The long leading forecast has now been negative for four weeks in a row. Please remember that clicking and reading, besides being educational, helps reward me for the work I put into this.
U6 underemployment rate rose 0.2% from 7.4% to 7.6%
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: rose +88,000 from 5.309 million to 5.397 million
Part time for economic reasons: rose +181,000 from 4.621 million to 4.802 million
Employment/population ratio ages 25-54: unchanged at 79.7%
Average Hourly Earnings for Production and Nonsupervisory Personnel: rose $.07 from $22.89 to $22.95, up +3.1% 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 +27,000 for an average of +20.000/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 rose +400 for an average of +75/month vs. the last seven years of Obama’s presidency in which an average of -300 jobs were lost each month
September was revised downward by -13,000. October was revised upward by +1,000, for a net change of -12,000.
The more leading numbers in the report tell us about where the economy is likely to be a few months from now. These were mixed.
Big, techy metros like San Francisco, Boston, and New York with populations over 1 million have flourished, accounting for 72 percent of the nation’s employment growth since the financial crisis. By contrast, many of the nation’s smaller cities, small towns, and rural areas have languished. Smaller metropolitan areas (those with populations between 50,000 and 250,000) have contributed less than 6 percent of the nation’s employment growth since 2010 while employment remains below pre-recession levels in many ‘micro’ towns and rural communities (those with populations less than 50,000).
Two graphs demonstrate part of the geography of markets and growth. Of course even the 1 per cent metros have divergent economic trends within them. The graphs make useful visualizations for discussion. Market forces are unlikely to change this on its own even if it is considered a problem generally:
The markets are closed today in observation of former President George H.W. Bush’s funeral. In the meantime, let me offer a brief few observations (pontifications?) about my sense of the immediate and longer term trend.
First off, here is a broad look at the last 10 years for the S&P 500 (blue, right scale) and 10 year Treasury bond (red, left scale):
The moves in the bond market look exaggerated, because the values are between 1.4% at its lowest, and 4% at its highest. Basically in the last 10 years yields on the 10 year bond completed their slow decline from about 20% in 1980, then went sideways 2011 and 2017, and this year started what I suspect will be an equally long term climb (although whether they will peak in a few decades at 6% or 600%, I have no clue).
Meanwhile the stock market quadrupled in value (!), although with a few hiccups along the way, particularly in 2010, 2011, 2015-16, and this year.
In other words, in the past 10 years bonds paid you very little, while stocks rewarded you handsomely.
Next, let me take a look at a few of those hiccups. First, here is the 2010-11 period:
Note that on several occasions (roughly mid-2010 and mid-2011) stocks declined by roughly 10%, and bond yields declined in tandem.
The same pattern appears in October 2014 and January 2016:
This is called a “flight to safety.” Stock investors get spooked for some reason or other, and run into the relative safety of bonds. Stock prices fall, and bond prices rise, which means bond yields fall.
That’s what I think is happening at the moment. After a 40% run-up beginning immediately after the 2016 US Presidential election (20% of which was in December 2017 and January 2018 alone):
this year stocks have gone sideways in roughly a 15% range:
In the broad view, investors got too exuberant in 2017 mainly, I suspect, in anticipation of the tax cut goodies, and once the goodies took effect, realized that all of their value – and then some – was already priced in. In the close-up view, the past month looks like another “flight to safety.”
NOTE: Complete speculation alert!: Because these things tend to inflict surprise on as many people as possible, my *guess* is that the carnage will continue until roughly the moment that 2 to 10 year bond yields invert. Then, once people are sure that the end is nigh, both will reverse higher, at least temporarily ending the inversion.
Finally, what is also interesting about this year is that it appears to mark a “change of season” in the relationship between stock and bond performance. From 1981 through 1998, stock prices and bond yields generally moved in the opposite directions (stocks up, yields down). Then, from 1998 until this past January, bond yields and stock prices tended to move in the same direction — not on a daily basis, but in the longer view. This year, as the first and third graphs above show, stock prices and bond yields have again generally become mirror images of one another.
This year’s pattern (with rising bond yields) last happened in the 1950s, which was a period of “reflation,” i.e., bond yields and the YoY change in prices gradually increased. That’s another reason why I think we have started a new secular financial era.
At the CEPR blog, Beat the Press, Dean Baker and Jason Hickel are debating degrowth. Dean makes the excellent point that “claims about growth” from oil companies and politicians who oppose policies to restrict greenhouse gas emissions, “are just window dressing.” I also agree, however, with the first comment in response to Dean’s post that his point about window dressing could be taken much further.
I would add that economic growth is window dressing for what used to be referred to much more aggressively as “man’s triumph over nature” or the “control of nature.” Climate change deniers are more forthright about this connection between aggression and so-called growth: “Is “Strive on — the control of nature is won, not given” a controversial statement? What does it mean for science if it is?” asks Linnea Lueken at the Heartland Institute website.
Scattered throughout his writings, Donald Winnicott made fleeting but intense criticisms of “sentimentality.” “Sentimentality is useless for parents,” he remarked in a 1949 article on the analysis of psychotic patients, “as it contains a denial of hate, and sentimentality in a mother is no good at all from the infant’s point of view.” The inference he drew from this observation was that “a psychotic patient in analysis cannot be expected to tolerate his hate of the analyst unless the analyst can hate him.”
In a 1946 article on the treatment of juvenile delinquents, he warned against “one of the biggest threats” to the use of psychological methods in the management of young offenders was “the adoption of a sentimental attitude towards crime:
If advances seem to come but are based on sentimentality, they are valueless; reaction must surely set in, and the advances had better never have been made. In sentimentality there is repressed or unconscious hate, and this repression is unhealthy. Sooner or later the hate turns up.
The most thorough discussion by Winnicott of his aversion to sentimentality is probably his 1939 article, “Aggression and its roots.” As it is only three paragraphs, I quote it in its entirety:
Finally, all aggression that is not denied, and for which personal responsibility can be accepted, is available to give strength to the work of reparation and restitution. At the back of all play, work, and art, is unconscious remorse about harm done in unconscious fantasy, and an unconscious desire to start putting things right.
Sentimentality contains an unconscious denial of the destructiveness underlying construction. It is withering to the developing child, and eventually it can make him need to show in direct form destructiveness which, in a less sentimental milieu, he could have conveyed indirectly by showing a desire to construct.
It is partly false to state that we ‘should provide opportunity for creative expression if we are to counter children’s destructive urges’. What is needed is an unsentimental attitude towards all productions, which means the appreciation not so much of talent as of the struggle behind all achievement, however small. For, apart from sensual love, no human manifestation of love is felt to be valuable that does not imply aggression acknowledged and harnessed.
He might well have added, “And I’m not so sure about sensual love.”
This all may sound somewhat arbitrary and speculative but actually it is a very compressed and jargon-free application of Melanie Klein’s developmental theory of the self. What Klein referred to as the depressive position involves an infant’s feeling of “guilt” — or in Winnicott’s less extravagant terminology, “concern” — about its aggressive fantasies toward its mother. In Klein’s rather lurid account of the infant’s aggressive fantasy:
The phantasied attacks on the mother follow two main lines: one is the predominantly oral impulse to suck dry, bite up, scoop out, and rob the mother’s body of its good contents.… The other line of attack derives from the anal and urethral impulses and implies expelling dangerous substances (excrements) out of the self and into the mother.… These excrements and bad parts of the self are meant not only to injure the object but also to control it and take possession of it.
Whether or not the infant has such unconscious aggressive fantasies about the mother’s body, Rex Tillerson, when he was CEO of Exxon, expressed similar, fully-conscious ones, “My philosophy is to make money. If I can drill and make money, then that’s what I want to do…” Robert White-Stevens, the corporate-designated nemesis of Rachel Carson following the publication of Silent Spring, exemplified the “control of nature” faction of science:
Miss Carson maintains that the balance of nature is a major force in the survival of man, whereas the modern chemist, the modern biologist and scientist, believes that man is steadily controlling nature.
White-Stevens’s vision of a “feeble creature” penetrating “every corner of the planet,” and “contest[ing] the very laws and powers of Nature, herself,” could have been written as a Kleinian parody of the of the infantile arrogance of scientistic triumphalism:
Within the past 100 years, man has emerged from a feeble creature, virtually at the mercy of Nature and his environment, to become the only being which can penetrate every corner of the planet, communicate instantly to anywhere on earth, produce all the food, fiber, and shelter he needs, wherever he may need it, change the topography of his lands, the sea and the universe and prepare his voyage through the very arch of heaven into space itself.
This is the stuff that science is made of, and man has learned to use it. He cannot now go back; he has crossed his Rubicon and must advance into the future armed with the reason and the tools of his sciences, and in so doing will doubtless have to contest the very laws and powers of Nature herself. He has done this already by expanding his numbers far beyond her tolerance and by interrupting her laws of inheritance and survival. Now, he must go all the way, for he cannot but partially contest Nature. He has chosen to lead the way; he must take the responsibility upon himself.
But I digress. What does all this have to do with economic growth? Again, as Winnicott explained, “aggression that is not denied, and for which personal responsibility can be accepted, is available to give strength to the work of reparation and restitution.” However, “[i]n sentimentality there is repressed or unconscious hate, and this repression is unhealthy. Sooner or later the hate turns up.” Indeed, the hate does turn up at the Heartland Institute, where the “Green New Deal” is exposed as the “Old Socialist Despotism.”If it fails to acknowledge the primitive aggression of “man’s triumph over nature” that lies beneath the reparation of adopting environmentally-friendly policies, the debate between degrowth and green growth risks descending into sentimental bickering about the window dressing in the hotel on the edge of the abyss.
There are a lot of economic writers who won’t tell you when something moves against their thesis. Those guys trumpeting a flatlining of commercial and industrial growth last year? They never heard of it this year (hint: because it’s up!).
To the contrary, one of the reasons I do my Weekly Indicators piece is that it forces me to mark my forecasts to market each week. If a forecast doesn’t work out, I want to undertake a post mortem and understand why.
I certainly don’t have to do that today, but yesterday one piece of evidence did move against my thesis of a slowdown next year: ISM new orders for November.
As I reiterated in today’s piece at Seeking Alpha on yesterday’s yield curve inversion, the long leading indicators have pretty much been deteriorating all year long, to the point where for the last three weeks they have been negative. So there is simply a lot of evidence to suspect that the economy is going to follow suit after a year or so.
In the meantime, I’ve started to focus on whether the short leading indicators are also beginning to show signs of weakness. One such measure is manufacturers’ new orders. On a semi-weekly basis, I track that via the regional Fed indexes. On a monthly basis, the ISM new orders index is the go-to metric.
Well, one month ago the ISM new orders subindex declined to nearly a 2 year low. Then, during November, the average of the five Fed regional indexes declined further. So far, looking pretty good for my hypothesis.
Then, at the last minute, the Chicago PMI Index completely blew out to the upside, including a very strong new orders index. And yesterday, the ISM report’s new orders subindex for November rose back strongly. Here’s the graph, from Briefing.com:
Yesterday’s reading was about average from earlier this year.
So, fair is fair. Yesterday’s ISM report is contra my thesis. On the other hand, the general trend over the last few months has been a gradual backing off from extremely strong growth seen at the beginning of this year.
With the long leading indicators outside of corporate profits and ease of credit having turned neutral to negative, at least for now, my attention is turning more and more to the short leading indicators. And one of those — temporary employment — is of particular importance to the overall employment situation. It is reported as part of the overall monthly jobs report, and I will be paying particular attention to it when the November jobs report is issued this Friday.
Since the BLS started to report the series in 1991, temporary employment has tended to peak roughly 6 to 9 months before overall employment, and to bottom roughly 3 months in advance:
Here is the same information graphed as the YoY% change (note I’ve divided temp growth by 4 for purposes of scale):
The division of labor is limited by the extent of the market.
The model is a modified version of the simplified Romer 90 model. The modification is that there is a minimum efficient scale for the production of intermediate goods.
Gross output in the growing sector is (sum i = 1 to N of x_i^alpha)L1^(1-alpha) where x_i is the amount of the ith intermediate good used. There is also another way to produce the final product 1 for 1 from labor output = L2. L1+L2 = L which is fixed.
intermediate goods can be made from the final good one for one, but one must make at least one unit.
There is a small closed economy with (alpha)(L^(1-alpha)) <1. So in this economy it is not efficient to use or produce any intermediate goods. So N is fixed at zero and there is no growth.
With free trade and no transporation costs, the relevant L is the world labor force, so it makes sense to make intermediate goods.
They have to be invented and intellectual property is protected. Except for the minimum efficient scale of 1 unit, this is Barro and Sala i Martin's simplified version of Romer's 1990 model. Well also the number of inventions is a whole number, because making it a continuum is silly.
Value added is proportional to N. So is the real wage. Increased N is technological progress and is the engine of growth and increasing produtivity.
N only grows if L is large enough. L is world labor supply if there is free trade. Under autarchy small countries have no growth (which costs more than 1% of potential GDP).
The model is very simple and actually very old.
Here I come to an embarrassing conclusion.
I think the minimum efficient scale isn't even needed at all -- it just makes the result extreme.
In fact, I think the model as presented in the textbook has the effect high L causes high growth. There is no minimum efficient scale and no backstop no intermediate goods technology.
It was decided that the scale effect was unreasonable, so the model was changed to eliminate it. This eliminated the effect of trade on productivity growth. I don't think it was difficulty of finding a model. It was a consensus on what is a reasonable thing for a model to do.
In particular, there was a habit in (not so good) empirical work of treating each country as independent. I mean the standard work horse model confronted with data assumed no trade. Then it implied big countries grow faster than small countries. Ooops. So the model was modified. Then removing a counterfactual implication of the counterfactual no trade assumption removed all effects of trade on productivity growth, and at least one very smart person decided that theory suggested that there was no effect of trade on growth. In fact very old simple theory suggested cases where there could be no growth without trade.
And I have 12 minutes left. I will not waste your time suggesting you read more just so that I can present the model in 30 minutes.
Krugman argues that the Bank of Englands worst case scenario for no deal Brexit is implausibly bad. I agree with his conclusion, but strongly disagree with one argument (on a point which he stresses is quantitatively minor)
… the BoE includes some nonstandard effects of trade: they assume that reduced trade (and foreign direct investment) will reduce productivity more than the direct impacts on resource allocation would predict. They cite some statistical evidence, but it’s important to realize that this is black-box, reduced-form stuff: there’s no explicit mechanism through which it’s supposed to happen.
However, these assumed nonstandard effects aren’t what’s driving the really bad scenarios; they only, as I understand it, contribute something like 1 percentage point of GDP to the predicted costs.
[skip]
On the substance: I’m skeptical about the supposed effects of trade on productivity. I know that there’s some evidence for such effects; trade seems to favor more productive firms. But relying a lot on effects we can’t model seems dubious.
In particular, I have strong memories of the openness-growth debacle of the 1990s.
I comment.
To me sentence “But relying a lot on effects we can’t model seems dubious” seems dubious. What do you mean “we” bright man ? I am willing to bet you could whip up a model where trade causes high productivity growth within 15 minutes.I am not willing to bet on you against you as being the guy who bet he couldn’t do it would creat a bit of conflict of interests.
I will attempt to do it in 30 minutes (OK I have begun thinkin already).
Then against data you have an example (one (1)). I can think of many debacles of people who decided not to rely on an effect because they couldn’t model it.
1) we can’t explain why nominal stickiness might be optimal & in our models firms maximize profits. The claim is true. Menu costs don’t do the trick as firms synchronize. Calvo fairies are embarassingly implausible. Akerlof said near rational (not optimizing). So they decide they must assume prices are flexible and we get a RBC debacle.
2) “zero isn’t an especially important number” Paul Krugman 1988 (at 1050 Mass avenue). There is no reason why people should accept constant nominal wages with 2% expectable inflation and not accept a 2% wage decline with 0% expectable inflation. So it can’t be true. But it is.
3) There can’t be a liquidity trap because of the Pigou effect. Also there is Ricardian equivalence. No one noticed that Pigou and Ricardo contradict each other until … *you* remember when — it was in the 1990s (and that example is *not* an elephant).
Over at the New York Times I ran out of allowed space so I will continue here with examples after the jump.
But now I wan’t to start a clock. Trade causes higher productivity growth in the model which I will present in 30 minutes or less.
Yesterday initial jobless claims for the prior week were reported at 234,000, a six month high. That’s 32,000 above the recent one week low. The four week moving average rose to 223,250, more than 15,000 higher than its recent low:
Is it cause for concern? After all, the long leading indicators have been neutral for half a year, and in the last several weeks their more volatile high frequency version turned negative, so it is reasonable to expect short leading indicators to start to follow suit.
To cut to the chase, while it is certainly possible that it is the beginning of something worse, we aren’t anywhere near the point where we can rule out it simply being noise (although it certainly suggests that the monthly unemployment rate isn’t going to decline any further in the next few jobs reports, since initial claims lead the unemployment rate by several months). I’ve arrived at a formulation for distilling signal from noise, which will be the subject of a longer post, but consider this an introductory sketch.
