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

The End Of The End Of The Cold War

The End Of The End Of The Cold War

It is a sign of how wacko things have gotten that the truly most important event of the past week has simply been buried in the news by all the huffing and puffing over Trump’s shutdown ending and these revelations about VA Governor Northam. This would be decision by the US on Feb. 1 to withdraw from the Intermediate Nuclear Force (INF) treaty with Russia, followed by Russia’s doing so as well shortly thereafter. This is both historic and very serious, far more so than Trump’s wall or Northam’s photographs.

The treaty was signed in 1987 between then US President Reagan and then Soviet President Gorbachev, culminating several years of negotiations. It led to the destruction of around 3600 short and intermediate range nuclear missiles, including most importantly all of those in Europe that threatened the potential outbreak of a war on that continent between NATO and the USSR. It was one of the most important moments on the way to bringing about the end of the Cold War, and indeed it is unfortunately accurate to describe the ending of this treaty as the end of that end.

I have seen a number of people speculating that this action somehow shows Trump “standing up” to V.V. Putin, being a tough guy and all that. But the nearly immediate acceptance with virtually no complaint by Putin of this move suggests otherwise. US and also western European officials have argued that Russia has been in effective violation of the INF since 2014 when it developed a new cruise missile, 97M925, that can be easily modified to make it fly in the forbidden distance ranges. Russian leaders have argued that they were not in violation given that this missile also had as its main range adjusted and therefore are not in violation and none violating the limits had been deployed. Putting such missiles with the violating ranges in deployment would directly threaten western Europe. As it is, Putin is in a position now to rapidly deploy them in a way to threaten western Europe while the US has nothing to put in place to reply to this. So, Putin gets to gain a major military edge and threaten the western Europeans while getting to blame Trump for having ended the treaty by withdrawing and allowing him to do this. The Europeans in question had opposed Trump ending the treaty, with indeed this probably being one of those things Merkel was trying to maintain influence with Trump over by not complaining too loudly about the US pressuring German companies to stop dealing with Iran.

Another factor in this matter emphasized by US leaders is that China was never a part of the agreement, and I gather has been developing such intermediate range missiles. But those were unlikely to be deployed in Europe, where the removal of such missiles 32 years ago was a triumphant movement towards the reduction of mutual tensions and towards peace.

All the way around, there is nothing good at all about this development, and it most definitely doesn’t show Trump doing something that is against the interests or desires of V.V. Putin. The outcome may well be a new arms race, which will please the military-industrial complexes in both the US and Russia, and maybe China as well. No, this is not a good development at all

Barkley Rosser

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January jobs report: a tale of two almost diametrically opposed components

January jobs report: a tale of two almost diametrically opposed components

HEADLINES:

  • +304,000 jobs added
  • U3 unemployment rate rose 0.1% from 3.9% to 4.0%
  • U6 underemployment rate rose 0.5% from 7.6% to 8.1%

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 -73,000 from 5.327 million to 5.254 million
  • Part time for economic reasons: rose +490,000 from 4.657 million to 5.147 million
  • Employment/population ratio ages 25-54: rose +0.2% from 79.7% to 79.9%
  • Average Hourly Earnings for Production and Nonsupervisory Personnel: rose $.03 from  $23.09 to $23.12, up +3.4% 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.)

Is a recession close?

 

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, with at very least a decelerating bias.

  • the average manufacturing workweek fell -0.1 hours from 40.9 hours to 40.8 hours. This is one of the 10 components of the LEI.
  • Manufacturing jobs rose by +13,000. YoY manufacturing is up +261,000.
  • construction jobs rose by +52,000. YoY construction jobs are up +338,000.
  • temporary jobs rose by +1000. YoY these are up +146,000.
  • the number of people unemployed for 5 weeks or less rose by +199,000 from 2,126,000 to 2,325,000.  The post-recession low was set eight months ago at 2,034,000.
 

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Advance reading of January manufacturing supports further slowdown

Advance reading of January manufacturing supports further slowdown

I have been using an average of the five regional Fed new orders indexes to forecast the direction of the ISM manufacturing new orders index, and indirectly manufacturing production.  Now that all five regional Fed indexes have been reported, here’s a comparison of the regional Fed averages (left) and ISM new orders (right) for all of 2018 plus this month:

2018
JAN   15   65.4
FEB   20   64.2
MAR   16   61.9
APR   17   61.2
MAY   28   63.7
JUN   24   63.5
JUL   24   60.2
AUG   17   65.1
SEP   20   61.8
OCT 18  57.4
NOV 15  62.1
DEC  8   51.1

2019
JAN  5  n/a

That January’s average was even more tepid than December’s doesn’t mean that the ISM new orders index for January will be lower than last month’s poor reading, but it certainly does suggest that weakness will continue, and we should expect an ISM reading closer to December than November.

In broader context, this is pretty reliable evidence that the manufacturing slowdown is for real, and will manifest itself more fully over the next 2-4 months. At the same time, the average of the Fed indexes is not negative, and so does not support a forecast of recession at this point.

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Foxconn is flailing in Wisconsin (Insert your joke here.)

Foxconn is flailing in Wisconsin (Insert your joke here.)

 In what may end up as the biggest economic development failure in U.S. history, Foxconn announced Wednesday that its $10 billion Wisconsin factory will not be a factory. Instead, the company says, it will still create 13,000 jobs, but these will be research jobs rather than manufacturing ones. I’ll believe it when I see it.

Accompanied by an almost $4.8 billion subsidy package as estimated by Good Jobs First (follow the link to the spreadsheet), the project was heavily criticized even before it was announced in 2017 (my take here and here). The massive subsidy helped normalize the idea of multi-billion investment incentives and gave Amazon a handy benchmark for its own effort to break the bank.

As I analyzed a year and a half ago, it didn’t make sense to manufacture electronics in the United States when everything was cheaper in China, unless you were worried about access to the U.S. market. The illegitimate Trump regime had already created an unpredictable and protectionist trade climate, and this was long before the trade war with China really took off. If Foxconn felt it had to locate in the United States, the country was in a strong bargaining position, but by playing the states off against each other, it was still possible for a foreign company to score huge subsidies.

What happens next? As noted, Foxconn still says it will build a huge facility and hire 13,000 workers. But in 2018, it failed to meet its job creation target and forfeited what would have been a $9.5 million subsidy. I predict we will see more such failures from Foxconn until it finally pulls the plug. Indeed, on January 31, Good Jobs First called for the immediate cancellation of the deal, with the company financially responsible for expenses made by the state and by Racine County in connection with the project. This would be a fair resolution of the situation, appropriately leaving egg on the faces of the deal’s promoters, the recently defeated Governor Scott Walker and the head of the illegitimate Trump regime.

As you see, I have managed to steer clear of the obvious puns. Instead, I invite you to insert your joke here.

Cross-posted at Middle Class Political Economist

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A note on pending home sales and construction employment

A note on pending home sales and construction employment

The NAR reported that pending home sales declined -2.2% m/m in December. Since this is based on contract signings, it suggests that *existing* home sales will continue to decline for the next month or two.

A few commentators have expressed surprise at the negative number, since mortgage rates declined in December. The problem with this reasoning is that mortgage rates only declined to where they were in September, and were higher than at any previous point during last year. Just as in purchase mortgage applications, the continued decline in rates for most of January might be more positive.

In short, the shallow downturn in housing that we saw since the beginning of last year isn’t over yet.

In the meantime, Friday’s employment report will give us a look at construction employment, and since that usually turns down before a recession begins, it will bear heightened notice. I have an extended post on this pending at Seeking Alpha, and will link to it once it is posted.

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Flying blind: a note on the long leading forecast for the second half of 2019

Flying blind: a note on the long leading forecast for the second half of 2019

We are still “flying blind” on some important economic data, most notably housing permits, starts, and sales, and GDP.

As of this morning, neither the Commerce Department nor its Census Bureau have indicated when these reports will be released, although the notice from the former suggests that there will be at least a two week delay.

As a result, some important monthly and quarterly data that is essential for the long leading forecast that I would normally post this week after the release of the GDP report is missing: corporate profits and real private fixed residential investment from the GDP report,  housing permits from the monthly residential construction report, and real retail sales per capital from that monthly report.

This presents me with a quandary: should I wait for the reports to be posted, which may be weeks away, or should I provide a *very* preliminary forecast based upon data that has not been impacted?

Here is what I am going to do. I am going to wait for the rest of this week to see if we get an updated schedule. If we don’t, or if the reports are going to be delayed more than two weeks, I will go ahead an post the “preliminary” long leading forecast through the end of this year. If the reports will all be released within the following two weeks, I will wait for them and then do a formal forecast.

So that I can at least say something useful, at the moment, from other sources here is what we know:

  • The first two weeks of earnings reports from the S&P 500 show earnings up quarter over quarter. This is a pretty decent proxy for corporate profits and suggests they will be positive when reported in the GDP.
  • Mortgage applications, after tanking in December, have come roaring back in the first several weeks of January.
  • House prices, from the Case-Shiller report this morning, continued to rise at a level in excess of 5% nationally averaged as of November.
  • Taken together, the mortgage and price data suggests housing remained under pressure through December.
  • Weekly retail sales reports remained very positive through December, although the Retail Economist report stumbled badly one week ago.

*If* it winds up that housing is the only significant negative through December, the long leading forecast is not going to be negative for the second half of 2019.

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Robert H. Nelson Dies: Religion And Economics

Robert H. Nelson Dies: Religion And Economics

Robert H. Nelson of the University of Maryland Public Policy Department died at age 74 on Dec. 15 while attending a conference in Helsinki, Finland.  He was the leading economist writing about the relationship between religion and economics, notably in three books: Reaching for Heaven on Earth: The Theological Meaning of Economics (1991), Economics as Religion: From Samuelson to Chicago and Beyond (2001), and The New Holy Wars: Economic Religion vs. Enviornmental Religion  (2010).  I spent several days with him some years ago at a conference on forestry issues where he was presenting his views on environmentalism as religion.  In any case, his death has me thinking about the broader issues he wrote about.  I shall note the arguments in these books along with some further observations.

His first book was essentially a history of economic thought that put a certain theological perspectve on thnkers mostly from the fairly distant past. A basic theme in all of his books is that economics is a form of secular religion that posits a material salvation in some distant future as a result of economic  growth and redistribution, a material heaven on earth.  In that book he posed two competing theological strands in the history of economic thought: a Roman (Catholic) “rationalism” and a Protestant “revelationism.”  The former started with Aristotle and included such figures as Aquinas, Adam Smith, Saint-Simon, and Keynes.  The latter started with Plato and Augustine, Calvin, Darwin, Spencer, and Marx.  A number of observers criticized this pair of categories, noting particularly that virtually the only economist in the second list is Marx (although Spencer did write on economics somewhat).  I happen to share the criticisms that it is not clear how useful or meaningful this pair of lists is, although the tradition of lining up historiccal intellectual figures as being Aristotelian or Platonic has a long history in philosophy.

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The Two Percent Solution: Warren and the Stochastic Jubilee

The Two Percent Solution: Warren and the Stochastic Jubilee

Wait long enough, and great ideas come back around, although not necessarily wearing the same garb.  Elizabeth Warren has just come out for a 2% wealth tax (above $50 million).*  But this is simply an annualized version of my lump sum stochastic jubilee.  What’s the advantage of redistributing the whole thing every 50 years (on average) vs a steady trickle?  A periodic reset would interrupt long run processes of wealth inequality more fully than a tax, so long as the rate of return on financial assets is high enough to compensate for the extra annual pinch, which it most likely would be, since wealth holders would demand a higher rate of return.  It would also be a lot more fun.  On the other hand, it would be more complicated to administer and might be resisted by force.

On balance, I’d go for the jubilee, but I’ll take Warren’s version as a close second.

*There’s also an extra 1% on wealth in excess of $1 billion, but this is largely symbolic.

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Global Firms, National Policies

by Joseph Joyce

Global Firms, National Policies

Studies of international transactions often assume that national economies function as separate “islands” or “planets.” Each has its own markets and currency, and international trade and finance occurs when the residents of one economy exchange goods and services or financial assets with those of another. The balance of payments keeps track of the transactions. But in reality firms treat the differences across nations as opportunities to increase their profits, and their decisions on basing the location of their activities–or how they report the basing of the activities–reflect this.

Multinational companies are not new entities; they can be traced back to the European trading companies that colonized the Americas, Asia and Africa. In the twentieth century, firms expanded across borders to get around trade barriers, to obtain access to raw materials, and to produce their goods more cheaply using foreign labor. Advances in the technology of shipping (container ships) and communications (Internet) spurred the development of global supply chains. Firms divided the production of goods among countries in order to manufacture them at the lowest cost before assembly into a final product. Shipments of these intermediate goods have become a major component of international trade, and intermediate inputs represent a significant portion of the value of exports .

This stratification of production has several implications, as Shimelse Ali and Uri Dadush of the Carnegie Endowment for International Peace have pointed out. Bilateral trade balances, for example, are distorted. U.S. imports from China contain a significant amount of intermediate inputs from other countries. Measuring only the value-added by Chinese firms to their exports lowers its trade surplus with the U.S. by a significant amount.

 

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Two economic notes on the shutdown

Two economic notes on the shutdown

The government shutdown is the economic equivalent of sustaining -800,000, or -0.5%, layoffs. The last time we saw that was in the Panic of 2008.

So needless to say, it is very surprising that last week saw fewer official layoffs than at any time since November 1969. On a population-weighted basis, this is an all-time low. This entire behavior of first time jobless claims during this expansion speaks to employers only having hired new workers when there is compelling need. [Note that government workers are merely being “furloughed,” not laid off, so they are not showing up in these statistics.]

While this is undoubtedly good news, one of the two private sources of weekly consumer spending I follow reported only a +0.7% YoY increase in sales last week. Outside of the 2015-16 “shallow industrial recession,” this is the lowest for either of these series during the entire expansion.

I have a more detailed post about consumer spending pending at Seeking Alpha. Once it goes up, I’ll give you a link to hit here.

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