About Peter Radford

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Getting Trendy

The economy is all about trends and tendencies. We have to watch data over longer periods in order to identify where it is headed because short term or one-off bumps and leaps can mislead us easily.

In that context we should pay attention to today’s news that new claims for unemployment assistance dripped 15,000 to 358,000. Not only is that a good week-to-week improvement it helps bring the four week moving average down to 366,250, which is the lowest it has been since 2008.

Couple this news with last week’s employment report and all the anecdotal information we are receiving about hiring, and there is no doubting that the economy has entered a new and more optimistic phase.

Thing are looking up.

But.

Given the depth of the crisis we need to pause a moment and dwell on another trend: continuing claims rose 64,200. There is a dramatic bifurcation taking place in the unemployment roles. The short term unemployed are getting back to work much more easily, and fewer are being added to the rolls. Yet the longer term unemployed are having greater difficulty finding work, and many are simply leaving the workforce. It is easy to overplay the drop in workforce participation which has shrunk markedly through the crisis, but it is something we need to watch carefully. We need to make more effort to ameliorate the effects of long term unemployment via re-training and other measures. This will stop the erosion of skills that prevents the long term unemployed from returning to work.

That and we need to stop vilifying them as being lazy, unskilled, and living off our largesse. Only right wing economists and way out right wing politicians believe that the unemployed are naturally indolent who need to accept their fate and take low wages in order to get the job market back humming again.

Speaking of which Charles Murray’s new book ‘Coming Apart, and the Culture Myth’, has received far too much attention. Its central premise is that our long term problems are due to a drop in social values. Were our workers only to become good church goers, to stay happily married, and to keep away from temptation, our economy would hum once more, just like it did – in Murray’s mind anyway – way back when.

This repulsive and shallow analysis is simply a regurgitation of late Victorian and early Edwardian upper class twaddle. It recalls the dusty years of a fading empire when the elite realizes that its formula is no longer working. Since elites have a hard time coming to terms with the illusions upon which they imagine their success to be built – they routinely mistake the causes of success, and imagine their superiority is based upon exceptional values or work ethic rather than good luck – they then begin to preach to the unwashed. Murray has fallen down the same hole. It is naive and counter productive to think that social values will magically transform our economy, allow us to compete with global competitors, and re-balance our debts all with one deft sweep of the arms. It will be harder work than that. Work that begins with getting working wages to grow and not languish in the gutter.

That and eliminating an economic theory that argues all unemployed workers must value leisure more than work, and thus all the unemployed must be voluntarily so. There are a few economists I can think of who I wish, for a while, could test that stupid theory empirically. Now that would be a trend in the right direction too.

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The Art of Bankers and Economists

The big question, and one I have been asked several times this morning already, is this: does the good jobs report last week signal a major shift in the economy?

No.

Clearly the tone of things has changed, but there are still large reservoirs of under-used resources to be brought back on line before we can talk about a healthy economy. This entire recovery has been one characterized by baby steps. Our economy seems nowadays to be akin to a supertanker, lumbering, slow, making very long turgid moves, unable to make quick transitions. The days of fast recovery are a distant memory.

This, of course, is partly due to the nature of our recent crisis. The financial sector and the run up in household debt combined to undermine everything. Digging out from the catastrophe that our banks wrought is necessarily difficult. Particularly since they remain unchastened, under-capitalized, and way too large for our own good. Beware: the banks will be the cause of our next downturn.

Which leads me to a beef of mine, something that has dogged me throughout the crisis. I wish we could stop calling the yahoos who destroyed our economy ‘bankers’. In my day we referred to them as ‘traders’. Its a better description of what they do. They sit at desks and move mountains of money about. They do not do banking. They trade. Their incentives are built around rapid movement of bulk capital and cash in order to turn wafer thin spreads into huge profits. It is a volume business. It is largely self-contained. It has very little to do with banking.

Bankers take positions. They own the assets they create when they lend. They husband those assets when necessary. They are in contact with customers. They assist when credit weakens. They build reserves to offset losses. They stay very far away from speculative capital flows. They are the epitome of dull and boring.

We need bankers. We don’t need traders.

Our problem, which was emerging during my tenure in banking, is that our major banks are all run by traders. They have extremely short term decision horizons, and they believe they can fudge risk away by offloading it on other banks or by insuring against it. Every single bank seems to think it can accomplish this risk immunization. Hedging is everywhere. Structured finance sits precariously on top of a narrow foundation of basic assets that are not at all altered by the fun and games erected up above. The risk still exists, only it is masked behind accounting conventions and tricky book entries designed to fool regulators and shareholders into believing a 30:1 leverage ratio is not just sensible but is sound to boot.

I would laugh at this were it not so damn dangerous to you and I. These indescribably ignorant fools have the ability to ruin our economy. They will do so again. Soon.

Why?

Because we didn’t punish them. Nor did we have the courage to rid our politics of their influence. Their money still flows. So their games still continue. Until JP Morgan Chase, Citicorp, Wells Fargo, Bank of America, and the others are broken into little pieces, and until we have re-established a separation between banking and trading, our economy is not safe. It is as simple as that.

And we are not there yet.

So, while the economy may be turning around in its pondering way, we cannot be assured this recovery will last.

Further: we are now being treated to an object lesson in the irrelevancy of economics.

The good jobs news has brought to the fore the great divisions within economics. Those of you who are new to the subject might be forgiven if you imagine it to be a scientific pursuit laden with sage insights and bursting with solid advice. Not at all. It is an art. It is an adjunct to politics. It is full of ideological axiomatically driven bias. Its object is to discuss its own artifacts not those of a real economy. Thus it expends derisory amounts of time on a general equilibrium that no one, not once, has actually witnessed. It stylizes consumers as being automatons with inhuman cognitive capacities. And it flattens business firms into a ludicrous other wordily construct that no business person I know would recognize, let alone dignify as a grown up interpretation of what goes on. This is all done in order to pursue the holy grail of determining, definitively, that markets are more efficient than any other form of allocating mechanism – like the government for instance. At the end of all this its more honest adherents will admit the entire enterprise is disconnected from the real economy, while its more ardent defenders will argue this paraphernalia actually helps interpret the real world.

Quite how, I am at a loss to say. But there we are.

Meanwhile the more politically connected representatives of this melange of arts get involved in the debate about the jobs news.

One side, represented by the infamous Glenn Hubbard – of ‘Inside Job’ notoriety – says that the pick up in employment is despite Obama’s policies. The other side, represented ably by Larry Summers – the leader of bank deregulation amongst other oddities – says that the gain is entirely due to those self same policies.

Nothing could articulate for you the irrelevancy of economics more clearly. Which is it? Did those policies help or hinder? A scientist could answer that question. An artist can always paint a picture or tell a tale to defend whatever side needs a good story. Some people like abstract art. Some people find orthodox economic theory appealing. Whatever pleases your eye. And whatever plays into your preconceived views. Capitalism is great. Or it is an abomination. Economists have no idea which. But they can sure as heck talk about it. As artists they are unsurpassed. The stories they tell are riveting. The pictures are full of color and texture. Our walls and libraries are copiously equipped with the product of economic artistry.

The connection between bankers and economists, beyond their artistry, is that they have the power to be really dangerous. They both believe themselves in possession of magic that allows them to defy uncertainty. They have concocted recipes for brews and potions that addle the rest of us into thinking that we, too, are free from the ravages of uncertainty. Since that is so alluring, we were in their thrall.

Then they trashed the place.

Only to emerge as the people we turn to fix things. Now the bankers are called creditors. They’re the ones calling for wisdom and sacrifice on the part of the devastated economies. And the economists are the ones we turn for the wisdom and to organize the sacrifice in order that we all may return to our happy ways. So the economists negotiate with the bankers on our behalf in order to right the wrongs they wrote.

How did that happen?

I don’t know.

But it goes to show how relevant irrelevancy can be.

Alice in Wonderland?

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Buyer’s Remorse?

Some of you are no doubt aware that Sir Fred Goodwin is no longer Sir Fred, but simply Fred. The UK government has an obscure department tucked away deep within its wood paneled bureaucracy that has the power to reverse awards like knighthoods. So whereas once Fred was a poster child for aggressive capitalism, and thus was invested as Sir Fred, he, having fallen calamitously from grace and having taken the Royal Bank of Scotland with him, is now relieved of his title and has reverted to being one of us – a mere commoner. He is Fred once more.

This is a tad perverse. I think it’s silly to give out titles anyway, especially knighthoods – where exactly was Fred’s horse and armor? – but this idea of taking it back just makes the first error more noticeable.

I recall being given Tom Peter’s run away business best seller back in the 1980’s. In it he described the business practices of a series of supposedly excellent firms, the kind we all ought to emulate. The CEO of our bank wanted us to absorb the lessons carefully, copy them, and propel our little enterprise to the top of the performance list. As it turns out it was a good job we failed, lamentably, to replicate their success. Most were dismal failures a few years later. The lesson is obvious: business success is short lived and almost entirely due to good luck. This is as it should be in an uncertain world. Indeed it is exactly what we would predict.

But, no matter, the UK government’s u-turn prompts me to wonder what other titles need to be rescinded now that history has had its way with lofty reputations. I have few winners of the economics pseudo-Nobel prize in mind.

What about you?

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Jobs – Lot of Them

Today’s employment report was very positive. It is difficult, even for a conformed skeptic like myself, to find much to gripe about – we will get to my caveats in a moment. If this keeps up the election this November takes on a totally different tenor. More importantly, a whole bunch of people will be newly employed. About time.

According to the report the US economy added 243,000 jobs in January. Virtually all of this was in the private sector and was well distributed across the economy – no one sector or industry dominated, so this was a broad based gain. Of note was the 50,000 new jobs on manufacturing, and the gain in retail stores which was a little patchy but nonetheless strong. The retail sector lost 14,000 jobs in specialty clothing stores as places like The Gap retrenched, but this was more than offset by gains elsewhere, such as the 19,000 pick up in department stores. Overall retailers have added 390,000 jobs since the end of 2009, which suggests that demand is filtering back and that business confidence is growing.

The manufacturing gain was particularly strong in the durable goods sector, which reflects the increase in investment we have seen over the last year. Overall durable goods manufacturers have added 418,000 jobs in the past two years.

One of the caveats we need to note: construction id reported to have added 21,000 new jobs in January, after having added 31,000 in December. We should be cautious here. The unusually warm weather may have allowed firms to hire earlier than they normally would. Plus the seasonal adjustment may be giving a positive skew to the data. Let’s see if this trend keeps up further into spring.

The service sector contributed the most to the overall gain. Firms providing professional services led the way by adding 70,000 new jobs, with almost half that coming in the employment industry itself. Clearly the workplace is changing for the better if the employment bureaus feel the need to staff up to cover the volume. Other notable gains were in accounting, 13,000 new jobs, and architecture and engineering, with 7,000 new jobs. Elsewhere in services, health care continued to add jobs – 31,000 in all – with a notable contribution being made by the businesses affected by the new health care reform, which clearly did no harm to the private sector.

Lastly we should note that the hospitality industry, including restaurants and other eating places, is recovering well. It has added 487,000 jobs since the low reached for that industry in February 2010, with 44,000 coming this January alone.

This stronger job growth is reflected in the unemployment rate which dropped 0.2% to 8.3%, and is now down 0.8% since last August. Within the demographics, the unemployment rate for adult male and female workers is now the same at 7.7% – the rate for male workers fell in January. Teenage unemployment remains very high at 23.2%, while the unemployment rate for blacks fell to 13.6%.

The number of people who are marginally attached to the workforce – to use the rather dry term tossed about by the government – remained about the same at 2.8 million. These people are those who are wanting to work, have looked for a job in the past year, and are still without a job. This group consists of about 1.1 million discouraged workers – people who have given up looking for work currently because they don’t think there is anything out there; and about 1.7 million who have not looked for work in the past four weeks – usually because of things such as school commitments and so on.

This leaves the total of unemployed workers at 12.8 million, down from 13.1 million in December 2011, and 13.9 million a year ago. Obviously progress is being made.

What do we make of all of this?

First an additional caveat: the Bureau of Labor Statistics annually changes its estimate of the population. This year it added over a million people to its estimate. That alters the proportions favorably when we are discussing unemployment. I don’t think this alters the trend at all, but it does give the appearance of a more dramatic gain than might be real.

With that in mind, this is a good report. Jobs are being created across the board – except in the government sector which has lost 276,000 jobs in the last year, but didn’t change much in January. There is now a noticeable recovery in the private sector which added about two million jobs in 2011. Most of that growth has been in the last six months alone. The rate of job creation in manufacturing is now at a six year high. The flip side of job creation measured by the new claims of unemployment assistance has dropped to a new, and much lower, level. So the tone of the labor market has improved markedly.

Things are definitely looking up. There is no denying the progress being made.

Now back to my normal grumpiness: this is not enough. An unemployment rate of 8.3% this far into an erstwhile recovery is mediocre at best. Even at January’s pace of job creation we will have unusually high levels of unemployment well into 2014, which is absurd and painful given that we all knew how to avoid the problem.

Which brings us to politics: the recent steady improvement in the employment situation will start to have a knock-on effect in the presidential election. If, and it is still a big if, the unemployment rate gets below 8.0% during the summer, and if, also a big if, growth chugs along above 2.0% all year, then Obama’s re-election chances will surely rise dramatically. It would also take away the primary line of attack from whichever Republican he is running against. I wonder how long it will be before we hear of conspiracy theories surrounding the government’s supposed rigging of the numbers. I guess mid-summer.

But that is speculation.

What is real is this improvement in the labor market. Let’s applaud and hope for more.

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Brighter Jobs Market

This is a very hectic week, but today’s ADP jobs report is worth noting: the private sector added another 170,000 jobs in January, down from December’s 292,000, but decent nonetheless. This means we have had twenty-four straight months of job creation and confirms what other statistics are telling us: the recovery is well under way, but remains at a steady rather than dramatic pace.

While this is all good news, we should not get carried away. The economy is laden with under used resources, both labor and capital, and so we are leaving a tremendous amount of wealth on the table each month.

The details of the report suggest that there is a stirring of growth at the lower levels of the economy. The vast majority of the new jobs were in small or medium sized businesses, and the service sector is the primary driver of growth – 152,000 of the total were in services, while only 18,000 were in manufacturing.

Also of interest, because it gives us insight into consumer confidence outside of the usual surveys, is that there has been a steady increase in the number of workers quitting their jobs voluntarily in order to take a better job. This supports the notion that the tone of the labor market has improved and that, slowly but surely, workers are shaking off the deep despondency of the crisis. Hopefully we can maintain this trend since it will have a compounding effect by spreading confidence throughout the economy.

Lastly: one of the much discussed aspects of this crisis has been the way in which the collapse in property values contributed to the sticky labor market. Many workers were not able to move to new regions of the country to take a new job because they could not sell their home without taking a loss. This added to the problems all too evident in the job market and has made the recovery much more difficult. The news that more and more people are changing jobs of their own volition suggests that they are able or willing to make a move despite the impediment of a potential housing issue. Perhaps we are seeing a general loosening of conditions and thus the beginnings of a stronger trend.

Perhaps.

We will have to watch theses kinds of statistics carefully over the next few months in order to tease such information from the data.

Still the jobs market is much better than it was. And that’s worth noting.

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