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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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Housing: comprehensive review of August reports 

Housing: comprehensive review of August reports

– by New Deal democratI pay particular attention to housing because it is ian important long leading indicator for the economy.

And more and more evidence is accumulating  — although it is not universal — that housing may have passed its peak in this cycle. Last year housing was resued by an autumn surge. I don’t think that will happen this year, but there are conflicting signals.

My comprehensive review of that evidence is up at Seeking Alpha.

As usual, your clicking over and reading hopefully will be educational. It will also reward me, ever so slightly, for the work I do putting this stuff together.

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The *rate* of new jobless claims, at all-time lows, forecasts even lower unemployment

The *rate* of new jobless claims, at all-time lows, forecasts even lower unemployment

I thought I’d start out with something I haven’t looked at in awhile: initial jobless claims as a share of the population and as a leading indicator for the unemployment rate.

This economic expansion has featured two contrary extremes in the labor market: low wage growth and increasingly vanishing layoffs (I don’t think that’s a coincidence, but that’s a subject for another post!).  Let’s take a look.

The first graph below is of weekly jobless claims as a share of the entire labor force. To generate this, I also take into account “covered employment.” That is, not all jobs are eligible for unemployment insurance, and because of part time work and the gig economy, that share is less than it had been previously. So, first I divide the average number of jobless claims over a month by the percent of covered employment. The lower the share of covered employment, the higher the adjusted layoffs number. Then I divide that in turn by the number of people, both employed and unemployed, in the labor force.  Here’s what I get, through August:

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The US-Mexico Trade Deal Dies

The US-Mexico Trade Deal Dies

Nobody is calling it that, but the low key story on the back pages of Wednessday’s major papers report that this is what has happened, not to my surprise.  September 29 (or maybe the 30th at a stretch) is the deadline for President Trump to submit to the Congress the final version of the US-Mexico trade deal if there is any chance of it being passed by the US Senate in time for outgoing Mexican President Pena Nieto to sign it on his lats day in office on November 30 after the outgoing Mexican parliament could approve of it.  The US Senate rules are that there is a 90-day waiting period for the initial announcement of a trade deal and a 60 day waiting for delivering the final detailed agreement.  The Trump administration got their initial report in on time, but with only it involving US and Mexico.  Sept. 29 is the deadline for the final deal.

As noted in previous posts here (Aug. 29, econospeak.blogspot.com/2018/08/marrying-nafta-and-tpp-us-mexico-free.html and Sept. 6, econospeak.blogspot.com/2018/09/has-trump-gone-over-the-edge-on-negotiating.html , sorry having trouble providing the links), top Republican senators such as No. 2 John Cornyn of Texas and others have said they will not approve a deal that does not include Canada, a reformed NAFTA.  Let me note that it was not impossible for this US-Mexico trade deal to form the basis of such a deal.  But, unfortunately, in the immediate aftermath of the announcement of the US-Mexico deal Trump announced that Canada must settle the negotiation on “our terms.”  Oh.  The funny thing is that there was a possible deal.  The US was making demands of Canada about the dairy industry (never a part of NAFTA because it was so hard to make a deal) and Canada was making demands about the lumber industry, generally described as a dispute over “dispute resolution.”  There were other issues, but these were the politically hard and sensitive  ones involving such places as Wisconsin and Quebec.  In the end it appears that no deal between the US and Canada has been made and probably will not be made in time for the Sept. 29 deadline.

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A Weak Defense of Citizen United: Ownership v. Control

A Weak Defense of Citizen United: Ownership v. Control

Many thanks to Peter Dorman for highlighting Citizens United As Bad Corporate Law. I guess we had to endure this comment, which is a really weak rebuttal:

Corporate shareholders are most definitely owners; they alone have the authority to sell their shares or the company’s assets. Their rights are based not on contract law but statutory rules of franchise. They are guaranteed rights of assembly abd representation, and they cannot legally surrender those rights even if they elect Directors who vote to do so.

My first thought to this attempted rebuttal was the complaints of condominium owners in San Francisco. They may own the rights to what is effectively an apartment but they have to deal with management as they really do not own the land. And even the land owner does not have that much control in a city where regulations control land use. My second thought involved the minority shareholders of Yukos Oil during Yeltsin’s Russia, which I noted in this related post:

AB noted yesterday that some of Sinclair Broadcasting’s shareholders were upset the decision of management to aid the Bush-Cheney ’04 campaign with free air time for another smear of John Kerry. Their stock, which was around $10 a share in early August, is trading now for about $7.30 a share.

Now I get that the corporate governance rules in the U.S. are not as pathetic as they were during Yeltsin’s Russia but the idea that an individual shareholder has any real control of how a corporation is run is quite naïve. Peter asked this commenter if he had read the paper. Had he done so, he might have noticed footnote 34 on page 19, which included a seminal paper by Ronald Coase entitled “the Nature of the Firm”. This paper initiated an entire literature on what this recent paper calls the “nexus of contracts theory”. If our commenter has not read this literature, he should.

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Citizens United, Thoroughly Debunked

Citizens United, Thoroughly Debunked

I admit I haven’t paid too much attention to debates over Citizens United, since I regard the direction taken by regulation, control over who may contribute to political campaigns and how much they can put up, to be misguided.  I would like to see comprehensive control over how much money can be spent on behalf of candidates, period.  (I would also like to see a mandate that all such contributions be funneled through an intermediary, like a public political finance fund, that keeps the identities of donors hidden from recipients.)  While CU has been yet another blow to democracy, the demand that plutocrats use one vehicle to flood the system rather than another is second best.

That said, I was struck by this new critique of CU.  Its authors, Jonathan Macey and Leo Strine, base their analysis on a point I was familiar with in the context of economic debates over the Jensenian shareholder rights theory of the firm, but its application to CU is obvious once you think about it.  The article ranges over a number of topics, but here’s the core, taken from the abstract:

In this Article we show that Citizens United v. FEC, arguably the most important First Amendment case of the new millennium, is predicated on a fundamental misconception about the nature of the corporation. Specifically, Citizens United v. FEC, which prohibited the government from restricting independent expenditures for corporate communications, and held that corporations enjoy the same free speech rights to engage in political spending as human citizens, is grounded on the erroneous theory that corporations are “associations of citizens” rather than what they actually are: independent legal entities distinct from those who own their stock…..[C]orporations do not have owners, they have investors who have contract-based, financial interests in the firms and limited management rights.

The best ideas often seem obvious once they are put forward, but the trick is to see them in the first place.

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A bold forecast: there will be no autumn surge in housing this year

A bold forecast: there will be no autumn surge in housing this year

The big issue this year in housing is whether increased mortgage rates and higher prices have merely resulted in a deceleration in the increase in new housing sales and construction, or whether housing is actually rolling over.

As I’ve written several times in the last month, there is accumulating evidence that it is actually the latter: housing has at very least plateaued. The acid test will be what happens in the next four months. Here’s why.

(As an aside, as I recently learned from reading a biography of Mark Twain, who hid out during the Civil War in Nevada and California, the “acid test” is a real thing.  Real gold does not dissolve in acid, but “fool’s gold” a/k/a iron pyrite, does. So there.)

Let’s start by going back seven years, which is the last time mortgage rates were higher than they are now, and before house prices bottomed. Here’s what mortgage rates (blue, left scale) and the least volatile housing metric, single family housing permits (red, right scale), look like:

Note a few things:

  •  mortgage rates declined nearly 2%, from 5% to 3.3%, from 2011 through mid-2013.
  •  during that big decline, single family permits rose over 60%.
  •  during the “taper tantrum” of 2013, mortgage rates rose back to 4.6%
  •  permits stalled for a year after the tantrum, and established a new, less steep trend line that was broken to the downside by this week’s August housing permits report.
  •  after mid-2013, mortgage rates established three meaningful intermediate lows: in early 2015, mid-2016 (due to “Brexit”), and mid-2017.
  •  each of these three intermediate lows in mortgage rates coincided with a temporary acceleration of the growth in housing permits
  •  mortgage rates have just made a new 7 year high, reaching 4.87% this week.

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A hypothesis for Prof. Krugman: the transmission method was FEAR

A hypothesis for Prof. Krugman: the transmission method was FEAR

In his recent column disagreeing with Ben Bernanke, Paul Krugman asks for an explanation as to how a financial panic could lead to years thereafter of a slow recovery. Specifically, Krugman says that he “really really wants to hear about the transmission mechanism.”

After all, the financial panic eased in 2009. And yet, outside of the very noteworthy exceptions of corporate profits generally and Wall Street bank profits specifically, the economic recovery was lethargic.

Now, to a great extent, the debate between “credit event” and “housing event” is somewhat a semantic one.  You simply don’t get a housing bubble unless there is a credit bubble to enable it. Similarly, absent a credit bubble in consumer lending for either housing (the 2000s) or appliances and furniture (the 1920s), you don’t get a big consumer downturn (see, e.g., 2001, in which consumers sailed right through a brief and shallow recession brought on in large part by a stock market bubble. See also the quick late 1980s recovery from the 1987 stock market crash).

But if you are looking for a transmission mechanism that lasted after 2009, as usual you have to look beyond narrow-minded neoclassical economy orthodoxy. Because from a behavioral point of view, the answer looks pretty simple: FEAR.

Behavioral economists have shown that people in general react twice as strongly to the fear of a loss vs. the anticipation of an equivalent gain. A good example in the everyday economy is that consumers cut back spending twice as sharply in the face of an oil price spike, as they loosen their spending in the face of a steep decline in gas prices.

It is crystal clear that the financial panic of September 2008 instilled fear in the vast mass of households. I believe that there is very good evidence that it persisted for most of this decade.

To begin with, here is a graph of consumer confidence as measured by the University of Michigan:

I have zoomed in on 2007-2015, because i want to emphasize that consumer confidence did not rebound meaningfully at all once it crashed in 2008, until about 2014. Furthermore, any time there was a whiff of renewed crisis during that timeframe, confidence plummeted, in the case of the 2011 “debt ceiling debacle,” all the way back to its bottom, but also in response to the Deepwater Horizon massive oil spill (2010), the “fiscal cliff” (end of 2012) and the GOP’s government shutdown (2013).

That, ladies and gentlemen, is fear.

Meanwhile, households didn’t just deleverage out of debt during the 2008 financial panic, but they continued to deleverage and deleverage and deleverage all the way until late 2014 — well after housing prices had bottomed (red in the graph below):

and they haven’t meaningfully increased their exposure to debt since.

Further, there was a housing boom from 1986-88 without a credit bubble. Afterward house prices declined 10% into the early 1990s:

But the below graph of the personal savings rate shows that, unlike the 1990s, when the household savings rate went into a sustained decline, as household debt levels increased (see first graph above), following the great recession, the savings rate maintained its higher level, with the exception of 2012-13 when a one year 2% rebate of Social Security withholding taxes that resulted in higher spending, which resulted in a one year decline in saving when it expired:

So, I believe a good case can be made that the “transmission mechanism” that Krugman seeks is that the trauma of the 2008 financial crisis instilled a continuing sense of fear in consumers that there might be a repeat, leading to a shunning of debt and a resulting more subdued increase in the consumption that is 70% of the U.S. economy.

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A detailed look at Industrial Production during this expansion

A detailed look at Industrial Production during this expansion

In the past week there’s been a little highbrow relitigation of the drivers of the “Great Recession” between Paul Krugman and Ben Bernanke. Bernanke plumps for it having been a “credit event” — and as to the crisis of 2008, he is clearly correct — while Krugman says it was primarily a “housing event,” although Krugman also acknowledges that he is mainly speaking of the aftermath from 2009 onward.

Since neither the 10% decline in housing prices between 1989 and 1992, nor the NASDAQ internet bubble of 1999-2000 managed to cause the worst downturn in 75 years, my own view is that it was precisely because there was a credit bubble in the biggest asset that is owned by a majority of Americans — for which there was no financial help forthcoming to the middle class — that the effects were so longstanding. Had the government — as it did for the 1930s Dust Bowl — bought up or crammed down existing mortgages, and took repayment of the loans out of housing appreciation whenever the owners eventually sold, it is likely that the consumer rebound from the recession bottom would have been much more “V”-ish.

But neither Krugman nor Bernanke, so far as I can tell, mentions a third important reason for the slowness of the recovery: the second installment of the China shock.  Because it is crystal clear that businesses decided, once demand picked up beginning in late 2009, to move plants and hiring overseas.

This is plain when we look at how employment recovered. Services employment recovered in relatively “V”-ish fashion: two years down and three years up. Even goods employment ex-manufacturing came back in more delayed fashion, and is at 97% of peak 2007 levels. But manufacturing employment only began to turn very late and, at 92.5% of peak 2007 levels, is still far behind:

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