unemployment

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A Mixed Week Ends Well

There was a flurry of economic news this week, most of which was encouraging. The economy is in decent shape. Not great, just decent.

We began, on Monday, with a strong showing from durable goods, which grew 4.6% in December. The problem with this is that the growth was skewed by aircraft orders which are notoriously volatile. Even without them, however, orders were – you guessed it decent. The other Monday report was also a bit misleading. Pending homes sales dropped 4.3% in December, but the problem appears to be a lack of inventory of houses for sale in key areas rather than a lack of demand. This weakness may continue until the spring when home owners usually start the selling process. This would ease the inventory blockage and allow demand to be met more closely.

Then Tuesday produced evidence to support that interpretation of the pending homes sales decline: the Case-Shiller index of home prices showed a solid year on year price gain of 5.5%. Nineteen of the twenty cities comprising the index showed a year on year gain, with only New York City showing a decline. So the real estate market continued its recovery throughout the year and enters 2013 in much better health. We ought to remember, though, that even after 2012’s recovery home prices are still about 30% below the absurdity of their bubble peaks and practically every index of activity in housing is well below those peak levels as well.

Tuesday also brought us a shocking consumer sentiment number. The Conference Board measure of sentiment dropped to 58.6 in January, its lowest level since November 2011. Not only was the decline sharp – the index had been 66.7 in December – but it was more than expected and through the market into some confusion. The thinking had been that the horror show in Washington had eroded consumer confidence a tad, but no one expected anything to this degree. It turns out that the decline was less to do with legislative lunacy and the ongoing farce that is our political system, but was driven largely by a reaction to the sudden loss of wages due to the hike in payroll taxes. Not only does that hike scrunch worker pay packets, but it reminds people that their wages haven’t been growing much anyway. Score another negative for the forces of austerity.

Next: Wednesday brought us the bad news that the economy actually shrank 0.1% in the fourth quarter. This turns out to be an illusion when we adjust for two major quirks. First, inventories dropped sharply. Second, there was a huge spike down in defense spending. Remove these two oddities and the economy was chugging along at its recent 2.0% pace. there is no reason to believe that either inventories or military spending will repeat that fourth quarter gyration. So we can safely ignore them when we try to project the trajectory of growth this year. That dull, but decent, 2.0% rate seems a safe bet.

On Thursday there were one or two more strange numbers to think about. Personal incomes rose in December at the fastest rate for eight years. Was this the end of wage stagnation? Unfortunately not. The 2.6% jump came almost entirely because of a 34.3% increase in divided income. A very large number of businesses shifted their dividend payout from early 2013 to late 2012 in order to avoid potential tax increases. So what appears top be a great number turns out to be a total dud. The increase will simply be offset by a decline in 2013 as things settle back to normal. And that flood of cash it unlikely to turn up as spending. Typically people who receive much of their income as dividends are more wealthy and tend to spend a smaller percentage of their overall income.

Thursday’s weekly new claims for unemployment assistance data was also a jolt. Claims shot up 38,000 in a single week. Under normal circumstances this kind of change would make us all worry about the labor market, but this week’s figures elicited a big yawn. The reason being that it seems to be simply an unwinding of a major seasonal shift. The prior few weeks had been unusually strong, so much so that no one really believed the figures, and so this week’s weakness has been interpreted as a return to normal.

That this is the case is supported by today’s employment data. The economy added 157,000 new jobs in January which belies any thoughts of weakness. The number of new jobs was less than many had predicted based upon the very healthy 192,000 new private sector jobs reported by ADP earlier in the week. One of the key differences between the government report and the ADP date is that the government includes public sector jobs as well. Since government at all levels has been shedding jobs steadily the relatively good data for the private sector is being masked by the layoffs by government. Don’t forget that the majority of government jobs fall into three categories: teachers, police, and fire personnel. So the attrition of government jobs means we have of those people. Indeed most of the loss is in teaching – the country is employing about 300,000 fewer teachers than before the onset of crisis.

The good news on the jobs front was that there were some major revisions to the data for the end of 2012 with the result that the economy added an average of close to 180,000 jobs a month last year. This is the best sustained rate of job creation we have seen for a decade, and speaks well to the underlying strength of the economy. It still isn’t good enough, though, to prevent the unemployment rate from ticking up slightly to 7.9%. The reason being that we are seeing a greater influx of workers into the workforce. With opportunities more abundant some of the discouraged workers who dropped out completely during the bad years are now starting to look for work again and this has the perverse effect of making the data look worse.

Lastly, also today, we had the monthly glimpse into manufacturing provided by the Institute for Supply Management’s index and we had a different look at consumer sentiment.

The ISM index rose to 53.1% from 50.2%, which was a slightly stronger improvement than expected. Any reading over the magic 50.0% mark means that the manufacturing sector is expanding rather than contracting so this months number is encouraging. It also reverses the slight reversal that had set in during late summer and early fall. At the same time it is a not a very strong statement about the economy. Clearly thing could be a lot better.

Then there was the University of Michigan’s monthly look at consumer confidence which showed an increase from 72.9 in December to 73.8 in January. Yes, I know. This contrasts rather starkly with the other index – from the Conference Board  – I mentioned earlier. One fell, the other rose. The common features are these: the ending of the payroll tax ‘holiday’ hit consumers hard; neither index is very strong by historic standards; and both were depressed  by what people see as dampened current conditions. Those aspects of sentiment dealing with the future were more buoyant. Whether consumers are right about the future we will have to wait and see.

Right now we have navigated a very full week of information only to end up pretty much where we started. The economy is decent,not great. It could be a whole lot better, but won’t be until we get policies aimed at getting demand moving. Since the entire focus is on austerity, which is a policy disaster, we cannot expect an improvement.

Nothing this week changes my mind: look for growth to hover between 1.5% and 2.0% this year. Better than nothing. Not good at all.

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Jobs Report

I would be remiss not to remark on this week’s employment news. The economy added a decent 155,000 jobs in December. Coincidentally that is almost exactly the average monthly gain we have experienced for the past two years. So the recent trend continues. We add sufficient jobs to absorb new workers coming into the workforce, but not enough to whittle down unemployment very quickly. The unemployment rate remains 7.8% and doesn’t look likely to move much until spring at the earliest. There were a couple of changes to prior months also reported today: October’s job growth was reduced slightly from 138,000 to 137,000; whilst November’s was boosted from 146,000 to 161,000. Neither change adds much to our understanding of the trend.

Even the detail has become mundane: jobs were added across most sectors of the economy, health care led the way with 45,000 new jobs, while only the retail and government sectors lost jobs – the latter being the biggest loser, shedding 13,000 jobs in the month.

Perhaps the most interesting aspect of the report is that, by being so close to the recent average, it suggests that all the horror stories about the uncertainty created by the fiscal cliff debacle – remember the cliff was supposed to be a major reason businesses were not hiring – were wildly overblown. Clearly business chugged along regardless. We are already being treated to a reprise of the horror message as we head towards the great debt ceiling confrontation in the next two months. Maybe we should all take a deep breath and relax. The shenanigans in Washington is being tuned out by huge swathes of the country. Or, at least, we have become sufficiently inured to the nonsense down there that we plod along and try to ignore the silliness.

At any rate, this report speaks to a remarkable stability. We are growing. We are growing too slowly. The theme stays the same.

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Explicit Fed

The Fed has shocked some people today. I don’t think it shocking at all. I see today’s announcements as the continuance of a trend, so the shock is not so significant as others seem to think. Still things are different now.

The shift people are focusing on is the explicit nature of the Fed’s targeting. From here on out we are all clearly aware of what will drive Fed activity: it’s goals are an unemployment rate of 6.5% or less, and an inflation rate of 2.5%. Not only this but the Fed has made it clear that it will work to keep interest rates at their current low levels until the unemployment rate gets to that 6.5% level, which is not expected to be until sometime in 2015.

From my point of view, the Fed has been edging towards this kind of policy clarity for while. I think Bernanke’s legacy at the Fed will be more about his willingness to be transparent than anything else. After all he was one of those mistaken about monetary policy and the economy before the crisis: his abject adulation of Milton Friedman is a fitting epitaph for a who generation of failed economists.

But the shock being expressed in some quarters, notably on Wall Street, is out of order.

In those circles the Fed is being seen as suddenly siding with the unemployed while abandoning its time honored pursuit of stable prices to boot. It’s as if the Fed were going to allow inflation to rise suddenly.

This is nonsense for two reasons.

First, the Fed has a dual mandate. It was always supposed to be pursuing full employment – however that is calculated, and it was always supposed to pursue stable prices. Both at once. In recent decades, though, the Fed, like most central banks, forgot the unemployed and focused relentlessly on inflation. This meant quite often that it looked as if it were ignoring half its mandate. So, by being explicit about its unemployment target, the Fed is merely being true to its charter. There is no news other than the Fed has finally woken up to its social mission.

Second, and this is more practical, there is no threat of inflation. This must be driving ‘austerian’ and orthodox economists nuts. In their world, all the Fed’s extravagant support of the economy ought to be showing up as inflationary pressure. All that new money is supposed to be causing hyperinflation. This is a common claim from the right and is often used to try to dampen down efforts to stimulate the economy. It is also laughable. At some point, no doubt, the endless cries of imminent inflation from this crowd will prove to be correct. Whether that is any time in this century I have no idea. But like the proverbial broken clock they’ll get it right at least once. At the moment, though, they lack any credibility. Their theories have been so thoroughly debunked by circumstances that it is a wonder they are employed at all. Still they infest Wall Street where, as we know, being incorrect or ignorant is no barrier to profit or career progression.

So the Fed hasn’t abandoned the fight against inflation because there isn’t any to fight against. Nor has it suddenly lurched into the arms of the unemployed because it as always supposed to be on their side anyway.

No.

The boldness of today’s Fed actions is simply that it’s being clear about its intentions, its actions, and its operations. It is thus  helping clarify the environment for business community, who as we all know, prattles on endlessly about how vague everything is and how that vagueness prevents them from doing anything –  like investing in America.

Calling that bluff is a good thing for all of us. Well done Fed.

Our newly explicit Fed.

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Employment Numbers: Good or Bad?

Don’t you hate it when the best answer to that question is a variant of: “well, it depends”?

But it does.

It depends on whether you read the household survey first or the establishment survey.

The household survey was taken a week earlier and thus captures the blip caused by hurricane Sandy. The good news is that the unemployment rate dropped to 7.7%. The bad news is that this decline was caused by a sharp drop in the workforce. The number of people working dropped 122,000, but because the number of people in the workforce dropped even more – by 351,000 – the ratio of employed people in the total workforce rose. Thus the unemployment rate fell.

Is this good or bad?

It depends.

If the survey failed to adjust properly for Sandy then the decline in the workforce may be less than reported and the number of jobs higher. What that would do for the unemployment rate we can’t guess without knowing the extent of the error. Which is my way of saying these numbers leave us in the dark. Somewhat.

The one thing we can say unequivocally is that whatever happened isn’t sufficient. The economy is still crawling along and not generating new jobs at the rate we require to push the unemployment rate down to an acceptable long term level. This is particularly true when we look at the expanded definition of unemployment to include those who are discouraged and thus not even attempting to find work, and those who are working part time instead of full time. This so-called ‘U6’ measure of unemployment stands at 14.4%, down from last month’s 14.6%, but still way too high. Plus the workforce participation rate fell to 63.6% a rate way too low to indicate a healthy economy.

In contrast to all this the establishment survey was both relatively uncluttered and encouraging.

The service sector generated plenty of jobs, with retailers adding 53,000; professional service businesses adding 43,000; the leisure and hospitality industry added 23,000; and health care added 20,000. The only significant downside came from an expected quarter: construction businesses shed 20,000 in anticipation of the slower work rate during the colder months. Government employment was unchanged.

Neither average wages nor the average workweek budged much at all.which is an indicator of a stalled economy going sideways rather than up of down.

So, despite the encouraging headline figures today’s news is a decidedly mixed blessing. The past few months have seen a shift for the better – the aggregate numbers over the last six months have shown a stinger trend – but there is nothing to get particularly excited about.

So, are the numbers good or bad?

It depends.

Is the glass half full or half empty?

That’s the kind of economy we have nowadays.

 

 

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Update On The Economy

It’s been a long break occasioned by a string of visitors. What happened in the interim? Not a whole lot. Washington is now deeply immersed in the three ring circus known as the fiscal cliff, an event, we are told, so horrendous that we all ought to be prepared to sacrifice our preconceived notions of fairness in order to rush helter-skelter into a fudged ‘grand bargain’.

No thanks.

Meanwhile the economy muddles along.

It would be nice to see some of the energy being directed towards the entirely pointless fiscal cliff activities being diverted and put to better use. Like getting the economy onto a secure, sustainable growth path. In my dreams.

Still the economy is hobbling along by itself. Today we read the latest GDP numbers. This is the second estimate and represents quite a jump up from the first. According to the report GDP grew 2.7% during the third quarter, up from 1.3% in the second and 2.0% in the first. So on the face of things the economy appears to have picked up the pace.

The problem with this is that the first estimate of the third quarter had consumption considerably higher than the 1.4% in the current version. Likewise business investment, excluding inventories, actually declined rather than increasing as was reported before. These are signs of weakness not accelerating strength, so the top line numbers are somewhat deceiving.

Looking more deeply into the data it becomes obvious that much of the apparent strength during the third quarter came from inventory accumulation. This is an ambiguous source of growth. The question we need to ask is what caused businesses to build up their stocks. If it was anticipation of demand, then it might signal continued good growth. If it was an error created by a miscalculation of demand it may signal a retrenchment ahead and weakening growth. Nothing is ever simple. Looking through the lens of subsequent activity, especially reports of strong sales during the early part of this holiday season we can – for the moment – speculate that it is the former reason, not the latter. It looks as if businesses built stocks ahead of stronger sales, got the call right, and that activity will continue at a more rapid pace.

When we deconstruct the 2.7% overall growth we find it has the following components:

Personal consumption contributed +1.0%

Private investment contributed +0.1%

Inventory change contributed +0.8%

Net trade contributed +0.1%

Government spending contributed +0.7%

You can see clearly from this list the significance of inventories. Everything else looks a little weak.

Elsewhere today we heard about new claims for unemployment assistance. They fell dramatically, by 23,000, to 393,000 last week, and down from the 451,000 of a couple of weeks ago. Once again I urge caution. These numbers are highly skewed by the effects of hurricane Sandy and are not a reliable barometer of the economy. It will take a while for things to settle down, by which time we will be into the funny numbers of seasonal employment. Of course the data is seasonally adjusted, but there are always blips that obscure trends. So don’t go celebrating today’s report, it is simply part of a return to normality, rather than an indicator of a new, stronger, normality.

Looking further afield we also heard about pending home sales which rose 5.2% in October, the eighteenth straight month of gain. Pending sales are now 13.2% higher than a year ago and continue their long road to recovery. As a comparison: this level of activity is roughly the same as that in late 2001, which is decent, not great, and not frenzied. We can safely say that real estate is back on its feet, albeit at much lower levels of activity than those reached during the insanity of the bubble years. Let’s hope it stays that way.

Finally, let me return to the fiscal cliff.

It is a contrived problem designed to scare us. Of course we don’t want a dramatic tightening of fiscal policy next year. That would be awful. But we must not forget that we do not have a Federal debt problem. At least not now. The annual deficit as a percentage of GDP shot up exactly as we would expect during a deep recession. It went from an order of magnitude of about 1.2% to around 9.0% of GDP. This explosion was predictable and temporary. Once growth is re-established it will decline back to its former levels of its own accord. No significant policy changes are needed. Remember: non-health care transfer payments have been a fairly constant proportion of GDP for decades. They rise during recessions and then fall back subsequently. Absent health care, transfer payments are not a cause of our supposed debt problem. By the way: defense spending has been a reasonably steady proportion of GDP as well. This irks me and others who would like to build a case to cut it, but that case has to rest on non-budgetary reasoning, not on false debt crises.

So, if the fiscal cliff is a made up problem, who made it up? and, why?

The fiscal cliff is an artifact of class war. It arises from the longstanding attempt of the political right wing to defund and shrink government, deregulate, and boost business profits. Hacking away at the safety net is simply part of that long term plan. Likewise the horror stories on the left are all designed to fight a rearguard sufficient to protect the safety net from the predation of our plutocracy. We happen to be living through a moment when the right came close to winning. They were perilously close to ramming through more tax cuts for the wealthy to be paid for by stripping funding from social programs. The result of this would be the long term impoverishment of the middle class and the continued enrichment of the top tier of income earners. So these are tense times when compromise is dangerous and thus difficult.

In this sense the fiscal cliff is also the first battle in a war designed to tackle inequality. Hence the obsessive focus on raising taxes on the wealthy, even though such an increase is insufficient to make much of a dent in the long term deficit.

In other words, the fiscal cliff is a political construct that results from our deeply divided views on social policy. It has less economic significance other than the near term negative shock it would deliver were all its aspects to come to pass.

Ironically, as I have pointed out before, anyone who is alarmed at such a negative shock is, by definition, making the statement that they see benefit in stimulus. For if sudden contraction in fiscal policy is capable of sending the economy into recession, as they argue, then sudden expansion of fiscal policy will drive the economy out of recession. The fiscal cliff rhetoric thus hides a stunning level of agreement. Apparently, and perhaps unwittingly, our right wingers are now ardent Keynesians.

Similarly, anyone who has made a fuss of the damage to inflationary potential of large deficits and government spending should now be applauding the imminent slashing of spending incorporated within the fiscal cliff packages. Think of the rating agencies. They are an example of the confusion on the right. On the one hand they warn us that failure to resolve the fiscal cliff issues will force them to downgrade US bond ratings. On the other they claim that reduced spending is a criterion for getting a higher rating. But the fiscal cliff would produce exactly such reduced spending. Clearly they don’t mean reduced spending. They mean reduced social spending. They have declared their ideological colors.

So we hear no applause, nor do we see consistency.

Which is why I make my claim about class war. The fiscal cliff is artificial. It exists as a ploy by the right to hack away at social spending. The rational response is thus to drive off the cliff, and then to negotiate backwards. This would make the right the fall guy for a hike in taxes on the middle class and consequently provide a major incentive for them to bargain quickly to undo the damage.

All this is my way of saying: tune the fiscal cliff blather out and enjoy the upcoming holiday season!

But wouldn’t it be nice were Washington to tackle some of our real problems instead of the mad up ones? Oh well. Dream on.

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