Better News!
I won’t say ‘good news’, but definitely better.
Jobs:
This morning’s report on first time claims for unemployment assistance has them dropping by 29,000 to 469,000. Before we all get too wrapped up by this though we have to recall the free pass we gave ourselves the last two weeks. There has been an issue with the accuracy of this particular data set for a few weeks because of the stormy weather and disruptions to the collection of the raw information. Anecdotal reports suggested that a backlog of application forms had built in some states most affected by bad weather, and that the clearance of that backlog made the week to week flow of data very ‘chunky’ and inaccurate. So tis week’s report may simply be the unwinding of those problems and not a refection of a deeper improvement.
With that said, any backing away from the increases of the last few weeks has to be a relief. Claims had edged 8% higher since the start of the year, making us all scramble to understand why. Other jobs related indicators – planned and mass layoffs, payroll numbers etc – all told a similar story: that the economy has come to the end of the purging of jobs, but that it hasn’t yet reached a point of adding new ones in bulk. The new claims data had been an outlier in this narrative so far this year, but today’s figures seem to pull it back ‘on message’.
The bad news within the jobs data remains the huge build up in long term unemployment. The number of people out of a job for six months or more has ballooned during this crisis: it is up to around 6.3 million, which is 41% of the total number of people reported as unemployed. It is this long term problem that caused the government to extend benefits which, in some states, are now available for up to 99 weeks. It was the continued extension of this benefit that sat at the center of ‘Bunning’s folly’ late last and early this week.
Long term unemployment is insidious and very damaging both to the person involved and to the economy as a whole. Skills erode through time and the existence of long term unemployment on such a scale suggests the economy needs to make a major adjustment. Oddly this intersects with the housing bubble implosion, because one factor preventing an unemployed worker getting a new job is their inability to relocate due to the existence of a loss in equity on, or an inability to sell, their home. This factor is one of the hidden results of the real estate binge we brought upon ourselves: less labor market flexibility and thus more long term unemployment being tolerated by workers.
Overall, though, the jobs situation is very slowly healing. I see no sudden improvement on the horizon, but the tone is now healthier than it was late last year. Unemployment should have now peaked and will start to trend down at a very slow pace throughout the year. And all thoughts of a ‘V’ shaped recovery should be banished from our thoughts.
Retail Sales:
Toady’s information released by the big retail store chains is good news: same store sales rose strongly in February, despite the snowy weather, which makes for six straight months of growth. Overall sales in stores open at least a year rose at little over 4%, which was well above the levels expected by most pundits, and much better than last February’s annualized 4.7% decline. Most of the big chains reported good gains and it appears that consumers were out shopping in numbers we haven’t seen for quite a while. Pent-up demand seems to be the motivating factor. Recent dips in consumer confidence had suggested that we would start to see retail sales edge down and that the string of monthly gains would be broken. That February saw such strength flies in that face of the confidence information and suggests that consumer sentiment is more generalized and aimed at the frustratingly poor performance of Congress and the White House.
Nonetheless we need this kind of activity to be sustained for many more months so that it feeds through to the GDP personal consumption figures. While retail sales and personal consumption are obviously related they do not necessarily move simultaneously – the retail sales data is just one part of total consumption, which also includes things such as restaurant expenditures, and other service like data not captured by big chain store reports. The fourth quarter GDP figures told a story of very slow recovery in those other forms of consumption, so it will be important that they pick up speed in the first half of the year and match today’s good news from retail sales.
Productivity:
I don’t often mention productivity, but today I ought to because it provides us with powerful insight into why we are experiencing a ‘jobless’ recovery and why inflation is nowhere near the problem some deficit hawks make it out to be.
The newly revised report on productivity shows a strong upward movement in overall productivity: it grew by at an annualized rate of 6.9% in the fourth quarter, up from the original report of 6.2%.
Productivity is the ultimate driver of wealth in an economy. This is because greater productivity in current activities releases resources to add new activities and allows resources to be re-allocated by consumers. This is a central theme of economic growth throughout history. As I mentioned earlier this week, it is the relentless growth of productivity in our factories that has created the illusion of the death of manufacturing in America, when, in fact, we produce more than ever. The same goes for agriculture: we produce way more than ever in our history and yet employ fewer farmers than ever also. Productivity in both manufacturing and agriculture has released millions of workers for employment in other sectors of the economy, and has lowered prices for the goods produced, so we are all much better off. So productivity lies at the heart of wealth creation over the long haul.
Last year’s rise, however points to the other side of productivity: it can rise more strongly if wages or employment drops. This is because being able to produce more with less input in the form of worker hours and worker wages are exactly what drives productivity higher. This is the ‘dark’ side of the improvement in manufacturing productivity I just mentioned. In fact part of the surge in fourth quarter productivity was driven by a 1.7% decline in unit labor costs – the highest decline ever recorded. This extraordinary drop in labor costs is attributable to the huge slack in the labor market and the near zero bargaining power workers have. In a classical sense this is a great example of the struggle between workers and capitalists: if workers have no bargaining power, improvements in productivity flow into profits rather than higher wages. Under those circumstances inflation disappears as a problem and deflation starts to rear its ugly head. Productivity gains, in theory, should ultimately show up in lower prices – that’s how we all get better off, we can buy more with our incomes as prices go down relative to those incomes. But if productivity gains flow only into profits while wages stagnate or fall because unemployment removes worker bargaining power, most people see no such improvement in their standard of living. On the contrary they may feel worse off.
A major implication of the fourth quarter productivity numbers, and especially that unit labor cost decline, is that we have entered a very dangerous zone for prices: deflation is a real threat. This reinforces my view that we need more stimulus and are in no way ready for a monetary or fiscal tightening.
Lastly, the trend of productivity gains flowing into profits rather than wages has been a long term one dogging that past decade. Gains in inflation adjusted wages have been flat for a long time, which is one reason why we now see a much more exaggerated distribution of incomes. Wage earners have lagged way behind those who get income from profits in the form of capital gains or investment income. The only major economic statistic that performed well throughout the Bush era was corporate profits, which now account for a much larger percentage of national income than ever before. The implied squeeze on wages has resulted in higher productivity, but it has also caused consumption to lag. It may also have contributed to the surge in household credit as workers tried to offset wage stagnation by borrowing to pay for large items.
This is dangerous territory for any free market economy to enter: if its wage earners cannot provide the engine of consumption a economy is prone to fall into the classic down cycle. Lower relative wages lead to lower profits, which induce job cuts etc.
I won’t bore you with the orthodox economic analysis of all this – orthodox economists deny that money has any meaning, they call it the ‘money illusion’, which is another fault line between them and the Keynesians – but I will point out that our current cohort of business managers,through their relentless pursuit of short term profit via a squeeze on labor costs, run the real risk of creating the very conditions in which they need to repeat those cuts. The ‘golden era’ of the 19050’s and 60’s was very different: there was an implicit understanding that wage growth was healthy because it fed consumption and hence profit. So, despite the existence of some very hard nosed executives, productivity flowed to wages as well as profits. There was a better balance between the two. Our current difficulties reflect decades of imbalance. The result being both difficulty in restoring consumption, and in avoiding deflation.
The lesson?
Beware of the results of deregulation and lax oversight: the consequences are both profound and deep rooted. They are also costly to eliminate, as we have just learned.
