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

Measures of underemployment continue to show improvement

by New Deal democrat

Measures of underemployment continue to show improvement

The unemployment rate, at 4.7%, is generally acknowledged to be decent, although not great.  But what of the underemployed?

Typically as an economy expands, the U6 (unemployed + underemployed) rate has declined more than the U3 (unemployed only) rate, as shown on the below graph which subtracts U3 from U6, thus leaving us with just the underemployed:

As the recovery matures, the two move in tandem.  As the economy weakens into a recession, the underemployed tend to feel it fist, as U6 increases more than U3.

So the good news for now is that U6 is still declining more than U3.

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February jobs report: hitting on all cylinders but wages

by New Deal democrat

February jobs report: hitting on all cylinders but wages
  • +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).
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.

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A quick primer on interest rates and rate hikes

 by New Deal democrat

A quick primer on interest rates and rate hikes

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.

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The Emerging Market Economies and the Appreciating Dollar

by Joseph Joyce

The Emerging Market Economies and the Appreciating Dollar

U.S. policymakers are changing gears. First, the Federal Reserve has signaled its intent to raise its policy rate several times this year. Second, some Congressional policymakers are working on a border tax plan that would adversely impact imports. Third, the White House has announced that it intends to spend $1 trillion on infrastructure projects. How all these measures affect the U.S. economy will depends in large part on the timing of the interest rate rises and the final details of the fiscal policy measures. But they will have consequences outside our borders, particularly for the emerging market economies.

Forecasts for growth in the emerging markets and developing economies have generally improved. In January the IMF revised its global outlook for the emerging markets and developing economies (EMDE):

EMDE growth is currently estimated at 4.1 percent in 2016, and is projected to reach 4.5 percent for 2017, around 0.1 percentage point weaker than the October forecast. A further pickup in growth to 4.8 percent is projected for 2018.

The improvement is based in part on the stabilization of commodity prices, as well as the spillover of steady growth in the U.S. and the European Union. But the U.S. policy initiatives could upend these predications. A tax on imports or any trade restrictions would deter trade flows. Moreover, those policies combined with higher interest rates are almost guaranteed to appreciate the dollar. How would a more expensive dollar affect the emerging markets?

On the one hand, an appreciation of the dollar would help countries that export to the U.S. But the cost of servicing dollar-denominated debt would increase while U.S. interest rates were rising. The Bank for International Settlements has estimated that emerging market non-bank borrowers have accumulated about $3.6 trillion in such debt, so the amounts are considerable.

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Trump’s America First economic strategy looks a lot like the import substitution economic development strategy that was so popular several decades ago—notably in Latin America and South Asia..  But it only had limited success, especially compared to the export led growth strategy followed in East Asia.  Import substitution tended to produce fragmented, inefficient and low productivity industries protected from foreign competition by high tariffs and other trade barriers

Take autos, for example.  It does not take a lot more labor to build a $30,000 or $60,000 car than a $15,000 car.  But no one can profitably manufacture a $15,000 car using expensive American labor.  That is why most auto imports are economy or luxury cars.  But this is exactly what Trump is asking Detroit to do.  SEER suspects that the auto CEOs told Trump what he wanted to hear and went back home and did nothing. If for no other reason, the auto industry is operating at very high capacity utilization and does not have the idle capacity to dedicate to small car and truck production. If questioned, they can say it is more difficult than they thought and they are still working on it. That is probably preferable to  actually building some white elephant. Most manufactured imports are not profitable to make in the US at current prices.


The Border Adjustment Tax ( BAT) appears to be dead, but who knows.  SEER does not accept the idea being pushed that the dollar will automatically rise to offset the tariffs. It is an interesting theory, but SEER has not been able to find a single historic example of it ever actually happening.  The trade deficit is driven by the domestic savings-investment gap – including the federal deficit as negative savings.  BAT will be a major source of federal revenues and will dampen the savings- investment gap as well as the trade balance.  The impact of BAT on the dollar appears indeterminate as far as SEER can tell. But the bottom line is that the Republicans have long worked to shift taxes from income to consumption and BAT is just another example of that.

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Meanwhile this is still going on during the week….

From Diane Ravitch’s blog:

While we’re consumed 24/7 with the Trump/Russia psychodrama, Republicans are quietly, under the cover of darkness and diversion, introducing these new bills in the House:

HR 610 Vouchers for Public Education — (The bill also repeals basic nutrition standards for the national school lunch and breakfast programs)
HR 899 Terminate the Department of Education
HR 785 National Right to Work (aimed at ending unions, including teacher unions)

And there’s more. Much more, including:

–HR 861 Terminate the Environmental Protection Agency
–HJR 69 Repeal Rule Protecting Wildlife
–HR 370 Repeal Affordable Care Act
–HR 354 Defund Planned Parenthood
–HR 83 Mobilizing Against Sanctuary Cities Bill
–HR 147 Criminalizing Abortion (“Prenatal Nondiscrimination Act”)
–HR 808 Sanctions against Iran

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Do “high pressure” low unemployment economies lead to more capital investment?

by New Deal democrat

Do “high pressure” low unemployment economies lead to more capitalinvestment?

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.

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Larry Summers: genius economist, failure at Psychology 101

by New Deal democrat

Larry Summers: genius economist, failure at Psychology 101

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.

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

by New Deal democrat

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

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).

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The “Cutz & Putz” Bezzle, Graphed by FRED

by Sandwichman
The “Cutz & Putz” Bezzle, Graphed by FRED

anne at Economist’s View has retrieved a FRED graph that perfectly illustrates the divergence, since the mid-1990s of net worth from GDP:

The empty spaces between the red line and the blue line that open up after around 1995 is what John Kenneth Galbraith called “the bezzle” — summarized by John Kay as “that increment to wealth that occurs during the magic interval when a confidence trickster knows he has the money he has appropriated but the victim does not yet understand that he has lost it.”

In Chapter 8 of The Great Crash, 1929, Galbraith wrote:

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