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Real average and aggregate wages improved in June

Real average and aggregate wages improved in June

Now that we have the June inflation reading, let’s finish out our week focusing on the labor market.

First of all, nominal average hourly wages in June increased +0.2%, while consumer prices increased +0.1%, meaning real average hourly wages for non-managerial personnel increased +0.1%. Together with upward revisions to prior months, this brings real wages up to 97.2% of their all time high in January 1973:

On a YoY basis, real average wages were up +1.6%:

On that score, this morning’s readings include this take by Prof. James Hamilton at Econbrowser indicating that the Phillips curve (the trade-off between inflation and employment) is still alive, together with this guest post by David Branchflower at Talking Points Memo on Jerome Powell’s acknowledgement that the Fed (and many others) failed to appreciate that we were not at full employment in 2016 as they began to raise rates, and stating that the evidence

shows that, now, wage growth is driven not by unemployment but by underemployment, which has still not returned to pre-recession levels. That explains the weak wage growth we see today, and why the U.S. is not yet at full employment.

This has been my point of view as well, and it gives me the opportunity to run a graph I haven’t updated in quite awhile – average hourly wages of non-managerial workers (minus 2.5% for easier observation] vs. the U6 underemployment rate [subtracted from 10% so that lower rates show as positives]. This shows that, following recent recessions, underemployment has had to fall below 10% before wage growth stops decelerating:

Last month I raised a concern that real aggregate wages had decelerated sharply this year, writing that “[w]hen we take the information in the above graph and chart the YoY% change, we see that real aggregate wage growth has typically decelerated by 1/2 or more from its 12 month peak just at the onset of recessions, although there have been 3 false positives coincident with slowdowns.” Well, with June’s revisions that concern has disappeared for now:

Finally, with the improvement in June, real aggregate wages – the total amount of real pay taken home by the middle and working classes – are up 29.2% from their October 2009 low:

For total wage growth, this expansion is solidly in third place, but behind the 1960s and 1990s, among all post-World War 2 expansions; while the *pace* of wage growth has been the slowest except for the 2000s expansion.

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May JOLTS report is weak, consistent with last month’s weak jobs report

May JOLTS report is weak, consistent with last month’s weak jobs report

The jobs report one month ago was poor, so as expected the JOLTS report for May, released this morning, followed suit.

To review, because this series is only 20 years old, we only have one full business cycle to compare. During the 2000s expansion:

  • Hires peaked first, from December 2004 through September 2005
  • Quits peaked next, in September 2005
  • Layoffs and Discharges peaked next, from October 2005 through September 2006
  • Openings peaked last, in April 2007

As shown in the below graph (normed to 100 as of May 2018):

As shown above, in today’s report, all of the above series, as well as job openings, declined month over month. Additionally, the only series that were higher compared with one year ago were job openings (+2.8% but significantly off its November 2018 high) and quits (+2.5%)

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Scenes from the June employment report

Scenes from the June employment report

As I (and everyone else) wrote on Friday, the establishment portion of the June jobs report was very good.

On closer examination, though, the leading components of the report continued to show some weakness.

To begin with, for months I’ve been following manufacturing, residential construction, and temporary employment as the leading sectors. As the below graph of the past 18 months shows, all were positive in June:

But if you compare each bar (blue, red, green), you see that two of the three sectors nevertheless came in considerably lower for June with the average in that sector from 2018 (17k vs. 21K, 4.6k vs. 4.3k, 4.3k vs. 6k, respectively).

 

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June jobs report: excellent establishment survey, mediocre household survey

June jobs report: excellent establishment survey, mediocre household survey

HEADLINES:

  • +224,000 jobs added
  • U3 unemployment rate rose 0.1% from 3.6% to 3.7%
  • U6 underemployment rate rose 0.1% from 7.1% to 7.2%

Leading employment indicators of a slowdown or recession

 

I am highlighting these because many leading indicators overall strongly suggest that an employment slowdown is coming. The following more leading numbers in the report tell us about where the economy is likely to be a few months from now. These were all positive this month.

  • the average manufacturing workweek rose 0.1 from 40.6 hours to 40.7 hours. This is one of the 10 components of the LEI.
  • Manufacturing jobs rose by 17,000. YoY manufacturing is up 167,000, a deceleration from last summer’s pace.
  • construction jobs rose by 21,000. YoY construction jobs are up 204,000, also a deceleration from last summer. Residential construction jobs, which are even more leading, rose by 4600, the first monthly decline in the past three.
  • temporary jobs rose by 4300.
  • the number of people unemployed for 5 weeks or less declined by -186,000 from 2,147,000 to 1,961,000. The post-recession low was two months ago.

Wages and participation rates

Here are the headlines on wages and the broader measures of underemployment:

  • Not in Labor Force, but Want a Job Now: rose by 227,000 from 5.045 million to 5.322 million
  • Part time for economic reasons: declined by -8,000 from 4.355 million to 4.347 million
  • Employment/population ratio ages 25-54: unchanged at 79.7%. This remains a declined from the peak at the beginning of this year.
  • Average Hourly Earnings for Production and Nonsupervisory Personnel: rose $.04 from  $23.39 to $23.43, up +3.3% YoY. This is still a slight decline from the recent YoY% change peak.  (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?  

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On Gerrymandering: “The United States shall guarantee to every State in this Union a Republican Form of Government”

On Gerrymandering: “The United States shall guarantee to every State in this Union a Republican Form of Government”

Previously I have written that the Fourteenth Amendment specifically provides for a reduction in representation for any state that engages in voter suppression.

Section Two of the Fourteenth Amendment provides in part:

“[W]hen the right to vote at any election … is denied to any … citizens of the United States, or in any way abridged, except for participation in rebellion, or other crime, the basis of representation therein shall be reduced in the proportion [thereto]….”

In view of the GOP Supreme Court majority deciding that partisan gerrymandering is a “political question” beyond the purview of the courts, I want to take this matter further. Because if the Congress is willing to play hardball, it has a remedy.

Article 4, Section 4 of the US Constitution provides:

“The United States shall guarantee to every State in this Union a Republican Form of Government.”

Importantly, In Luther v. Borden (1849), the Supreme Court established the doctrine that questions arising under this section are political, not judicial, in character and that “it rests with Congress to decide what government is the established one in a State . . . as well as its republican character.”

In other words, it has already been established that what the guarantee of a “republican form of government is” is not for the Federal Courts, but for the Congress and the President to determine.

Do States have a “republican form of government” if a minority of the people are able to entrench themselves as a permanent legislative majority based on the outcome of just one election? Now that the Supreme Court has said that the Courts may not act, I think Congress has every right to declare that this is the case, both at the state and federal election levels, and to refuse to seat anybody winning such elections.

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In which I nitpick Prof. Jared Bernstein about a consumer “economic tailwind

In which I nitpick Prof. Jared Bernstein about a consumer “economic tailwind

Last Friday, following the release of May’s personal income and spending report, Prof. Jared Bernstein, whom I follow religiously, wrote among other things about some economic headwinds and tailwinds, including the following:

Finally, my personal favorite tailwind indicator [pointing to the below graph]: the close tracking between aggregate real earnings and consumer spending. The good news is they’re both clearly in expansion territory. The bad news is that they can both downshift within a few quarters:

Although he labels them differently, the first is one of my favorites as well: real aggregate payrolls of production and non-supervisory employees. The second is real personal consumption expenditures.

 

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As we start the second half of 2019 . . . (Updated: manufacturing almost exactly flat in June)

As we start the second half of 2019 . . . (Updated: manufacturing almost exactly flat in June)

First of all, I forgot to post a link to my post at Seeking Alpha on how a near-term recession is not likely to be centered on either the consumer and financial sectors of the economy, which are doing OK at the moment, but the producer sector – manufacturing – which is getting pretty shaky. We’ll find out more later this morning when ISM manufacturing for June gets reported.

As usual, clicking over and reading puts a penny or two in my pocket to reward me for my efforts.

Now that we are in the second half of the year, I expect the slowdown that we’ve seen over the past few months to become more entrenched. I remain on “recession watch” because risks are elevated (see, for example, this post by Menzie Chinn), but despite the inverted yield curve, my base case remains slowdown only because the Fed can lower rates substantially without being worried about inflation. The main wild card is that Trump probably simply cannot control his urge to roil producers with chaotic tariff and trade policies.

UPDATE: The ISM manufacturing index remained slightly positive in June, at 51.7. The leading new orders subindex was precisely flat, at 50.0:

There is no manufacturing recession. There is the barest of manufacturing expansion.

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The consumer is alright

The consumer is alright

One of my big themes this year is that low gas prices can hide a multitude of economic sins. This morning’s data on personal income and spending confirms that the consumer side of the economic ledger is doing OK.

Nominal personal income rose +0.4%, and nominal personal spending rose +0.5%. After adjusting for inflation, the numbers are +0.3% and +0.2%, respectively. As a result, the positive trends for both continue:

On a YoY basis, we can see that spending slightly leads income (similarly point to the way consumption leads employment, not the other way around), and is also more volatile:

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Initial jobless claims: positive this week, but close to crossing two thresholds for concern

Initial jobless claims: positive this week, but close to crossing two thresholds for concern

I have started to monitor initial jobless claims to see if there are any signs of stress.

My two thresholds are:

1. If the four week average on claims is more than 10% above its expansion low.
2. If the YoY% change in the monthly average turns higher.

Here’s this week’s update.

The four week average is 9.8% above its recent low:

On a weekly basis, YoY the average is +0.3% higher than this week last June.

Last June the monthly average was 222,000. With one week still to go this June, it is 221,250:

 

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Manufacturing job losses now look virtually certain

Manufacturing job losses now look virtually certain

I’ll have a post going up at Seeking Alpha later, but between a steep decline in the manufacturing work week, lackluster regional Fed manufacturing indexes (still barely positive), a turndown in durable goods orders (in part due to Boeing’s woes), and increasing inventories, it now looks nearly certain that there will be an actual decline in manufacturing jobs over the next twelve months.
To put this in perspective, here are the annual gains (losses in 2010) in manufacturing jobs through the end of 2018:

Here is the same data monthly through May from the beginning of Obama’s second term:

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