Economics

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Signs of Life? Part 3

OK, let’s end the week with one last optimistic hurrah. Today’s employment report was pretty good. That’s probably less enthusiasm than you will sense in the way others are reacting, but I put today’s numbers in a longer term context. In which case they aren’t bad, but they aren’t exactly terrific either.

The facts:

The economy added a total of 203,000 jobs in November. Growth was across the board, so we cannot argue that there was a peculiar one sector warp to the figures. The unemployment rate dropped to 7.0%, which puts it back roughly where it was at the end of 2008. This is clearly a good thing, but it has also taken an inordinately long time to get here. We ought not be too proud of the ineptitude that led to such a prolonged period of high unemployment. And, parenthetically, 7% is still too high: we have a way to go before we can claim to be fully recovered.

Meanwhile the number of people looking for work increased and helped bring the workforce participation level up slightly to 63%, from the prior month’s 62.8%. The return of government workers previously record as out of work because of the government shutdown may have skewed the figures somewhat, so we should be careful in drawing any long term conclusions.

Lastly the number of long term unemployed remains stuck at around 4.1 million, a shockingly high and depressing figure that often gets glossed over. Long term unemployment is usually associated with the atrophy of skills, immense financial disruption, and an increasing resistance by employers to offer work. After all, businesses often argue, there must be a perfectly good reason why someone has been unable to find work after so long a period.

So, while this report suggests the economy is sustaining its recent trend of decent performance, it doesn’t suggest a breakout to better or higher rates of growth. For this reason I see the Fed resisting calls to cut back on its unusual monetary policy. Indeed with Janet Yellen about to take over the helm I think that the end of the Fed’s support activities may well have to wait until late in the first quarter. By then we will know whether this week’s flood of buoyant news was the start of better times, or whether all those odd and one off circumstances that led to the flurry of strength, were merely masking prolonged stagnation.

I tend towards the latter thought. Let’s hope I am wrong.

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Signs of Life? Part 2

Yesterday’s reports of economic strength have been followed by a couple of similar reports today. We are spoiled by good news. Well sort of.

The headline grabber will be the news that GDP grew 3.6% in the third quarter. If you recall, the first estimate had growth at a much lower 2.8%. This level of growth is the highest we have seen for a while and would, on the surface, suggest things have taken a turn for the better.

But, of course, that’s just on the surface. Before we get to the enigma inside the news let’s run down the basic facts:

  • Personal Consumption rose by 1.4%, which added +0.96% to that 3.6% total
  • Private Investment grew by 16.7%, which added +2.49% to the total
  • Exports grew 3.7%, while imports only grew 2.7%, which means that net trade added +0.07% to the total
  • Federal government spending declined 1.4%, but State government spending rose 1.7%, so overall government spending added +0.09% to the total

So what’s the enigma?

First, personal consumption, which accounts for around two-thrids of the entire economy, had its slowest rate of growth for a while. In fact you have to go all the way back to 2009 to find weaker growth. This does not auger well for the economy. Clearly households are still holding back. Or, which is more likely, they are being constrained by weak employment and wage growth. All those arguments about inequality and our incredibly skewed distribution of wealth are relevant to this part of the economy: there may be a lot of cash sloshing around the economy, but if it doesn’t end up in the average household where it is more likely to get spent, then the economy doesn’t benefit.

Second, and this may well follow from the prior point, the big jump in private investment was ruled by a second quarter of huge inventory accumulation. Indeed almost half of all growth in the third quarter can be accounted for by inventory build up. This, to put it bluntly, is not a good thing. There are always two interpretations of inventory accumulation. The positive spin is that businesses are sensing an imminent burst to consumption and so stock shelves in anticipation of strong sales. The negative spin is that businesses stocked shelves but the sales didn’t materialize and so production will have to be cut in order to allow stocks to run off. I think there is more of that second explanation than the first in last quarter’s numbers. Demand looks weak. Inventories are too high. Production will have to be adjusted downwards. This implies a weaker economy in the next quarter or two.

We ought not to leave GDP without commenting on the continued shrinkage of Federal spending. In ten of the last twelve quarters Federal spending has declined. This puts a dampener on overall growth, which is the exact opposite of what we need. There is a time and place for budget cuts, the last few years was not such a time. We have, due to wrongheaded austerity policies, prolonged and worsened the economy’s weakness.

There’s no news in that. But we ought to resist further austerity moves as determinedly as we can.

The other report released today was the weekly summary of new claims for unemployment assistance. This was also unexpectedly good. Claims fell by 23,000 to 298,000. This is only the second time claims have been below the 300,000 mark since the recession, and, under normal circumstances would be very good news. There is a problem however. The report is seasonally adjusted, and such adjustments are always a little tricky during holidays like Thanksgiving, when newly unemployed people may delay making their first application for help. So, rather than get too excited, we all need to wait a week or two to see if future numbers reinforce or contradict today’s apparently upbeat message. Besides, as I have mentioned many times before, we all ought to focus on the four week moving average of claims because it is a more reliable statistic. That number also dropped nicely, by 10,750, to 322,250. So clearly there is positive momentum in the labor market. How much remains to be seen.

So there you have it, two good but flawed pieces of news.

The economy is still growing, employment is still improving, but neither is as strong as today’s reports suggest.

Which means we are still stuck in relative stagnation and still need help rather than hindrance from Congress. Good luck with that.

 

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Signs Of Life?

I was asked yesterday, by a stranger who knew that I write about such things, what I think about the economy. I said it sucks. Which it does in many ways. Yet there are signs of life because the news this week has been good so far.

Take, for example, the monthly report from the Institute for Supply Management. This is one of our more eagerly awaited pieces of data because it gives us insight into conditions in our manufacturing industries. The latest report covers information gleaned about industry in November, and was much more ebullient than anyone expected. The index of activity rose to 57.3% in November, up from October’s 56.4%. This continues a recent run of continuing strength and brings the index back up to where it was back in April 2011. There is  no way to interpret this other than to say it is very positive – any number over 50% points to expansion, and a series of such numbers suggests a steady gain in momentum.

The problem is that other statistics, also seeking to measure strength in manufacturing, seem at odds with this rosy picture. For instance, the Commerce Department’s data on orders for manufactured goods, has been relatively flat all year and is now suggesting a rather sluggish immediate prospect far removed from that the ISM data seems to support.

Time, will of course, resolve this apparent discrepancy, but the ISM index has generally stood the test of time and is a fairly reliable barometer of what is likely to go on over the next few months. So I err on the side of optimism, albeit cautiously.

Supporting this, and in another sector of the economy, is today’s news about new home sales. They jumped much more than expected in October, the latest moth for which data is available. Indeed that annualized rate of 440,000 new home sales represents a remarkable 25.4% increase over September’s rate and is a heady 21.6% up from last October. The median sale price in October reached $245,800, and the mean rose to $321,700. Meanwhile the inventory of new homes available for sale shrank to 183,000 which is around 4.9 months of supply at current rates of sale. This news is simply another in quite a long string all suggesting that the recovery in real estate is now fairly complete. Another well known report in this sector is the Case-Shiller index that tracks prices of existing homes being re-sold. The latest data we have from Case-Shiller – for sales through September – has prices at around 11.2% higher than last year, with p[rice gains showing up right across the country.

Incidentally, anecdotal information suggests that the new regulatory requirements issued by the Consumer Federal Protection Bureau which come into effect in January, may slow the real estate market down a little because they some of the easy money style mortgages that fueled real estate activity during the bubble. These regulations may end up damping bank lending down a little and thus making financing a home more costly and difficult. If they appear to be too stringent they may be revised. Then again such damping down is exactly what they are intended to do. They will make the emergence of a new bubble less likely.

Lastly, in this good news fest, is today’s employment report from ADP the big private payroll processor. ADP measures employment gains across the private sector and publishes its data a couple of days ahead of the government’s more complete employment and unemployment report, the next of which is due out Friday. According to ADP the economy added 215,000 new jobs last month which is well above expectations. It is also the best monthly gain in a year, and suggests that all the confusion caused by the government shutdown which depressed October’s numbers is well in the past. It also suggests that those dire reports about the negative effects on employment of health care reform were false. But we knew they would be didn’t we?

So there you have it. Three good reports in the span of a few days. Three very different parts of the economy doing well – very well.

So, why do I think the economy sucks?

Because of the longer term problems we have notably the enormously unequal distribution of the way in which new wealth is distributed. Our divided society is getting ever more sharply divided, and I consider that a major impediment to our ability to return  to a path of both strong and steady growth.

But that’s old news. Most of the newer reports are good. So let’s absorb that for a while before we dive back into the arguments over inequality.

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Matter of Opinion Economics

Those looking for economics to cure itself will be waiting a long time. We need a generation to die out first. Maybe two. Maybe it will never happen. Then again …

There is more than one way to understand our current malaise. The problem is that economics provides several. There’s an economist to defend pretty much any economic policy. Some say up. Some say down. Some say both up and down are merely efforts to subjugate the working class. Some say sideways is probably better when interest rates are too low. This, naturally depends on your view as to whether interest rates are too low. Some say there’s an “natural” interest rate. Others say there’s nothing natural at all in an interest rate. Some say that all economics discriminates against women and so needs to be re-written anyway. Then there’s those that see growth as the panacea. While others tell us growth is the problem.

Some say economics is positive. Others say no it’s not. Some argue for more math – it’s so logical and disciplined. Others say math just hides bias or sloppy thinking. Yet others say that the math economists use is rotten and an embarrassment to mathematicians everywhere.

There are leftist economists. There are rightist economists. There are orthodox and heterodox. There are, I am sure, both tall and short economists. There are some who think in evolutionary terms, and there are those who clearly have no idea what evolution is. There are those who believe in equilibrium, as if it were the holy grail. There are those who, having never seen one, think an equilibrium is a misleading mirage.

Some have utter faith in markets. Others suspect markets are, being human, irretrievably muddled. Some think government intervention is the cause of the malaise. Others believe that only government intervention can cure the malaise.

In summary:

There isn’t such a thing as economics. All those textbooks and academic papers are simply expressions of opinion. Articulate, numerate, and logically expressed opinion. Clever opinion.

And, yes, there are some grand thematic theories that lend a general flavor to those opinions.

For those keeping score there are really three great such flavors.

Classical; Marxist; and Keynesian. All the rest are usually just offshoots, nuanced variants, or modifications of these three.

The first arose in order to justify the unfettering of business from central authority, when that authority was autocratic or authoritarian. Its variants all advocate “freedom” – or property ownership, of workplace relations, of the individual etc – as the bedrock of prosperity for all of us. The irony of this line of thought is that it emerged in the early days of social transition from authoritarian governance towards democracy and so remains suspicious of government because it fails to recognize the legitimacy of the mass versus that of the individual. Most of its modern variants suffer from this fault even now. Austrians I am looking at you!

The second arose in reaction to the conditions that the first defended. Notably that unfettered freedom was an illusion. Some may be free, but others weren’t. Not, at least, in any humane definition of that concept. All the institutions built to defend those hallowed “freedoms” were, apparently, simply a disguise to prolong oppression. An oppression that, because of the inherent contradictions of early capitalism, would collapse anyway. Thus in contrast to the first, classical, flavor, this line of thinking fails totally to incorporate any meaningful individuality. It is obsessed with collectives. And it is based on a strangely teleological view of history: it posits outcomes as inevitable, rather than as optional.

The third arose in the midst of the very kind of crisis that Marx suggested was inevitable – he was right about so much darn him. Its context was a deep crisis within, and apparent failure of, the Classical view, along with a democratically informed rejection of the Marxist alternative. It sought to preserve the prosperity machine of the former, yet modify it by acknowledging the worth of occasional collective action. It could re-introduce government intervention as positive because governments were now often democratically determined. The choice was not between oppressive autocratic tinkering and a wild free for all, but between degrees of government activity. It was between bigger or smaller government, not none or all government.

Neither of the first two flavors fit well with modern democracy. They developed before it and assume a socio-political milieu more appropriate for the mid 1800’s than the technologically entwined global economy of the 21st century. They are extreme and tend to appeal to those searching for “pure” answers. They are impossible to implement in a world filled with human beings. They also ignore a great feature of reality: that none of us knows the future. The Classicals get around this by assuming the future replicates, at least in part, the past. The Marxists get around it by embedding us all within their theory of history, so the future is known and it’s all just a matter of navigating towards it.

These three great traditions are all well thought out, brilliantly explicated, and ready to infuse any opinion you might want to come up with.

I have no doubt there will be a fourth one day.

Why?

Because economics is contextual. It is socially contingent. And, because societies change, so too does economics, but, naturally and in order to add to our consternation, economists like to advocate policies that alter society, so there is feedback between economics and the society it seeks to explain. Society and its economy are entangled. It’s hard to tell where one ends and the other begins. Still, when a moment arrives that the three old flavors are not useful, or look quaintly out of touch with contemporary problems, someone, somewhere, will develop that fourth flavor.

And since the older flavors will no doubt linger on in some distant academic setting, all the new development will do is to add to the noisy argument and clash of opinion that passes for economics.

If you thought it’s confusing now, just wait. There will be more choice.

Whether its a better choice is, of course, a matter of opinion.

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Another Walmart Goodie?

The Cleveland Plain Dealer reports that a Walmart in Canton Ohio is having a drive to raise food for the needy. How socially aware of them. And so unusual for Walmart, which normally displays a regard for society at the level of Attila the Hun.

Except.

In this case the food drive is designed to help Walmart employees and not the public.

I wonder whether we file this piece of corporate wisdom in the same category as the recent MacDonalds advice personal finance to its employees who were assumed, in the illustrative budget they were given, to have no heating costs and so on. Only then could they save anything given the wages MacDonalds pays.

Back to Walmart.

Now it could be that a few employees had set the drive up on their own, without management consent, and that it is thus a local well intentioned effort to help co-workers. I am suspicious though. Mainly because Walmart’s management operates along the lines of a cross between the Gestapo, the Stasi, and the NSA. Remember, this is a company that has locked its employees in so that they don’t take unauthorized breaks. So the idea of anything resembling a food drive taking place without management consent is tenuous to say the least.

Maybe Walmart could pay its employees enough that they didn’t have to rely on charity for subsistence. Then again that might disrupt this year’s divined payout to the Walton family. Or it might lower senior management bonuses. And we don’t want to do that. Personally I am surprised we haven’t seen this food drive held up as another example of the “have-nots” trying to mooch of the “haves”. I just don’t get why the little people – the kind who resort to working for below living wages at places like Walmart – can’t make do with less. It’s not as if they have important things to do, or that they work for what they earn, like, say, the Walton family does.

Horrid, don’t you think?

Addendum:

You will notice in the story that there is a fund within Walmart that gives grants to employees in need – things like being homeless count as a “need” in this case. What you might miss as you read the article is that this fund is financed by employee payroll deductions. It isn’t a company effort at all. Although the company spokesman is clearly trying to position it such that the fund is viewed as an example of Walmart’s employee outreach. The gall of the company is astonishing. More astonishing is that, apparently, homelessness is common enough amongst its employees that it gets a mention as an example of the type of problem the fund is set up to offset.

Living wages? No. That can’t be part of the problem. Can it?

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