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

Here’s a model that didn’t pan out in 2018

Here’s a model that didn’t pan out in 2018

A little over a year ago, I proposed A simple model of interest rates and the jobs market. As I explained at the time, “during the past such era of [low interest rates in] 1930-1955 several recessions including the very bad 1938 recession occurred without a yield curve inversion, I have been looking at alternative measures.”

What I found was that “a YoY increase in the Fed funds rate equal to the YoY% change in job growth has in the past almost infallibly been correlated with a recession within roughly 12 months.”

Here’s the graph I posted of “the relationship I describe in the above paragraph over the last 60+ years:”

Another graph “subtract[ed] the YoY change in the Fed funds rate from YoY payroll growth, and subtracts a further -0.5%, showing that even when the relationship gets that close, with the exception of 2002-03 (a near recession), a recession has always followed:”

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The coming slowdown in employment

The coming slowdown in employment

Last summer I wrote a piece entitled “What the compressed yield curve means for employment.” I re-read it over the weekend, and in light of what has been going on in the bond market, I thought it was worth an update.

Let me pretty much re-quote the entire piece:

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Four times during the 1980s and 1990s the difference in the interest yield between 2 and 10 year treasury bonds got about as low as it is now [Note: i.e., August 2018] (blue in the graphs below). That occurred in 1984, 1986, 1994, and 1998.

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Over 50% of all wealth in the US is inherited not earned

Over 50% of all wealth in the US is inherited not earned

I got waylaid putting together a very detailed post about how the newly-widened Panama Canal is disrupting the internal US transportation network. When it goes up at Seeking Alpha, I’ll link to it.

In the meantime, here is something that I found a week or two ago for you to chew on. Over half of all US wealth is not earned but inherited:

Click on picture to enlarge.

According to a report summarized recently in the Washington Post, “The wealthiest 1 percent of American households own 40 percent of the country’s wealth.”

It’s likely that about 25% of all wealth in the US is inherited of the top 1%. I strongly suspect the relationship is even more egregious at the level of the top 0.1% and top 0.01%.
It’s hard to argue that the US is at all a meritocracy when the starting points are so distorted.

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… And, the 10 year treasury yield inverts

… And, the 10 year treasury yield inverts

Yesterday over at Seeking Alpha I wrote about how the Fed is boxed in. The essence of the article is that, while lower rates are good for the housing market, a fuller yield curve inversion adds to the evidence that a recession may take place first, unless the Fed completely reverses course and starts cutting interest rates very soon.

Please click on over and read the whole article. Not only should it be educational for you, but it rewards me a little for my efforts in writing about the economy.

And so what do I see when I check out interest rates this morning? This:

For the first time, the yield curve inversion has spread to the 10 year Treasury, which is yielding less than either the 6 month or even the one month Treasury bill.

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A couple of nuggets of good economic news

A couple of nuggets of good economic news

Sometimes there is almost no economic news at all. This isn’t one of those times.

Because there have been increasingly ominous signs among the long leading indicators, that have been spilling over into the short leading indicators, suddenly there are a lot of signs and portents to look at. A lot less about jobs and wages that I keep exclusively here.

So, once again I got waylaid preparing a long piece for Seeking Alpha, on how the Fed may need to *cut* rates quickly in order to avoid a recession, that may not get posted until tomorrow.

In the meantime, here are a couple of graphs to give you something to chew on.

First, I’ve noted in the last few months how wages for ordinary workers have started to take off. A few people have pointed out that it may be less due to overall tightness in the labor market and more due to statutory minimum wage increases.

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The government shutdown may have caused a mini-recession

The government shutdown may have caused a mini-recession

Aside from being a monumentally poor policy outcome, and aside from the hardship it caused nearly a million workers, the government shutdown may also have caused a general contraction in production, sales, and income, and a slowdown in employment, that if it were longer would qualify as a recession.

Because the affected three months straddle Q4 2018 and Q1 2019, both quarters will likely show positive real GDP growth, it won’t be a recession. Let’s call it a mini-recession.

Although shorthand for a recession is two quarters of GDP contraction, that wasn’t the case for 2001, and the NBER has indicated that a general downturn in production, employment, sales, and income are the crucial criteria. So let’s look at each.

Industrial production declined significantly in December, and the small rebound in January was not enough to overcome that downturn. This is especially true of the manufacturing component:

 

The same is also true of real retail sales:

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Preventing Presidential autocracy: thoughts on reining in Executive power

Preventing Presidential autocracy: thoughts on reining in Executive power

Matt Yglesias posted a jarring tweet this past week when he wrote:

He elaborated by linking to a long-form article he wrote four years ago, explaining his position, where in relevant part, he wrote:

America’s constitutional democracy is going to collapse.

Some day … there is going to be a collapse of the legal and political order and its replacement by something else. If we’re lucky, it won’t be violent. If we’re very lucky, it will lead us to tackle the underlying problems and result in a better, more robust, political system. If we’re less lucky, well, then, something worse will happen.

….

In a 1990 essay, the late Yale political scientist Juan Linz observed that “aside from the United States, only Chile has managed a century and a half of relatively undisturbed constitutional continuity under presidential government — but Chilean democracy broke down in the 1970s.”

Yglesias — and Linz — saved me a lot of work. Because I had long ago heard that the US was the only Presidential democracy that hadn’t succumbed to autocratic rule. That was precisely Linz’s finding. At this point the only other democracies that I know of that come close are Costa Rica (since the last coup of 1948) and the Fourth and Fifth French Republics (since 1945).

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Leading scenes from the February jobs report

Leading scenes from the February jobs report

Let me catch up with some details from last Friday’s employment report.

As a preliminary matter, the overwhelming take was that the poor +20,000 gain was “nothing to see here, just an outlier.” The problem with that take is that, for all of 2018, the average monthly gain in jobs was just over +200,000 a month. January came in more than 100,000 above that, at +311,000 jobs, and yet I don’t recall anyone taking the same position, that it was just an “outlier” to the positive side then! Here’s a graph, from which the 2018 average of 204,500 monthly jobs gain has been subtracted, so that the variance from that average shows as positive or negative:

So, yes, it’s true that February was a bigger outlier, to the downside, than January was, to the upside, but both were outliers. If you average the two months together, you get +165,500 jobs per month, a significant downdraft from the 2018 average.

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Real wage growth continued to improve in February

Real wage growth continued to improve in February

  

Now that we have February’s CPI (up +0.2%), let’s update nominal and real wage growth.

First, here is a graph of nominal wage growth YoY vs. consumer inflation YoY since the beginning of this expansion almost 10 years ago:

First of all, why do I bother with nominal wages? Because employers don’t give out inflation-adjusted salary and wage increases. If they give you a 3% raise, it’s a 3% raise regardless of what happens to inflation. And the long term picture is that nominal wage growth decelerates coming out of recessions until unemployment (or, more likely, underemployment) falls to the point where employees gain a little bargaining power:

 

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Negative Nov. and Dec. revisions overwhelm positive January retail sales

Negative Nov. and Dec. revisions overwhelm positive January retail sales

The initial spin on this morning’s delayed retail sales report for January has been positive, with for example the Wall Street Journal calling it a “rebound” and “a sign of solid economic momentum in the first quarter.

Ummmmm, No.

Both nominally and in real terms, retails sales did improve by +0.2% in January over December.

The problem is, both November and December were revised downward. In particular, December’s initially reported poor -1.2% showing got even worse, to -1.6% nominally. In other words, for the two months combined, retail sales even measured nominally declined by -0.2%.

Here’s what they look like in real terms through January:

Because real retail sales tend to lead employment (red in the graph below) with a variable lag on the order of 6-9 months, this downturn in retail sales is more evidence that February’s poor employment report should not simply be dismissed as an outlier:

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