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

San Francisco Fed: ease of finding a new job is driving improved labor force participation

San Francisco Fed: ease of finding a new job is driving improved labor force participation

This is a surprising result that is worth noting: the San Francisco Fed found that the increase in prime age labor force participation in the past five years has not been due to new people being drawn into the labor force, but rather by a very large decrease in people leaving it:

[Note: keep in mind that prior to the early 1990s, both inflows and outflows are increasing due to the secular trend of women entering the workforce.]

Why is this surprising? Because you would think that increased wages would draw people on the sidelines into the workforce. This is something I’ve looked at a few times in the past several years, and the pattern has been clear:

1. The unemployment rate declines

2. Once the unemployment rate declines enough, the decline in labor force participation decelerates, but nevertheless continues.

3. Average hourly wage growth starts to improve.

4. Labor force participation starts to increase.

Here’s a graph showing this relationship since 1994:

Comments (8) | |

A comment about the economy and the 2020 election

A comment about the economy and the 2020 election

Recently I’ve seen a bunch of takes to the effect that “the economy is doing great, and therefore it is likely that Donald Trump will be re-elected.” In my opinion that fear is overblown for three important reasons.

The first, least noteworthy reason, is that there is still a lot of time between now and the election. As I noted Monday, many – but not all – models of the economy indicate that a recession is likely between now and then, for reasons having nothing to do with the age of the expansion. Needless to say, a recession in 2020 would not bode well for either Trump or the GOP.

Secondly, consider what economic interventions Trump and the GOP have made since they inherited the economy from Obama. There have been three:

1. They passed a tax cut that lopsidedly favored the wealthy and corporations, that has generated zero acclaim from the middle and working classes – and with the decrease in tax refunds, may have generated net negative feelings.

2. Trump has started several trade wars that are proving unpopular, partly because they mainly have hurt portions of his own base, partly because they are  resulting in net higher prices to consumers that may be getting noticed, and partly because negatively affected businesses may start laying off workers.

3. Trump is held responsible for the government shutdown that resulted in a mini-recession.

In short, it’s not clear to say the least that the public at large would give Trump credit for an economy that he mainly inherited from Obama and as to which his known interventions have been received negatively.

Finally, and most notably, the example of the Bush vs. Gore 2000 election strongly cuts against Trump. As I wrote in 2016, all of the fundamentals-based election models, such as the “bread and peace” model, or models based on the unemployment rate or on consumer income and spending, indicated that Gore should have won by nearly a landslide, on the order of 55%-45%, as shown in the graph below:

Instead, Gore won the popular vote by only 0.5%, despite being able to run on both peace and prosperity – the biggest outlier of the entire series going back to 1952.

Two big factors held Gore back: first, the economic expansion had gone on for nearly 10 years, and at some point the public takes it for granted, or in other words, “so what have you done for me lately?” Second, as his Vice President, Gore was stained by Bill Clinton’s slimy personal life.

Both of the factors that worked against Gore in 2000 are likely to work against Trump in 2020: if the economy remains in expansion, the public will probably take it for granted; and Trump’s pervasive sliminess, both public and private, will work against him. In short, Trump is likely to underperform compared with the fundamentals even more than did Gore.

While the example of 2016 certainly means that the 2020 election is another “all hands on deck” moment for Democrats, and nothing should be taken for granted, even if the economy remains in expansion as it is now I do not think that means Trump wins the election.

Comments (12) | |

Twelve Big Picture bullet points on the economy

Twelve Big Picture bullet points on the economy

It’s a really slow week for economic data. Really the only important report is new home sales, which will be released Thursday.

I’ve been working on a few things, but they are really information-dense and time-consuming to organize, and because they deal with how long leading indicators interact with one another, I’ll probably post them on Seeking Alpha.

So in the meantime, let me give you a few hopefully pithy Big Picture observations.

1. Virtually every economic model that relies upon the yield curve is forecasting recession to happen sometime in 2020.

2. The few economic models that don’t rely upon the yield curve suggest a recession *could* happen later this year.

3. If we use a “fundamentals” based model that doesn’t rely on financial conditions like interest rates (“real” corporate profits, housing, and cars), the important data is deteriorating, but not enough at this point to forecast recession vs. slowdown.

4. All of these models seem to have a shortcoming in that they rely too heavily on monetary and interest rate policy, and do not adequately account for fiscal policy, like stimulus. Thus all of them “forecast” a recession in 1966-67 that didn’t happen!

5. The reason no recession happened in 1966-67 was LBJ’s “guns and butter” fiscal policy of Vietnam War military spending + domestic Great Society spending, which increased the budget deficit by 500% (!) and helped keep industrial production from declining.

6. The stimulus passed by the Congress at the end of 2016 is much smaller, amounting to only a 50% increase in the deficit. It is also much smaller than either Reagan’s or W’s tax cut stimulus.

7. In any event, the stimulative effect is estimated to end by the end of this year.

8. Contrarily, Trump’s tariffs amount to large, regressive sales tax increases.

9. Which means that, if things don’t change, by next year fiscal policy will be a net drag on the economy.

10. The question remains whether the positive effect of lower mortgage rates can overcome that drag, and the drag of higher short term interest rates.

11. In the meantime, every metric I use indicates that job gains are set to decrease substantially starting more or less right now. The UCLA forecast puts this figure at about 160,000 a month for this year.

12. Needless to say, if a recession happens by the end of 2020, especially if Trump’s tariffs play an important role, fundamentals-based Presidential election models do not bode well for Trump or the GOP.

Comments (0) | |

Nancy Pelosi is an able tactician, but a poor strategist. She will not save the Republic

Nancy Pelosi is an able tactician, but a poor strategist. She will not save the Republic

A couple of years ago I read Andrew Roberts’ tome on Napoleon. As a schoolboy, Napoleon voraciously inhaled everything he could read about military conflict, including several then-recent books suggesting novel tactics. As a young general, he implemented those tactics to brilliant effect, winning almost every big battle he fought.

But if he was a masterful tactician, he was a so-so strategist. His strategy essentially consisted of:

1. Invade neighbor’s country.
2. Win all the big battles.
3. Occupy his capital.
4. Accept large indemnities, and territorial and political concessions, in return for going home.

By the time he got to the last big continental power, Russia, Tsar Alexander and his generals had thoroughly analyzed Napoleon’s style. So they employed a colossal, masterful rope-a-dope strategy in which they retreated after every battle was started, denying him his decisive big victories while drawing him ever deeper into Russia’s heartland – ultimately 1000 miles. The tsar even allowed him to occupy Russia’s “old capital” of Moscow, and set it afire so that Napoleon could not use it to provision him during the winter. Then he simply ignored Napoleon’s entreaties to negotiate step #4. By the time Napoleon realized the tsar was simply going to refuse to capitulate, it was too late, and Napoleon lost over half a million men in the ensuing retreat through the brutal winter back to his nearest supply lines in Poland. Napoleon was fatally wounded, and Tsar Alexander’s men harried his retreat all the way back across Europe. Three years later, Russian troops occupied Paris.

Okay, so I’m not tarring Nancy Pelosi as making Napoleonic mistakes. But there is a comparison, because while Pelosi is a very able tactician, her excessive caution makes her a poor strategist.

Take the government shutdown. Common wisdom is, Pelosi won that battle. But look what was “accomplished:” in return for a government shutdown for about 45 days, with 800,000 federal workers furloughed without pay, causing an actual downturn in economic activity I’ve called a “mini-recession”:

Comments (14) | |

Consumer credit: both producer and consumer sides of the ledger show mortgage market OK, increasing stress for other loans

Consumer credit: both producer and consumer sides of the ledger show mortgage market OK, increasing stress for other loans

The New York Fed reported on household debt and credit.

The good news is that there has been no increase in total delinquencies:

This is important because the amount of delinquencies would be expected to increase if we were close to getting into a recession.

Comments (1) | |

We are probably close (~500,000) to “full employment

We are probably close (~500,000) to “full employment”

From time to time over the past few years I have tried to estimate how far we were from “full employment,” by which I meant the average levels of the best year in each of the past two expansions. I also estimated how long it would take to get there given the then-current monthly gains in employment.

For example, two years ago I estimated that we needed to add another 2.5 million people, or 1.5% of the labor force, to the employment rolls in order to be at “full employment.” Last August, I updated the figure to a shortfall of about 0.8%, and estimated that, if employment trends held, we would get to “full employment” in about 9 to 12 months from then, which would be sometime between now and the end of summer.

Given the continuing very good jobs reports, I thought I’d take another look.

First, here is the U6 underemployment rate. This includes, most importantly, involuntary part-time workers. For us to be at full employment, this figure ought to be at its 1999-2000 and 2006-07 levels:

We have already surpassed the latter, and are only about 0.2% away from the former.


Comments (3) | |

We Already Passed a Constitutional Crisis into Presidential Autocracy

I don’t think we have entered a constitutional crisis. I think for all intents and purposes we are already past it, because of the ineffectual response to Trump’s autocratic behavior.

On February 15, he brazenly abrogated Congress’s appropriations power with this diversion of funds for his “border wall.” Presidential Proclamation on Declaring a National Emergency Concerning the Southern Border.

On March 15, he vetoed Congress’s downvote of that emergency. Trump Issues First Veto After Congress Rejects Border Emergency.

On March 26, the House failed to override Trump’s veto: House fails to override Trump veto on Southern Border Emergency.

The House did not file suit until April 5. It requested an injunction to stop the President from acting unilaterally. SCOTUS did not “fast-track” the request for injunction. Trump responded to the House’s request last week asking the court to reject the House Lawsuit. Trump Administration Urges Judge to Reject House Lawsuit on Border Wall.

We are now three months past the emergency declaration and action to stop Trump is on the proverbial slow boat to China. By the time the Supreme Court rules, the 2020 election will probably have already passed.

So, tell me, exactly why should any President whose party controls at least 1/3 of either House of Congress simply bypass any Congressional opposition to anything by declaring states of emergency?

Future democratic Presidents might still refrain from doing so, but it is crystal clear to me that, the precedent having been set, future GOP Presidents will pursue this route at will. Such actions are what makes up an autocracy.

We also have the specter of GOP Senators openly telling a witness to ignore a subpoena issued BY ONE OF THEIR OWN PARTY’S SENATORS. Graham Tells Don Jr. To Ignore Senate Intel Subpoena: “You Don’t Need To Go.”

And, of course, Trump is simply refusing to honor any subpoena issued by the House.

Again a future democratic President might play nice; but once again the precedent having been set, future GOP Presidents will simply employ this strategy across the board.

Bottom line we are not “approaching” a crisis, we are in crisis. The precedents for future GOP Presidential autocracy have already been set and they will be followed. We are passing out of the Constitutional rule of law right now.

The burden may rest with John Roberts who cares about his legacy as Chief Justice and has shown such in previous decisions. He will have to decide whether he wants to go down in history as the Chief Justice who cast the deciding vote to de facto end the American Republic.

Comments (1) | |

Gas prices fail to ignite overall inflation in April, but real wages flat so far for 2019

Gas prices fail to ignite overall inflation in April, but real wages flat so far for 2019

The consumer price index rose +0.3% in April, just as in March mainly as a result of a big monthly increase in gas prices. This is actually a surprisingly small increase because, as I pointed out last month, almost every time gas prices have increased by as much as they did — up 9% in March and 11% for April — consumer prices as a whole have gone up at least +0.4%. I’m showing just the last 10 years in the graph below (wages in blue, gas prices in red):

Figure one

Ex-gas, consumer inflation ex-energy has been remarkably stable between 1.5% and 2.5% YoY ever since gas prices made their long term bottom in early 1999. The only big exceptions were in the year before each of the last two recessions:

Comments (0) | |

Are initial jobless claims showing a re-assertion of an underlying weak economic trend?

Are initial jobless claims showing a re-assertion of an underlying weak economic trend?

I don’t normally comment on initial jobless claims, but I’m following them with particular interest at this point. Here’s why.

Last spring the long leading indicators were still at least weakly positive. I saw growth ahead through Q1 of this year, and getting questionable in Q2. By last summer, the enough long leading indicators were down that I called for a slowdown in the economy by midsummer of this year – I.e., about 2-3 months from now.

And then … Trump’s incipient trade war, the government shutdown (the equivalent of 800,000 layoffs without pay, followed by mass-rehiring with pay about 60 days later), and an ill-timed Fed rate hike immediately after a partial inversion of the yield curve, got together and caused a mini-recession in production, sales, and income. This mini-recession spanned 1 month in Q4 of last year and the first two months of Q1 this year. So the quarterly GDP numbers for both quarters looked good, but the monthly and weekly data deteriorated sharply.

Once these distractions were over, most of the data rebounded. On top of that, Easter came very late this year, and it looks like there were some issues of unresolved seasonality.

Comments (0) | |

March JOLTS report: Hiring and discharges show signs of late cycle deceleration

March JOLTS report: Hiring and discharges show signs of late cycle deceleration

The JOLTS report on labor is noteworthy and helpful because it breaks down the jobs market into a more granular look at hiring, firing, and voluntary quits. Its drawback is that the data only goes back less than 20 years, so from the point of view of looking at the economic cycle, it has to be taken with a large dose of salt.

With that disclaimer out of the way, today’s JOLTS report for March generally showed a slight backing off from their recent best readings of this expansion.  All of the series are off their best levels, and three of the five noteworthy ones continued to decline:

  • Quits declined slightly (less than -0.1%) and are -2% off their peak of two months ago.
  • Hires declined slightly to about -4% off their October peak.
  • Total separations rose declined to about -4% off their peak in last July.
  • Job openings rose and are now down -2% from their November all time high, reversing February’s sharp decline.
  • Layoffs and Discharges declined about -5% (a good thing) and remain about 7% above their September 2016 low, although well below their levels of most of the past 18 months.

Let’s update where the report might tell us we are in the cycle.

First, below is a graph of the *rates* of hiring, quits, layoffs, and openings as a percentage of the labor force since the inception of the series (layoffs and discharges are inverted at the 3% level, so that higher readings show fewer layoffs than normal, and lower readings show more):


During the 2000s expansion:

Comments (1) | |