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

Real income growth trends

Making comparisons over time of how real income grows is a difficult proposition with many data problems. One recent study was able to show how a current family’s income when they were in their thirties compared to the income of the same individuals parents when the parents were in their thirties. This type of intergenerational income comparisons is very unusual and can be used to show how much of income mobility is due to family or inherited factors and how much of mobility is due to general mobility in the economy. The findings of this study were generally in line with other studies that show family is a very important factor in driving income mobility and that in general economic mobility does not appear to have changed much in recent years.

But that is not what I want to focus on. Rather I want to focus on a couple of points that this study did not emphasize. One is the changing nature of income growth and where family income comes from. The first point is how real income of males and females and shown very different trends in recent decades. Since the 1970s the real income of males has been flat to down while the real income of females has risen significantly. However, it is still less then the real income of a male.

This trend of flat male incomes and rising female income has combined with a major shift in female employment. When you combine this with the major shift in the share of wifes working it becomes obvious that a major driving force behind the growth in family income shown in the first chart has been the growth in two income families.

The fundamental question is why has it become much more difficult for a current family to achieve rising family incomes then it was for the previous generation. Obviously, the dominant long term factor driving this trend is the sharp slowing of productivity growth since the 1970s.
Even though productivity growth rebounded in the 1990s, the long term trend is still much lower then it was in the 1950 to 1980 era.

But the overall slowdown in the growth of family income has been significant, from a trend growth rate of 2.3% to a trend of 1.3%. If the old trend had continued real family income
would now be 50% higher.

The other point that the chart demonstrates is that the growth in real family income has become much more cyclical in recent times. In the 1950-75 era, cyclical weakness in real income growth was minor and quickly reversed. But since 1975 the cyclical weakness in family income has been much more severe and prolonged. Moreover, the pronounced change in the cyclical pattern raises questions that the weaker trend since the late 1970s may be due to other factors on top on weak productivity–for example higher oil prices and a general deterioration in the US terms of trade.

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Trade and GDP accounting

Trade and inventories are treated differently in the GDP accounts. All other GDP data is the average of the three months data. But trade and inventories are the change from the end of the quarter to the end of the quarter. This is because we not not directly measure output. Rather, we measure consumption and adjust that for the chage in trade and inventories to indirectly estimate output.

But this is a major source of revisions to the data. When the preliminary data is released there is no data for inventories and trade in the final month. That is reported in time for the first revision of the GDP data.

This quarter this should generate significant upward revisions to the reported growth of real GDP in the 4th Q of last year. The real trade data for December was released this morning.
This chart is of the data and the arrow points at the September data, the end of the last quarter.
Note that the November observation –the next to the last data point –was below the September observation. So using the November data it looked like the real trade balance expanded in the 4th Q — a negative for real GDP growth. But now we see that the December data is above the September, so we now know that in the fourth Quarter the real trade balance contracted, a positive for real GDP growth. We only have some nominal data for December inventories, but it strongly implies that the inventory data in the next GDP report will be resived significantly. These two recent data reports imply that when the next real GDP report is released we will see that 4th Q, 2007 real GDP growth was from 0.5 to 1.0 percentage points higher then the 0.6% originally reported.

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This is a chart of your data on personal taxes as a share of personal income.

See what I mean by how stable it has been until recent years.

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This chart was published the Division of Labor Blog and is getting a lot of references in the libertarian blogs.

But it is an example of the danger of a little knowledge. OSHA was created under Nixon as part of his “Simplifying Government Initiative”. The creation of OSHA was just a bureaucratic reorganization that involve no new laws or hiring of additional regulator.

Over the years Congress passed laws at various times regulating safety measures in different industries. Each time they would task some government department like the Department of Agriculture, Interior, Labor, Commerce or Treasury with the job of enforcing that law and writing and enforcing specific regulation. Consequently, over the years numerous regulatory agencies came to be located throughout the Federal bureaucracy.

All OSHA did was reorganize all these regulatory agencies under one umbrella organization. It was not accompanied by any new laws or an expansion of the regulatory apparatus.

So there was no reason for the creation of OSHA to create a break in the trend of workplace facilities and just another display of a little knowledge being a dangerous thing.

Also notice that it is not on a log scale, so it is essentially impossible to determine the trend.
For all anyone knows there may have been several trend breaks over this period.

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Recession Indicators

The NBER comittee that officially determines the dates for recessions has a few favorite, or key indicators that it gives much more weight.

One of the indicators is real manufacturing and trade sales. Not many people pay much attention to it because it does not have its own press release and wall street traders do not bet on it. It is an old Business Conditions Digest (BCD) that use to be published by the Bureau of Economic Analysis. But when they quit doing the BCD and the leading indicator the Conference Board took over responsibility of publishing this series because it is a component of the coincident index. But as the following chart it has a very good record of signaling recession turning points..

But something strange has been happening to this index over the last few months of 2007.
It has been improving and actually implies that growth may be accelerating, not slowing.

One probable reason for the recent strength is that it includes exports, where growth is very strong.

But if you think the NBER is on the verge of declaring that we are entering a recession this indicator suggest otherwise.

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January Auto Sales

The other big economic report Friday came through late in the afternoon and did not get much attention. But it was also discouraging. Auto sales fell from 16.3 M (SAAR) in December to 15.2 M (SAAR) in January. So we are starting the first quarter with a sharp drop in both employment and demand.

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I have a lot of theories about what caused the long wave in interest rates. Most center on inflation, but here is another interesting chart to make you think about it.

One of the key relationship is that monetary velocity is inversely related to real interest rates
and that has been true for decades — including the 1930s.

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Bond Market Long Wave

Oldvet– very good on the long run bond market.

Here is another chart to put that trend in perspective.

I suspect that to get back to the solid trend line it will take a Japaneses type depression scenario.

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