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

Cut Social Security, Medicare, and Medicaid McConnell Says

After instituting a $1.5 trillion tax cut and after signing off on a $675 billion Defense budget, Senate Majority Leader Mitch McConnell said yesterday, Tuesday, October 16, 2016;

“The only way to lower the record-high federal deficit would be to cut entitlement programs like Medicare, Medicaid and Social Security.”

More McConnell: “It’s disappointing but it’s not a Republican problem.” The deficit, grew 17 percent to $779 billion in fiscal year 2018. “It is a bipartisan problem and a problem of the unwillingness to address the real drivers of the debt by doing anything to adjust those programs to the demographics of America in the future.”

The deficit has increased 77 percent since McConnell became majority leader in 2015.

A new Treasury Department analysis on Monday revealed that corporate tax cuts had a significant impact on the deficit this year. Federal revenue rose by 0.04 percent in 2018 which is a nearly 100 percent decrease from the previous year’s 1.5 percent. In fiscal year 2018, tax receipts on corporate income fell to $205 billion from $297 billion in 2017.

Still, McConnell insisted the change had nothing to do with a lack of revenue due to the tax break or increased spending resulting from new programs since 2015. Instead he insists the deficit increase is due to entitlement and welfare programs. Now he does the old switcheroo from the yearly deficit to the national debt.

McConnell said, the debt is very “disturbing and is driven by the three big entitlement programs that are very popular, Medicare, Social Security and Medicaid. There has been a bipartisan reluctance to tackle entitlement changes because of the popularity of those programs. Hopefully, at some point here, we’ll get serious about this.”

What McConnell does not tell you is 8 years out those tax decreases will go away for much of the population and many will see tax increases. McConnell and Republicans needed a way to keep the 60% of the total tax break going to the 1% of the Household Taxpayers making greater than $500,000 annually since this tax break was passed under Reconciliation rules (Democrats could not block it without 60 votes). Robert Reich has called this a Trojan Horse tax break.

Recently, Mitch McConnell has been considering his legacy. I think it would be adequate to paraphrase it as: “I saved the 2018 tax break for the 1 percenters. To hell with the rest of you.”

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Fiscal Dishonesty from CNBC and Our Treasury Secretary

Fiscal Dishonesty from CNBC and Our Treasury Secretary

Is Jacob Pramuk on the White House payroll?

US budget deficit expands to $779 billion in fiscal 2018 as spending surges. The federal budget deficit rose 17 percent in fiscal 2018, according to the Trump administration. Spending jumped, and revenue only increased slightly following the GOP tax cuts. The Trump administration has pushed for dramatic budget cuts at several agencies and supported massive increases in military spending.

And that was just his headlines!

The deficit increased by $70 billion less than anticipated in a report published in July, according to the two officials. Federal revenue rose only slightly, by $14 billion after Republicans chopped tax rates for corporations and most individuals. Outlays climbed by $127 billion, or 3.2 percent.

He is getting his numbers from this report:

Government receipts totaled $3,329 billion in FY 2018. This was $14 billion higher than in FY 2017, an increase of 0.4 percent…Outlays were $4,108 billion, $127 billion above those in FY 2017, a 3.2 percent increase.

I have skipped the chest thumbing about the economy from Mnuchin and Mulvaney to focus on the stupidity ala CNBC. Real government spending barely kept pace with inflation, which is why outlays relative to GDP fell from 20.7% to 20.3%. Real tax revenues clearly fell in absolute terms and as a percent of GDP went from 17.2% to 16.5%. I guess this is what one gets when one lets Lawrence Kudlow become a chief economic adviser. But this kind of dishonesty is well known ever since Kudlow and his ilk tried to pull this intellectual garbage in the 1980’s. Does anyone at CNBC not realize the Trump White House is playing the same games with numbers? Never mind that the Treasury Department has decided to lead the way on some good old fashion rightwing nonsense.

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Subdued September inflation means real hourly and aggregate wages grow

Subdued September inflation means real hourly and aggregate wages grow

Courtesy of subdued gas price increases this year vs. one year ago, overall consumer prices rose only 0.1% in September vs. 0.5% one year ago (and 0.3% over the last two months vs. 0.9% one year ago). As a result, YoY CPI growth is down to 2.3% vs. 2.9% several months ago, and that means that “real” wages increased, despite no movement in growth nominally YoY.

With that background, let’s update real average and aggregate wages.

Since nominal wages for non-managerial workers are up 2.7% through September, this means that real wages, which had been flat, have grown in the last few months by +0.4% YoY:

In the last 2 1/2 years, real wages had been essentially flat. The last couple of months moves the needle a little bit:

 

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Housing’s most difficult comparisons in years begin next Wednesday

Housing’s most difficult comparisons in years begin next Wednesday

After a real quiet week for news, next week we get retail sales, industrial production, the JOLTS report, existing home sales … and housing permits and starts. The week after, real residential fixed investment will be reported as part of Q3 GDP.  Permits and residential fixed investments will have some of the most challenging comparisons in a long time.

Here’s why. First, here’s a graph of 30 year mortgage rates:

These have broken out to highs not seen since early 2011.

 

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Tracking Trump’s trade wars: inventories and intermodal traffic

Tracking Trump’s trade wars: inventories and intermodal traffic

Here’s something I thought I would start to track: looking for evidence of the effects of Trump’s trade wars on manufacturing and distribution.

Producers and distributors aren’t simply going to sit back and wait to absorb new tariff expenses: we should expect them to engage in as much “front-running” as possible, importing the goods and commodities likely to be affected by the tariffs early, and building up inventories that can be sold at the lower, pre-tariff prices. Once the tariffs kick in, the front-running would end, leading to a reversal of the pattern.

Two places we would expect that front-running to show up are in manufacturers and wholesalers inventories, and in the intermodal units that are typically used for cross-ocean shipping.  Let’s take them in order.

First, as a general rule sales lead inventories. Sales peak first going into recessions, and bottom first coming out.  It is likely the very fact that sales turn that is the signal for producers to add or subtract from inventories. Here’s that relationship for wholesalers over the past 25+ years:

 

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Is the taboo against raising wages beginning to break?

Is the taboo against raising wages beginning to break?

It’s a *really* slow news week for economic data — just producer and consumer prices tomorrow and Thursday. Even JOLTS doesn’t come out until next week.

But there was one little nugget of good news this morning: the NFIB, which represents small businesses, came out with their September report, and there was some good news about wages: more small businesses — 37% — said they *actually* raised wages in the last 3 months, than during any other 3 month period over the last 30 years:

If the taboo against raising wages is finally breaking, that is good news. Now we have to see if it is confirmed by actual data on wages.

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September jobs report: a mixed report with different implications in different timeframes

September jobs report: a mixed report with different implications in different timeframes

HEADLINES:

  • +134,000 jobs added
  • U3 unemployment rate declined -0.2% from 3.9% to 3.7%
  • U6 underemployment rate rose from 7.4% to 7.5%

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

Wages and participation rates

  • Not in Labor Force, but Want a Job Now:  declined -152,000 from 5.379 million to 5.237 million
  • Part time for economic reasons: rose +263,000 from 4.379 million to 4.642 million
  • Employment/population ratio ages 25-54: unchanged at 79.3%
  • Average Weekly Earnings for Production and Nonsupervisory Personnel: rose $.07 from  $22.74 to $22.81, up +2.7% 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 +18,000 for an average of +23,000/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 fell -300 for an average of -16/month vs. the last seven years of Obama’s presidency in which an average of -300 jobs were lost each month

July was revised upward by 18,000. August was also revised upward by 69,000, for a net change of 87,000.

 

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The simple Fed funds + payrolls leading indicator: autumn update

The simple Fed funds + payrolls leading indicator: autumn update

While we are waiting for tomorrow’s jobs report, let me update my alternative Fed funds + payrolls leading indicator for the economy, which I debuted earlier this year. This was the result of looking for an interest rate indicator that did not rely upon the yield curve. This indicator is really simple, and what it predicts is, if the Fed fate rises YoY by as much as the YoY% change in jobs growth, the economy will fall into recession within roughly a year.
Here is the long term history of this indicator:

It’s been infallible since the 1960s.

Well, the Fed raised rates by 0.25% last week, so let’s zoom in on where we stand now:

The YoY change in the Fed funds rate is +1.0%, while the YoY% change in payrolls, through August, was +1.6%.  No recession is signaled by this model for the next 12 months.

But wait, there’s more! Because the change in the Fed funds rate seems to have a predictable relationship to the YoY% growth in jobs over the next 12-18 months, let’s take a look at that.

 

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Trump’s trade war isn’t hurting manufacturing . . . yet

Trump’s trade war isn’t hurting manufacturing . . . yet

The Trump Administration’s trade war hasn’t hurt manufacturing and production yet. At least that’s the message from this morning’s ISM report on manufacturing.

According to the ISM:

The September PMI®registered 59.8 percent, a decrease of 1.5 percentage points from the August reading of 61.3 percent. The New Orders Index registered 61.8 percent, a decrease of 3.3 percentage points from the August reading of 65.1 percent.

Here is what the overall index and the leading new orders index look like since the turn of the Millennium (except for this morning’s report) (h/t Briefing.com):

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I Was Wrong: US-Mexico Trade Deal Lives With Canada: USMCA Rather Than NAFTA

I Was Wrong: US-Mexico Trade Deal Lives With Canada: USMCA Rather Than NAFTA

At the last minute last night the US and Canada cut a deal, so now Canada is on on the deal to change NAFTA to USMCA.  I think the name change is the biggest part of it, even though Trump still claims that NAFTA was “the worst trade deal ever” and the new deal makes relatively minor changes in it, especially if one considers what would have been the case if the US had actually joined the TPP, as most of the environmental, labor, and intellectual property parts of the new deal (the environmental and labor parts largely improvements, if not too dramatic) were already agreed to by Mexico and Canada when rhey joined TPP, which they belong to along with all its other members aside from the US.

Beyond continuing NAFTA and adding the TPP parts, the main changes are in the auto industry and the dairy industry, the former mostly affecting Mexico, the latter mostly affecting Canada.  Between the restrictions on outsourcing and the $16 per hour limit on imports, there may be some shifting of auto parts production from Mexico to the US and possibly Canada as well.  This will lead to job losses in Mexico, but there may be some Mexican autoworkers who see wage boosts also.  The auto deal has little impact on Canada aside from Trump retracting his threat to impose tariffs, which was opposed by GM and Ford as well as the UAW thanks to the profound integration between the US and Canadian auto industries.

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