employment growth through November 2016

Contents

Why look at the NSA YoY percent changes? What about the horrific numbers from… Aren’t most of the new jobs low-paying? What about the recession that was coming? Why are investors paying such high valuations for stocks?

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Men are abandoning the rat race, & changing American society

Summary:  America is changing in ways not easy to see. One is the exodus of men from the labor force, changing both our economy and society. Today’s post looks at the facts. Tomorrow’s gives a shocking explanation, different than the ideologically pleasing stories given by Left and Right.

“Work is the grand cure of all the maladies and miseries that ever beset mankind — honest work, which you intend getting done.”
— The Inaugural Address of Thomas Carlyle as Lord Rector of the University of Edinburgh (1866). This belief changed the West. It will change again when no longer believed.

 

Nicholas Eberstadt wrote Men Without Work: America’s Invisible Crisis to warn us of a major problem. He gave a summary in the Wall Street Journal: “The Idle Army: America’s Unworking Men” — “Millions of young males have left the workforce and civic life. Full employment? The U.S. isn’t even close.”

“Labor Day is an appropriate moment to reflect on a quiet catastrophe: the collapse, over two generations, of work for American men. During the past half-century, work rates for U.S. males spiraled relentlessly downward. America is now home to a vast army of jobless men who are no longer even looking for work — roughly seven million of them age 25 to 54, the traditional prime of working life.

“…There are also the barriers to work for America’s huge pool of male ex-prisoners and felons not behind bars — a poorly tracked cohort that accounts for one adult male in eight in the civilian population, excluding those in jail now.

“…What do unworking men do with their free time? Sadly, not much that’s constructive. About a tenth are students trying to improve their circumstances. But the overwhelming majority are what the British call NEET: ‘neither employed nor in education or training.’ Time-use surveys suggest they are almost entirely idle — helping out around the house less than unemployed men; caring for others less than employed women; volunteering and engaging in religious activities less than working men and women or unemployed men. For the NEETs, ‘socializing, relaxing and leisure’ is a full-time occupation, accounting for 3,000 hours a year, much of this time in front of television or computer screens.

“…Imagine how different America would be today if another roughly 10 million men held paying jobs. It is imperative for the future health of the country to make a determined and sustained effort to bring these detached men back—into the workplace, into their families, into civil society. “

His book got a lot of attention, such as — “Men not at work: America’s hidden unemployment” by Larry Summers in the Financial Times. “America’s Lost Workers” by Jeff Madrick in the New York Review of Books. Also see the follow-up discussion between the author and Madrick. “Enduring mystery of US recovery: men without work” by Simon Montlake in the Christian Science Monitor. The right-wing hack view: “Why Are Millions of Men Choosing Not to Work?” by George Will in the National Review — “American men who choose not to work are choosing lives of quiet self-emasculation.”

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Today’s mythbusting: the Fed is not suppressing interest rates

Summary: Here’s another in my series of economic myth-busting articles, explaining that the Fed is not suppressing rates. It is a follow-up to Ignore The Bond Bears, The Fed Will Not Raise Rates.

The Federal Reserve Monster

Part of the magical, even divine, powers attributed to the Federal Reserve is their ability to set interest rates — both short- and long-term. Since the quantitative easing ended we have seen this taken to the logical extreme — with the Fed suppressing rates without visible action! In physics that’s quantum mechanics. In finance it is mythology.

Economists, both Left (e.g., Paul Krugman) and Right (e.g. Tyler Cowen) acknowledge that the post-crash low rates do not result from the Fed’s action. They do so for good reason.

The Fed is not buying bonds — their most effective (almost the only effective) means of depressing interest rates. QE3 ended on 29 October 2014. Two years ago. On that day total Federal Reserve assets were $4,487 billion. As of 19 October 2016 they were $4,467 billion. See the graph.

In theory the Fed could affect prices by buying and holding a substantial fraction of the $64 trillion in outstanding US debt and loans. Taking the fraction they own from 3% to 6% over 7 years (2008-2014) did not seriously change the bond market’s structure. Perhaps the structure of credit spreads differs from what it might have been if the Fed had not added the Treasury securities and government-guaranteed mortgages. It’s difficult to determine such things. But it the effect on credit spreads, if any, is unlikely to have affected interest rates.

If the Fed is not suppressing rates, why are they so low? Fed Vice-Chairman Stanley Fischer explains in this speech on 17 October.

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Why New Home Construction Is Slow, And Will Remain So For A Long Time

Summary: September housing starts were weak, as they have been since the crash. Their failure to recover has been a surprising and large drag on this economic cycle. Demographic change and slow GDP prevent a housing recovery. On the other hand, housing busts create recessions; this slow expansion (without a boom) is more sustainable — and might run unusually long.

Slow growth of housing

September housing starts were weak, -15% YoY NSA (year-over-year, not seasonally adjusted) and -9.0% MoM SA. The weakness in this key industry is one facet of secular stagnation. How weak is it, compared to past expansions? See this graph of annual housing starts per 1000 people. After 7 years of economic expansion, starts run at less than half of the previous peak (Jan 2006), and two-thirds of the average during the previous two expansions. They rose to the 1963-2007 lows – and stalled.

Annual housing starts per 1000 people

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