Relevant and even prescient commentary on news, politics and the economy.

## Capacity Utilization Telling a Strange Story

Capacity utilization is telling a very unusual story. Information technology –computers & peripherals, communication equipment and semiconductors — is operating at recession levels. Part of the story is import tablets and smart phones displacing personal computers. But there has to be more to the story.

Meanwhile, the rest of industry appears to be operating at near full operating rates. Manufacturing excluding info tech capacity is only a few percentage points below its 2007 peak. Given the long run downward slope of capacity utilization this is probably effectively full utilization

## Greg Mankiw on Bond Returns

Greg Mankiw had an interesting post today pointing out that bond returns calculated by the economist were incorrect.

http://gregmankiw.blogspot.com/

Mankiw wrote:

Here is a question for students who are learning about compounding.  What is wrong with the following passage from The Economist magazine?

Investors who bought Treasury bonds in 1946, when yields were around current levels, did not suffer a formal default. But over the following 35 years they lost money in real terms at a rate of 2% a year. The cumulative real loss was 91%. By that standard, Greek creditors, who recently suffered a 50% loss via default, were lucky.

Answer: The second number is inconsistent with the first.  Note that .98^35=.49, so we get only a 51 percent cumulative loss.

In fact, the price level from 1946 to 1981 rose by a factor of about 5, so holding currency with a zero nominal return led to a real loss of only about 80 percent.

But Mankiw forgot one important element of calculating bond market returns.  Much of the total return for bonds is the interest on the annual interest payments and in a period of rising rates the returns will rise  as the interest payments  are reinvested at higher yields.  It is a bond market convention to assume that all the interest payments will be reinvested at the current yield.  They do that so they can actually calculate a valid price for the bond. But that is just a convention, and in a period of rising rates the returns will be higher than Mankiw calculates.

By omitting this point Mankiw is making just as serious an error as he is accusing the Economist of making.

## Obama-care and part time employment –Part 2

I’m seeing all types of comments on the 2013 rise in part time employment that blame it on Obama-care and that is just plain wrong.

Based on unpublished BLS data so far this year federal employes forced to work part time because of the sequester account for over 100% of the increase in part time employment.

So far this year private part time employment is actually some one million jobs lower than in the same 8 months of last year.  Because the data is not seasonally adjusted ( NSA ) the correct comparison to make is the year over year change because frequently the month-to-month changes can be misleading.

Time after time I’m seeing people observe the jump in part time workers and just jumping to the conclusion that it is Obama-care.  That is what they want to believe, so they do not bother to check  if their is another explanation. Economist generally call this  the omitted variable problem.  But I suspect it is just more Republican disinformation.  All it takes to get the data showing that the jump in part time  employment is all federal employes is just one simple phone call or email to the BLS . But it appears that people do not want to be confused by the facts.

(See table after the read more)

Disinformation was the old Cold War practice of both the CIA and KGB of planting false information in the press for propaganda purposes or to fool each other.The KGB actually had an entire Disinformation Division.Now it just seems to be the conservatives-liberaterians trying to fool themselves.

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## Is Fed Policy Inconsistent

When the Fed started QE they viewed it as a stimulative, easing of monetary policy.

Now they are arguing that tapering or reducing QE is not tightening.

Can both of these two positions be correct?

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## OBAMACARE,THE SEQUESTER and part time employment

It is time to get serious.

There are widespread claims that firms are cutting  hours worked and converting full time jobs into part time jobs because of Obama-care.

So what does the data say.  Below is a table of unpublished data from the Bureau of Labor Statistics (BLS) of part time employment by private and government employers.  The government data includes state, local and federal part time workers but I have also broken out federal part time workers in a separate column. The data  also is not seasonally adjusted, so generally month to month comparisons are meaningless and one should make comparisons between a month in 2013 and the same month in 2012.

The data shows that private part time employment in 2013 is lower in every month but one than it was in the same month of 2012. Moreover, federal part time employment was just the opposite, rising in every month but January. In particular, in June and July, 2013, when firms were supposedly cutting hours worked to avoid having to pay for employee health insurance over 100% of the increase in part time employment stemmed from federal government employment.  This in turn was generated by employee furloughs brought about by the sequestration.

So over the last few months when Obama-care was supposedly causing a surge in part time employment the data shows that private part time employment actually fell, just the opposite of what is being claimed.

Overall, the data massively contradicts claims that Obama-care is responsible for the recent surge in part time employment. Moreover, it strongly supports the case that the recent increase in part time employment stemmed from the Sequester.

I can understand why papers like the Wall Street Journal will buy into such Republican misinformation, but I am really surprised that the New York Times  appeared to accept the misinformation even though they were publishing good data on the sequester. But as far as anyone else is concerned, I see no reason to take you seriously unless you can show good, hard data demonstrating that the BLS data is wrong.

PS. The Pentagon announced that it is reducing the number of furlough days DOD civilians must take from 11 to 6.

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## Part Time Employment and the Sequester

Part of the reason employment and hours worked, in particular, have been so weak in early 2013 is the rapid growth of part-time employment. Part time employment is volatile and subject to many influences.  From December to June part time employment rose 589,000.  That is a 2.2% — almost 5% annualized – growth rate. Part time employment jumped from 18.4 % of total employment in December  to 19.0% in July.

The unusually large increase in part time employment is due  almost exclusively to the sequester.  For example, at the Department of Defense (DOD) some 650,000 civilians must take 11 days off in the second and third quarters. They have 26 weeks, but after adjusting for federal holidays, vacations, sick leave, etc., the effective  time is 22 weeks. This works out that DOD employees must take an involuntary, unpaid day-off every other week. Consequently, on any given week about half of the DOD civilian workers (325,000) became part time employees.  That is 55% of the 589,000 jump in part time employment in the first half of 2013..

But the sequester is impacting all federal employees and is spreading to federal contractors.  Total federal civilian employment is 2,760,000.  If half are now part time workers that would be 1,380,000, or 134% of the 589,000 jump in part time employment. Even if only 25% of non-DOD federal civilian workers are now part time, it would still mean that the sequester is converting over a million jobs into part-time work.

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## The Employment Situation

Although the July employment report was weaker than expected, it was still in line with recent experiences. The household survey reported employment gains of 204,000 while the payroll report showed a gain of 162,000 jobs.

Average hourly earnings for all employees on private nonfarm payrolls edged down by 2 cents to \$23.98, following a 10-cent increase in June.

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## Obamacare and Employment

If you listen to CNBC or read right wing blogs you would think that the Obamacare regulations that require  large employers — over 50 full time equivalent employees –to provide their employees insurance or pay a penalty is leading to a massive shifting of employees from full time to part time.  CNBC is constantly interviewing business owners who say they are shifting time workers from full time  to part time.  It makes for a logical argument, but the data does not support it.  So far this cycle part time employment is growing slower than full time employment so  part time employees share of employment is falling.  Part time share of employment seems to be following a normal cyclical development of surging during recession and declining during the recovery.   At a minimum this ratio says that shift full time employees to part time employees is not large enough to show up in the  the data.

Another way to look at the issue is to look at the average workweek.  The average workweek is impacted by two types of changes.  One, is employment growth in different industries with different work practices.  For example, manufacturing uses very little part time labor and the average workweek is actually over 40 hours.  While retail has long used part time labor extensively and the average workweek in retail is now only 30.1 hours.  If manufacturing employment is growing faster than retail employment

the average workweek will tend to lengthen.  But it will shorten if retail employment is growing faster than manufacturing employment. What we have this cycle is that employment in these two industries appear to be in balance, and so generating a flat workweek.

This is the factor that accounts for most of the long term secular decline in the average workweek.  But interestingly, the average workweek has been amazingly stable over the past year, not at all what you would expect if Obama care was causing employers to shift their employes from full time to part time work.

The other way the average workweek would change if some industry is changing its practices and shifting employment from full time to part time work.  The BLS publishes detailed data on the workweek for 13 different industries.  Over the past year only 3 of the 13 industries have experienced a drop in the average workweek while the workweek lengthened for 10 industries. In the table goods producing and service producing are sub categories, not individual industries.

So, on balance it seems we have another example of the right wing developing another beautiful theory that is strongly contradicted by the data.  Why am I not surprised?

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## Oil Prices

The last few weeks oil prices have been moving higher and few analysts seem to understand the full story.

If there is any commodity that trades at a one world price it is oil.  So the recent weakness in West Texas Intermediate ( WTI)  is very unusual and stems from temporary bottlenecks.  Over the last few years a new major source of oil has emerged from fracking in North Dakota and other interior locations. The problem was that over the years pipelines and other supply chains for oil had been built to move crude from  coastal ports to interior locations  and refiners like Cushing, Oklahoma, not from the interior to ports. A s a consequence, when mid-western oil supplies expanded it created local surpluses and price weakness.  But now these bottlenecks are being eliminated.  In particular, two pipelines from Cushing to the Gulf Coast have been reversed and large quantities of oil are now flowing from Cushing to the Gulf ports and refiners.  As a consequence the spread between  WTI and Brent crude is  collapsing.

Since the June low, Brent crude has risen some 6.5% while WTI has jumped some 15.7%.  This has caused the spread to collapse back to near its old pre-2011 values.  Butt in evaluating the impact of the Egyptian unrest on world oil prices the number to watch is the 6.5% increase in Brent crude, not the 15.7% increase in WTI.  But the impact on domestic gas prices is more complex.  On  the coast gas prices are experiencing small price increase in line with the move in Brent while in the interior gas prices are moving up some 10% to 20% in line with the jump in WTI.

## The Stock Market and Interest Rates

The quick and dirty rule of thumb is that the relationship between bond yields and the S&P 500 PE is one-to-one.

That is, 100 basis point change in bond yields should cause about a 100 basis point change in the PE.

Since WWII, the long term trend for earnings growth has been some 7%, or about the same as nominal GDP growth. I’ve long thought that the PE is an expression of the present value of a perpetual stream of 7% earnings growth

In the 1990s bubble , investors came to believe that long term earnings growth had moved to a permanently higher level and that justified the higher valuation.

Now, I wonder if the market, in its wisdom is already discounting a lower level of earnings growth, maybe about 4%.  That could explain why the market looks cheap.  Interestingly, in this recovery nominal GDP growth has been very stable around 4%.