Saturday, June 7, 2014

Weekly Indicators for June 2 - 6 at XE.com


 - by New Deal democrat

My Weekly Indicators piece is Up at XE.com.

The high frequency data is booming.

Friday, June 6, 2014

Live-blogging D Day hour by hour, as it happened


 - by New Deal democrat

For those of you who are interested, the blog World War 2 today, which normally posts one item per day, "live-blogging" what happened in the war exactly 70 years earlier, has been running numerous posts since late on June 4, on almost an hourly basis by now, as to the immediate prelude to and operation of the D Day landings in Normandy.

This is absolutely top-notch blogging, giving you a real sense of "you are there" as each facet of the landings begins to unfold.  By all means check it out.

May jobs report: same old, same old


- by New Deal democrat

HEADLINES:
  • Not in Labor Force, but Want a Job Now: up +292,000 to 6.438 million
  • Employment/population ratio ages 25-54: 76.4% down -0.1%
  • Average Weekly Earnings for Production and Nonsupervisory Personnel: $20.54 up $.03
In May 217,000 jobs were added to the US economy.  The unemployment rate was unchanged at 6.3%.  April was revised downward by -6,000. There was no revision to the March number.  

Since we knew the general range of job growth and unemployment, as I indicated last Sunday I would focus on the 3 above headline numbers as to "real" unemployment and wages.  These numbers for May tell us that we made no headway - in fact we went backward -  in bringing back discouraged workers into the workforce and into jobs.  

Those who want a job now, but weren't even counted in the workforce were 4.3 million at the height of the tech boom, and were at 7.0 million a couple of years ago.  The big increase this month was not welcome.

After inflation, real hourly wages probably declined slightly from April to May, but April was revised higher.  The YoY change in average hourly earnings is +2.4%.

The more leading numbers in the report tell us about where the economy is likely to be a few months from now. These were generally positive.
  • the average manufacturing workweek rose from an upwardly revised 40.9 hours to 41.1.This is one of the 10 components of the LEI, and will contribute significantly towards a positive number.

  • construction jobs increased by 6.000. YoY 188,000 construction jobs have been added.

  • manufacturing jobs  also increased by 10,000, and are up 105,000 YoY.

  • temporary jobs - a leading indicator for jobs overall - increased by 14,300.

  • the number of people unemployed for 5 weeks or less - a better leading indicator than initial jobless claims - rose by 15,000 from 2,447,000 to 2,461,000 compared with December's 2,255,000 low.

Other important coincident indicators help us paint a more complete picture of the present:

  • The average workweek for all nonsupervisory workers remained unchanged at 33.7 hours.

  • Overtime hours were unchanged at 3.5 hours.

  • the index of aggregate hours worked in the economy rose by 0.2 from 108.1 to 108.3.  This is a new record.

  • The broad U-6 unemployment rate, that includes discouraged workers decreased from 12.3% to 12.2%.

  • The workforce rose by 192,000. (partially offestting last month's number, which was the big Harbinger of DOOOOM at -806,000) Part time jobs for economic reasons decreased by 196,000.
Other news included:
  • the alternate jobs number contained in the more volatile household survey increased by 145,000 jobs.  The household survey jobs numbers had been lagging the establishment survey numbers, but as expected this difference has now been entirely made up, with the household survey showing a 1,895,,000 increase in jobs YoY.

  • Government jobs increased by 1,000.
  • the overall employment to population ratio for all ages 16 and above was unchanged at 58.9%, and has risen +0.2% YoY. The labor force participation rate was also unchanged at 62.8% , and has fallen by -0.6% YoY (but remember, this includes droves of retiring Boomers).
In summary, this report was another good report, with good internals, based on the standard of the last decade.  It is a mediocre report when measured against a longer timeframe.

Where the report is disappointing is in making headway against the real slack in the labor force, including discouraged workers, and in wages, which are still stagnant.

Same old, same old.


Thursday, June 5, 2014

Of corporate profits, progressives, and the business cycle


 - by New Deal democrat


Yves Smith has a piece up at Naked Capitalism this morning on "why economists don't recommend real remedies" in which she says:
I hate criticizing writers whose work I generally like, but as a contrast to this talk, suggest you look at a new post by Ed Lambert at Angry Bear. In it, a left-leaning blog (and remember, Angry Bear has been vigorous in its defense of Social Security), we see an strong argument against having workers get a better deal. Why? It will lower corporate profits, which will lower asset prices and give the confidence fairy a sad. I am not making that up. This shows the degree to which liberal economists have been intellectually captured by the orthodoxy and/or have been inculcated to live in fear of the Market Gods. If you can’t get parties who are ideologically sympathetic to argue for real remedies rather than a “recovery” only for the top tier, how can you possibly exert any pressure on the minions of the 1%?
 (my emphasis)

Except Lambert isn't saying that labor's share of productivity should stay low.  To the contrary, Here's his concluding paragraph:
Profit rates just simply went too high and labor share went too low. Bringing these back into a sustainable balance will trigger an unstable financial situation, which would likely produce a recession.
(my emphasis)

In what sense is stating that labor share is too low arguing that it shouldn't be increased?  Lambert is simply stating a fact from business cycle analysis:  recessions don't happen when corporate profits are increasing, they happen when corporate profits are decreasing.  Here's his explanation:
Firms do not want to see their profit rates fall… even though their aggregate profit rates are very high already. If profit rates start to fall, asset prices will fall. This will have a cascading effect to investment and consumption. The problem is that asset prices are dependent upon very high profit rates which are based on a historically very low labor share. This situation is unsustainable. People are demanding higher wages because they are struggling terribly. Moreover, government assistance increases to make up for low wages. There are calls for higher taxes on capital.
Even if labor share rose and profit rates were to back down from 9% to a more sustainable 8% (which is still high historically), asset prices would fall and there would be a negative cascading effect upon the economy.
The simple fact is, as I pointed out last week in a post at XE.com
Corporate profits, particularly as adjusted by unit labor costs, are a long leading indicator for the economy,  They typically decline by at least one year before the overall economy does, and sometimes make their high near mid-cycle.
Unsurprisingly, given the rest of the GDP report, Q1 corporate profits, both unadjusted and as adjusted by unit labor costs, declined....
Corporate profits are a long leading indicator, typically turning down over a year before the next recession.  That is simply a fact, as originally shown in detail (pdf) by Prof. Geoffrey Moore, who was instrumental in establishing the index of Leading Economic Indicators and went on to co-found ECRI.

If you don't believe me, here is  Cris Sheridan at Financial Sense discussing the downturn in corporate profits in the first quarter:
If you do this for the 60 years of data and 8 complete business cycles shown in the chart [below], you’ll find that BEA’s measure of corporate profits peak on average over a year before the stock market peaks and over two years before the onset of an economic recession.


Recessions typically mean that millions of workers get laid off.  Does Yves Smith want that?

The question is, if there were a uniform increase in corporate taxes, would that operate the same as when forces naturally generated by the economy lead to a decrease in profits?  Typically, when faced with a sustained downturn in profits, companies start looking for ways to economize. This can include hiring freezes, and if the squeeze continues, layoffs. But what if every company, across the board, faced a uniform increase in taxation?  Would they react the same to that as to a decline in profits endogenous to the economy (since their relative share of profits compared with other companies would be the same)?  

Like both Edward Lambert and Yves Smith, I believe that the Labor share of productivity is too low and must be raised.  So long as both profits and wages rise in tandem, we should get broad-scale growth.  At the same time, I know that a decrease in corporate profits typically has preceded a recession. 

While I think Lambert is correct that stock prices would decline, as the "p" part of the P/E ratio would have declined, it is well to remember that the stock market has famously "predicted 9 of the last 4 recessions." In other words, an externally imposed, uniform decrease in profits, as opposed to an endogenous decline, might not create the "cascade effect on the economy" from asset price declines that Lambert fears. While a decrease in stock prices would create a negative wealth effect, the increase in consumer spending by Labor would likely more than make up for that (since Labor spends more of its income than the wealthy).  And another paradoxical result of the business cycle is that employment doesn't lead spending, it is consumer spending that leads jobs.

 To test this, we need to examine past examples of the sequelae to increases in corporate profits.  Needless to say, those would be nearly non-existent after 1980. I'll poke around and if I find something worth following up on here, I'll post it.

Wednesday, June 4, 2014

Joe Weisenthal needs to start reading my Weekly Indicators column again


 - by New Deal democrat

I guess Joe Weisenthal of Business Insider must have stopped reading my Weekly Indicators columns, because otherwise he would have known two weekends ago that Gallup personal spending is at its highest since 2008, instead of posting it on Monday, and he would have known about the Spring spring two months ago instead of yesterday.

By the way, Joe, our new agreement with XE.com allows Business Insider to pick up the items we publish there, so long as credit for the original publication goes to XE along with a link.

So BI readers could have found out about the downturn in corporate profits, and why it isn't a big deal yet,  last week instead of waiting to Hussman and Shedlock yesterday to claim it as a harbinger of DOOOOOM!

Just sayin'.

P.S.:  On another matter, the new post-recession high in vehicle sales in May is about the 101st confirmation that there isn't going to be any economic downturn this year.  According to Prof. Edward Leamer's research, car sales are typically the second domino to fall, before the onset of a recession, after housing.  Typically vehicle sales have turned down over half a year before the onset of any recession.

Sunday, June 1, 2014

Euro and Pound Break Uptrend

This is up over at XE.com

http://community.xe.com/forum/xe-market-analysis/euro-and-pound-break-uptrends

The three data points I'll be watching for in this week's employment report


 - by New Deal democrat

This Friday we'll get the employment report for May.  Since it's going to be a busy news week, I thought I'd put right out front what I'll be paying particular attention to in that report, and it boils down to three specific data points.

Unless there is a huge surprise, we know that the economy will have added jobs, and the unemployment rate will be somewhere over 6%, and probably won't move much.  In other words, there's no reason to obsess over the headline numbers at this point.

Meanwhile, the economy as a whole has moved beyond the "recovery" stage into the "expansion" stage.  Production, sales, income, and almost certainly as of this Friday employment will all have exceeded their pre-recession levels.  But while the economy as a whole is continuing to expand, and there's no reason to think it won't continue to expand at least through the end of this year, on a per capita basis American households are still languishing.  Wages have employment have lagged.

So it is three measures of wages and employment that I will be particularly observant of this Friday:

1.  Not in Labor Force, Want a Job Now

This is a self-explanatory data series.  As I've pointed out repeatedly in the last few months, this is the only number you need to know to determine the "real" unemployment rate.  Even at the height of the tech boom, there were about 4.3 million people who fit this decription.  That number rose to 7 million in the wake of the recession, but has declined significantly in the last 18 months:



As of last month, there were 6.146 million people in this category. A decrease would be positive, and a decline to under 6 million would be a good number.  I'd like to see this number decline to about 5.5 million by the end of this year.

2.  The Employment - Population ratio for ages 25-54

This is of a piece with the first number.  I am selecting this age group because it excludes retiring Boomers and college students.  This ratio was as high as 80.3% in 2007 and as low as 74.8% in 2009 and 2010.  It has risen from 76.0% to 76.5% in the last 6 months:



A continuing increase would be welcome.  I would like to see this number at 77% or higher by the end of this year.  That wouldn't be great, but it would be nearly half the way back.

3.  Average hourly earnings of production and nonsupervisory employees

While a median measure would be nicer, those aren't reported on a monthly basis.  This average measure does not include managerial personnel, so is a good monthly measure of how the average American wage or salary worker is doing.  To get to the "real" average wage, in the below long term graph I have normed by the CPI:



You can see that real wages peaked in the 1970s, and made a partial comeback in the 1990s tech boom.  The big increase in the last recession is when gas prices declined to $1.50 a gallon, and we actually had significant YoY deflation.

This second graph of the same data zooms in on the last 5 years, and indexes to the recent "real" peak in October 2010:



We're still about 1% below that peak.  Since inflation has been running in the 1.5% to 2% range recently, I want to see at least a $.04 per hour increase from last month's reading of $20.50.  That should be enough to overcome any inflation in the last month.  The trend in the last 18 months has been for a "real" increase of about .1% a month.  I would like to see that at least maintained, on track for a new high by midyear next year.

I will spotlight these three points, which will tell us if average Americans are making any progress in employment and wages, when Friday's report comes out.