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Demographics, housing, and the economy

Demographics, housing, and the economy

Way back during the Great Recession, I first noted that demographics were about to become a tailwind for the housing market. The argument, in its simplest terms, is that the median age of first time home buyers is about 30, and the nadir of the “baby bust” was 1973-76. That means that the demographic nadir of the population of first time home buyers who ultimately drive the market (since everybody else just moves up from one house to another) was in the 2003-06 period.

Yesterday I started looking into quantifying that tailwind. Without getting into too much detail, my suspicion is that it has amounted to an increase in the pool of potential first buyers on the order of roughly 250,000 households per year since 2010 — i.e., the increase of each year over the year previous, continuing year after year. That’s just a back of the envelope approximation.

Lo and behold, Bill McBride a/k/a Calculated Risk posted on a similar subject yesterday, opining that the demographic tailwind was likely to continue for years for both housing and the economy generally, concluding that “My view is this is positive for both housing and the economy, especially in the 2020s. “Then Mike Shedlock a/k/a Mish responded with regard to housing, opining that “On the surface, the demographic trends may appear neutral or slightly favorable…. [but] For now, and the next five years, attitudes and affordability are the key issues. They far outweigh any potential demographic benefit, if any.”

Who’s got the better argument? Because historically we’ve been around this block before, in a pretty big way. You may have heard of it: it was something called the “baby boom.”

In my opinion that history gives us a pretty definitive answer.

Let’s start with the demographic history. Here’s a graph of live births for each year since 1900:

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The consumer edges closer to the precipice

The consumer edges closer to the precipice

In addition to my “long leading/short leading” model adapted from the work of Profs. Geoffrey Moore and Edward Leamer, and the “high frequency” weekly variation on the same, I also have several “alternate” recession forecasting models. The most noteworthy model is really a consumer nowcast. It turns on consumers running out of options to to continue increasing purchases (i.e., no interest rate financing, no wage real wage increases, and no increasing assets to cash in). When that happens, and consumers turn more cautious by saving more, a recession begins.
I first posted the model 10 years ago under the title, “Are Hard Times Near?  The great decline in interest rates is ending.”  The history is straightforward.  Since the 1970s, real average hourly earnings had declined.  Average Americans coped by spouses entering the workforce, by borrowing against appreciating assets, and by refinancing as interest rates declined.
By 1995 the spousal avenue peaked.  Borrowing against stock prices ended in 2000.  Borrowing against home equity ended in 2006.  When interest rates failed to make new lows, the consumer was tapped out, and began to curtail purchases.  A recession began – and its effects lingered for a long time. “Hard Times” had indeed begun.
What does the consumer model show now? I haven’t updated it in about two years, and there have been noteworthy developments. Let’s take a look.
Real hourly wages haven’t increased since last July, are up only 0.1% YoY and barely more in the past two years:
According to Ironman at Political Calculations, real median household income has declined slightly  for nearly two years:

Mortgage rates haven’t made a new low since 2013, and if anything are trending up, on the verge of breaking a 30 year trendline:

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Higher wage growth for job switchers: more evidence of a taboo against raising wages?

Higher wage growth for job switchers: more evidence of a taboo against raising wages?

Yesterday the Atlanta Fed published a note touting the wage growth for those who quit their jobs and transfer to a different line of work, writing that:

Although wages haven’t been rising faster for the median individual, they have been for those who switch jobs. This distinction is important because the wage growth of job-switchers tends to be a better cyclical indicator than overall wage growth. In particular, the median wage growth of people who change industry or occupation tends to rise more rapidly as the labor market tightens.

The following graph was posted in support of this point:
Essentially the Atlanta Fed is highlighting the orange line as a “better cyclical indicator.”
Is it? There’s no doubt that wage growth among job switches declined first in the last two expansions. But I would want to see a much longer record before being that confident.
Because what I see in the above graph is a decline among job keepers (the green line) that is only matched by those declines presaging the onset of the last two recessions. Meanwhile the orange line, while still rising, has flattened.
In fact I think the Atlanta Fed’s graph mainly shows evidence of what I highlighted last week as an emerging “taboo” against raising wages — i.e., a stubborn refusal to raise wages even if it would lead to even higher output and gross profits for a net gain.
Once again the JOLTS data gives us a good proxy.  If wage growth is increasing at a “normal” rate compared with previous expansions, there shouldn’t be an inordinate need to change jobs in order to get a raise, i.e., a rate higher than previous expansions. Thus the ratio of job changers who quit vs. the number of actual hires should be equivalent to similar stages in those expansions. If, on the other hand, employers have become inordinately stingy, quitting is almost essential to get ahead, in which case the ratio of quits to hires should be higher than normal.
Here is what the data shows:
For the last several years, Quits have been in the range of 58%-60% of hires, the highest since 2001, and specifically higher than the 56%-58% peak of the last expansion.
In other words, it looks like what the Atlanta Fed’s graph is showing is that employees are reacting to the taboo against raising wages by quitting their jobs and moving to employers in fields that are already paying more.

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Is the US economy booming? April 2018 update

Is the US economy booming? April 2018 update

Back in January, I asked if the economy was “booming.” There’s no official definition, but based on my recollection of the two periods I have lived through that felt like booms, the1960s and late 1990s, the two times in my life that the feel of an economic boom was palpable, I answered in the negative. I considered a number of indicators of well-being, to see what stood out in those two periods, and concluded that

The five markers of an economic Boom are the following:

1. An unemployment rate under 4.5%
2. YoY industrial production growth of at least 4%
3. YoY real wage growth of at least 1%
4. YoY real aggregate wage growth of at least 4%
5. Increasing YoY inflation.

In January, only the first and last markers were present. Let’s update now that the first quarter iv over.

Unemployment rate under 4.5%

This remains at 4.1%

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February 2018 JOLTS report: positive trend revised away

February 2018 JOLTS report: positive trend revised away

Last month I wrote that the January JOLTS report reflected very positive trends. Today they got revised away.

As a refresher, unlike the jobs report, which tabulates the net gain or loss of hiring over firing, the JOLTS report breaks the labor market down into openings, hirings, firings, quits, and total separations.

I pay little attention to “job openings,” which can simply reflect that companies trolling for resumes, or looking for the perfect, cheap candidate, and concentrate on the hard data of hiring, firing, quits and layoffs.

The first important relationship in the data is that historically, hiring leads firing.  While the one big shortcoming of this report is that it has only covered one full business cycle, during that time hires have peaked and troughed before separations.

And here, there has been an important revision.  Here is the historical relationship on a quarterly basis between hiring (red) and total separations (blue) as it existed through the end of the third quarter of 2017:

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A thought for Sunday: The Abyss always looks back, Presidential polling edition

A thought for Sunday: The Abyss always looks back, Presidential polling edition

A point I have made about economic forecasting a number of times is that one can be an excellent forecaster, so long as one is a bug on the wall. Once a significant number of people begin to follow *and act upon* the forecast, to that extent it must necessarily lose validity.

Take for example the yield curve, much in the news this year. So long as everyone ignores or excuses a yield curve inversion, it is an excellent indicator for the period of 12-24 months ahead. But if everyone *acted* on a yield curve inversion, by, e.g., canceling investments or increasing savings, it would turn into a botched “nowcast” instead. That which people might have started doing a year later, they would be doing now, when the conditions don’t yet necessitate it.

Simply put, people will act upon forecasts. The more previously reliable or certain the forecast, the more people will act on it — and thereby change the result.

This past week’s publication of former FBI Director James Comey’s book shows how the same principle applies to Presidential election polling.  Here’s the passage that has been getting a lot of scrutiny:

It is entirely possible that, because I was making decisions in an environment where Hillary Clinton was sure to be the next president, my concern about making her an illegitimate president by concealing the restarted investigation bore greater weight than it would have it the election appeared closer or if Donald Trump were ahead in all polls.

Leave aside for now that it was not for Comey to decide whether or not Clinton would be “an illegitimate president” — that’s what we have criminal juries and Impeachment for —  or that he simultaneously withheld from voters that Trump’s campaign was *also* under investigation at the time. The fact is that he was led by polling and poll aggregators who claimed that a Clinton victory was a near certainty to take an action that he probably would not otherwise have done.  And that action caused a near-immediate decline in Clinton’s poll numbers by about 4%, while early voting was actually going on in many states. All because Comey knew that Clinton’s election was “in the bag.”

In a similar vein, why was Barack Obama so passive in the face of the intelligence community telling him that Russia was trying to intervene in the election by, e.g., planting “fake news” stories? He was President. He did not need Mitch McConnell’s permission to address the nation in as non-partisan a fashion as possible. He didn’t act because he knew that Clinton’s election was “in the bag.” Isn’t that what Biden was sent to Europe to reassure all of our allies about?

There’s also been some detailed analysis indicating that there were enough Sanders to Jill Stein voters in Michigan, Wisconsin, and Pennsylvania to swing the outcomes in those States and thereby alter the election outcome. I think it’s a near certainty that these people felt comfortable casting such protest votes because they knew that Clinton’s election was “in the bag.”

To paraphrase the title of this post: when you look into the Future, the Future always looks back.

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Is raising wages becoming a taboo?

(Dan here…I have highlighted NDd’s conclusion. This is a long post but worth thinking about…)

So in conclusion, while I have no doubt that the “monopsony” argument is measuring something real, I am more and more inclined to believe that raising wages is simply becoming an ideological taboo among businesses, a higher priority than maximizing net profits after costs.

 

by New Deal democrat

Is raising wages becoming a taboo?

Yesterday I noted that, while the problem of lower labor market participation among the working age population hasn’t *entirely* resolved, it is getting close to resolving due to the surge in entry into the jobs market in the last two years. As the graph below shows, not only has the prime age population grown by about 2 million in the last 2.5 years (blue), but nearly an additional 2 million (1.5% of 125 million) have entered the labor force (red):
But,while in accord with the last two expansions, nominal wage growth bottomed out once the U6 underemployment rate fell to roughly 9%, for nonsupervisory workers, it has languished at about 2.5%:
This is less than the roughly 4.5% peaks in the past 3 expansions.
Why?
MONOPONY VS. SKITTISHNESS VS. TABOO
One explanation is in the first graph above itself. All else being equal, even accounting for population growth, there are 2,000,000 more candidates for jobs in the prime age labor force than there were 30 months ago. More competition for jobs should act to hold down compensation.
But recently another explanation has been written about at length: monopsony in the labor market. In more plain english, this is a monopoly or at least oligopoly on the demand side for labor. Increased market power to hold down wages, it is argued, is having that exact effect:

[I]n recent years, economists have discovered another source: the growth of the labor market power of employers — namely, their power to dictate, and hence suppress, wages…..[I]n many areas of rural America, [where] large-scale employers that dominate their local economies[, w]orkers can either choose to take the jobs on offer or incur the turmoil of moving elsewhere. Companies can and do take advantage of this leverage.

Yet another source of labor market power are so-called noncompete agreements …. These agreements prohibit workers who leave a job from working for a competitor of their former employer.

Almost a quarter of all workers report that their current employer or a former employer forced them to sign a noncompete clause…..[S]tudies have found that employer concentration has been increasing over time and that this concentration is associated with lower wages across labor markets.

….{Monopsonistic f]irms [which pay less than “competitive” wages] bear the loss in workers (and resulting lowered sales)  in exchange for the higher profits made off the workers who do not quit.

While the evidence appears compelling that employer market power is having *an* effect of holding down wages, I am not sure at all that it is the *primary* driver of low wages.
At least two other explanations for employers refusing to raise wages come to mind:
  1.  employer skittishness about the durability of a strong economy.
  2.  raising wages has become a taboo
Let me explain each.
Suppose I am an employer in competition with others. Suppose further, however, that I am skeptical that the current “good times” are going to last. After all, since 2000 there have only been about 4 years at most (2005-07 and 2017) where the economy has seemed to be operating at close to full throttle.  If I raise wages now, I will attract more workers, but then when the good times end, I will be stuck with a higher paid workforce than my competitors who haven’t raised wages. If I think that “bad times” are likely to exist more often than “good times” in the foreseeable future, then I might hold back on increasing my labor costs during the good times, leaving some additional profits on the table, because that will be more than offset by having relatively lowers costs during the bad times.
By an economic taboo, I mean a decision to leave profits on the table because they conflict with an even higher priority held by the employer (e.g., I refuse to higher a clearly more qualified black job applicant because I am a racist). Let’s suppose that I am an employer who *does* believe that the good times are likely to last, BUT I also believe that people who come to work for me ought to be grateful to earn, say $10 per hour, and because of my firm ideological belief, I am not going to budge. If I am alone in my ideological belief, I will suffer. But if my ideological belief is shared on a widespread basis by my competitors and other businesses, I am *not* at a competitive disadvantage. Thus depressed wages may persist because raising wages has become a taboo.
USING THE JOLTS SURVEY TO DISCRIMINATE AMONG THE HYPOTHESES
So, how can we tell if the primary driver of employer decisions not to raise wages is monopsony, skittishness, or taboo?
The JOLTS survey appears to give us a good look at the likely answer. JOLTS measures job openings, actual hires, and quits, among other things. Let me show you how.
To begin with, if skittishness about the durability of a strong economy is the primary driver of lower wages, I would not expect those employers to even go looking for new employees to hire at higher wages. In other words, there wouldn’t be an elevated number of job openings compared with actual hires, because skittish employers simply aren’t in the market.
On the other hand, both in the cases of monopsony power and taboo, I *would* expect to see elevated job openings, as in either case those employers *do* want to hire new workers — they just want to hire those workers at what they define as their “fair” price, And that is exactly what we see in the JOLTS data during this expansion compared with the last one:
That is pretty compelling evidence that it is not economic skittishness that is driving low wage growth.
Minneapolis Fed President Neel Kashkari appears to agree:

“Almost everywhere I go, businesses tell me they can’t find workers. I always ask them the same question: ‘Are you raising wages?’ Usually, the answer is ‘no.’ When you want more of something but won’t pay for it, that’s called ‘whining,’” he told the ninth Regional Economic Indicators Forum (REIF), founded and co-sponsored by National Bank of Commerce.  “Until you’re paying more, I know you’re not serious.”

So, how can we decide between the other two hypotheses? The Wall Street Journal (via Fundera) seems to think that smaller firms are offering bigger wage inducements:

The WSJ says small businesses across the country are increasing their wages at a faster rate than medium-size or even large firms. All industries with businesses made  up of 49 or fewer employees saw a pay bump of just over 1%.

But the evidence is anecdotal, not hard data.
 Again, the JOLTS survey seems to provide an answer in two parts.
First, as mentioned in the monopsony piece above, such firms should have “higher profits made off the workers who do not quit.”
So let’s look at the “Quits rate” in the JOLTS survey:
Workers are quitting their jobs at virtually the same rate in this expansion as during the last one, during which wage growth was higher. There simply isn’t a bigger pool of “workers who do not quit.”
A second thing we ought to find, if monopsony is the primary driver of low wage growth, is that  bigger firms with market power ought to have unfilled job openings at a much higher rate than firms in small, more competitive labor markets. This is backed up by a scientific study:

[I[n a competitive labor market, such “shortages” [of hiring compared with job openings as measured in the JOLTS report] should dissipate as employers competitively bid up wages to fill their vacancies. But counter to this prediction, Rothstein (2015) finds no evidence that wages have grown faster in sectors with rising job openings. Instead, the failure of hiring and wage growth to keep pace with the rise in job openings is consistent with the incentives faced by firms in an imperfectly competitive labor market; it suggests that companies have a strong interest in hiring workers at their offered wages, but have resisted bidding up wages in order to expand their workforces (Abraham 2015).

As it happens, we are able to able to infer a comparison in Rothstein’s metric between large and small firms.
Above I showed job openings (blue) vs. actual hires (red) in the JOLTS survey. The National Federation of Small Business conducts a similar survey among its members. Here are their graphs of job openings and actual hiring from their most recent report:
Small business owners clearly started singing “Happy Days are Here Again” on the day after the 2016 Presidential election.  And their job openings soared.
But their actual hires didn’t. They are adding jobs at the same level as they did in 2014 and 2015. They are behaving as if they have a taboo against raising wages.
So in conclusion, while I have no doubt that the “monopsony” argument is measuring something real, I am more and more inclined to believe that raising wages is simply becoming an ideological taboo among businesses, a higher priority than maximizing net profits after costs.

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March jobs report: surprisingly weak

March jobs report: surprisingly weak

HEADLINES:
  • +103,000 jobs added
  • U3 unemployment rate unchanged at 4.1%
  • U6 underemployment rate fell -0.2% from 8.2% to 8.0%
Here are the headlines on wages and the chronic heightened underemployment:
Wages and participation rates
  • Not in Labor Force, but Want a Job Now: fell -35,000 from 5.131 million to 5.096 million
  • Part time for economic reasons: fell -141,000 from 5.160 million to 5.019 million
  • Employment/population ratio ages 25-54: fell -0.1% from 79.3% to 79.2%
  • Average Weekly Earnings for Production and Nonsupervisory Personnel: rose $.04 from  $22.38 to $22.42, up +2.4% 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.)
Holding Trump accountable on manufacturing and mining jobs

 Trump specifically campaigned on bringing back manufacturing and mining jobs.  Is he keeping this promise?  
  • Manufacturing jobs rose 22,000 for an average of +19,000/month in the past year vs. the last seven years of Obama’s presidency in which an average of 10,300 manufacturing jobs were added each month.
  • Coal mining jobs were unchanged for an average of +75/month vs. the last seven years of Obama’s presidency in which an average of -300 jobs were lost each month

January was revised downward by -63,000. February was revised upward by +13,000, for a net change of -50,000.

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A thought for Sunday: 2018 arctic ice cover

A thought for Sunday: 2018 arctic ice cover

The National Snow and Ice Data Center reports that the peak in arctic ice cover this winter was the second lowest on record, just slightly above that of one year ago. The three next lowest peaks were in the three years just prior:
All of these are something like three standard deviations below the norm from 1980-2010.
The biggest abnormality this winter was that the Bering Sea between Alaska and Siberia did not freeze until very late. This encouraged the formation of persistent low pressure over the area, sending the jet stream high into the arctic from the Pacific for most of the season. And since what goes up must come down, that it did east of the Rockies
Since this is a US government web site, I am surprised that it is still available.

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A note on personal income and spending

A note on personal income and spending

Personal income and spending data from February intimates a weak Q1 GDP report, but doesn’t suggest any imminent downturn.
The first graph below compares real personal spending with real retail sales:
Real retail sales have pulled back from their autumn surge, and real personal spending has also declined slightly from its last peak in December. But we’ve had similar small drawbacks before, as in early 2012 and early 2014 without it portending anything horrible.

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