Overheating prices and cooling activity in America

313,000 Non-farm payroll (NFP) jobs added (seasonally adjusted). Without that, it is more than a million! Plus, upward revisions to jobs added for Dec. and January. Average Hourly Earnings rises more slowly than expected. Bond markets were confused but stock markets were elated. They have drunk the Kool Aid and are still drinking.

But, the report was not all that it was cracked up to be.

In the last six months, the U.S. economy added 1.369 million. Multiple job holders in these six months went up 655,000. That is 48%.

In the last one year, U.S. non-farm economy added 2.232 million jobs. Five categories contributed 62% of these jobs:

Administrative and Waste Services: 276K

Health Care and Social Services: 377K

Food and Drinking (part of retail) service: 251K

Construction: 254K

Manufacturing: 224K

The first three of them are low paying categories, for the most part.

Bulk of the employment creation, as per the Household Survey, happened for both Blacks and Whites and not for Asians. In terms of education, those with education above High School and no college and those with a Bachelor’s or more split the employment generation. Surprising that wages did not rise faster despite a big rise in the jobs for educated people. I thought that the unemployment rate for the educated had bottomed at 2.1% in January. It is true. It jumped to 2.3% in February but that is because more of them joined the labour force and quite a few found jobs too.

U-6 unemployment rate remained unchanged at 8.2%. It had bottomed out at 8.0% in October. Frankly, I think the labour market peaked in October. It is a lagging indicator. The economy might be on borrowed time. Just a hunch. Non-defence capital goods orders excluding aircraft peaked at 9.9% annual growth in October 2017. It had revived with the arrival of the new President. Now, the growth rate has slowed to 6.3% (y/y).

Atlanta Fed GDP NOWCAST forecast for Q1 was dropped to 2.5% from 2.7% after the release of the NFP report. But, the trimmed PCE inflation rate had risen to 2.67% in January, courtesy of Federal Reserve, Dallas, besting the previous (recent) peak of 2.62% in April 2016.

The 16% trimmed CPI inflation rate courtesy Federal Reserve Bank of Cleveland had hit 3.5% in January 2018, slightly besting the January 2017 number. Does not look like it is a January thing because Jan. 2016 number was 1.92%.

The ‘Underlying Inflation Gauge’ (UIG) of the Federal Reserve Bank of New York was nearly 3.0% in January, increasing at the second decimal place at a faster rate than in December 2017. See here.

There is overheating evidence in the real economy and it has been there in financial markets for a long time, however. Time for Jerome Powell to walk the talk and raise rates by 50 basis points in the March FOMC meeting.

On Friday night, saw this interesting piece by the folks from the Economic Cycle Research Institute (ECRI). They called for a recession in 2015 that did not materialise. May be, they are right now.

Who will ‘burn the house down’?

My friend and co-author Gulzar Natarajan has a lengthy and detailed post on few very important and thoughtful articles and reports that have been doing the rounds in the last week or so. His post is  very comprehensive.

I have the following comments on his blog post. It is a slightly expanded version of the comment I left on his post.

I am pleased to see that you had linked to the perceptive essay by Jonathan Rothwell in NYT on the elite interests that have gamed the system and the rules in their favour. Rothwell may be making one mistake, however.

In his long essay and in his tweets, he is dismissing the role of technology and globalisation in the extremely distorted income distribution. But, they were the pursuits and priorities of elites who gamed the regulations (as per his own analysis) to pursue technological upgradation and globalisation that delivered profits. So, they did contribute to the problem of inequality because they were ‘elite’ projects. Some of the domestic factors he lists could be more important but it would be hard to dismiss technological progress and globalisation as inconsequential for in-country rise in inequality in the developed world. In this regard, the review of the book, ‘Captured Economy’ is worth a read. It is well written.

As we discussed bilaterally, to a degree, the recommendation of the Mckinsey Global Institute (MGI) on more digitisation and more technology to restore the ‘glory’ of U.S. manufacturing (mind you, the ostensible problem they were dealing with was the declining labour share of income) vindicates Rothwell above!

MGI report notes that the labour share of income in the U.S. had dropped from 59.8% in 1970 to 55.6% in 2015 and that manufacturing contributed 68% to this decline. But, the solutions they propose, even if they restore the glory of U.S. manufacturing somewhat, might actually further erode labour income share if machines and robots replace workers while only requiring and paying some highly skilled workers and fewer of them. On paper, that might boost labour share of income but the median worker pay will not have improved. Even now, the decline in the U.S. labour share of income will be far pronounced if financial services workers are excluded.

One does not identify the decline of the manufacturing as a principal contributor to the decline of labour share of income and proceed to give solutions that might worsen the situation further. At the very least, there should be a debate/discussion in the report on the consequences of their proposals for the labour share of income. But, I had not read the full MGI report but only the Executive Summary. May be, the full report has such a discussion. The full report and the Executive Summary can be found here.

Further, although Tony Rothman in ‘Project Syndicate’ focuses more on customer convenience and the ‘ends’ of technological upgrades being lost (motion is not progress) in the welter of mindless ‘improvements’ and ‘enhancements’, that too is part of the problem.

As you conclude, the solution is to ‘burn the house down’ completely. But, that leads us to a cul-de-sac. In the Seventies, the pendulum swung (the house was brought down, as it existed then) due to a combination of factors:

  • Excessive abuse of labour power;
  • Economic misery – stagflation
  • The turning of the intellectual tide in favour of rules over discretion, Disgust with politics as usual (Nixon’s impeachment, Ford’s pardon and Carter’s perceived or real ineffectiveness)
  • Rise of alternative leaders who were not exactly perceived ‘extreme’ like in the case of Donald Trump

May be, I am missing out some.

But, if we try to develop a comparable checklist now, we do have

  • Excessive abuse of the power of capital by capitalists
  • Instead of stagflation, we have extreme inequality
  • There was disgust with politics as usual – it is demonstrated in the multiple political election and referendum results across Europe and the United States

But, what is missing are these two,

– There is intellectual resistance to changing the status quo – many would lose out on their personal perks and influence. Notice how many are writing as boldly as Dani Rodrik is writing. Very few. Those who do are not deemed ‘mainstream’. For example, the monetary policy establishment has managed to brand even the BIS and folks like William White and Claudio Borio, et al, as ‘extreme’ or ‘fringes’.

The ‘99%’ is unable to mobilise and have a sane leadership with clarity of purpose and goals as capitalists on either side of the Atlantic were able to achieve in the Seventies.

Usually, crises help overcome all these drawbacks and throw up policy and personnel (leadership) alternatives. One thought that the 2008 crisis would do that. To a degree, it has. It has cracked open the door. But, the door is still being manned and protected well, despite cracks in the door and in the castle.

Perhaps, it needs another crisis to ‘burn the house down’ as you put it. Or, may be, somewhat less dramatically, as Mark Klieman had written (tweeted by Jonathan Rothwell),

a political strategy capable of mobilizing forces proportionate to the massive task at hand. [Link]

Taxation for Universal Basic Income

In his regular column for ‘Project Syndicate’, Yanis Varoufakis writes about funding Universal Basic Income for workers likely rendered unemployed by the increasing spread, reach and impact of automation (Artificial Intelligence and robotics). Read this story on Amazon’s unmanned convenience stores.

I am more inclined to accept this method of funding than raising taxes on all. But, I am not convinced of such a free-rider rich solution in the first place. That is a topic for another occasion. Perhaps, when I write about Martin Ford’s ‘The rise of the robots’.

The best thing is to raise a socially disruptive tax on the companies that bring out these robotics and AI advances such that they stop these mindless extension of technology for its own sake.

Who is the worst danger to humanity? A plain Liberal or a tech.billionaire+liberal who is also developing robotics/AI?

US labour market health

In July, the US economy appears to have created a healthy number of jobs (+255,000). If one looked at the Current Establishment Survey (CES), the labour market appears healthy. The ‘Current Population Survey’ (CPS) paints a picture of slight deterioration in labour market health, at the margin. As per household survey, new jobs in the month of July were found only by those who either had no high school degree or had not gone to college. The unemployment rate for those who had not even completed high school dropped from 7.5% in June to 6.3% in July (seasonally adjusted). Unemployment rate for those with some college degree went up by .1% from 4.2% to 4.3%.

Among ethnicities, the unemployment rate for Asians went up by 0.3% to 3.8% in July. In the last several months (or, years) table A-7 is fodder for candidates like Bernie Sanders or Donald Trump. All labour market indicators for ‘foreign born’ are far healthier than that of ‘native born’. Given that multiple jobholders went up meaningfully by 164,000 (Table A-9), the total job creation (even from the household survey) of 420,000 is brought down to 256,000 in terms of new jobs created. Both the median and mean duration of unemployment had climbed steeply in July (Table A-12).

Table A-14 shows that the unemployment rates for workers in ‘Mining, Quarrying, Oil and Gas Extraction’, in ‘Durable Goods Manufacturing’ and ‘Information Technology’ are higher in July 2016 than they were a year ago.

From Table A-15, we note that the U-6 measure of unemployment rate had gone up marginally by 0.1% to 9.7% in July. It is still well below the rate of 10.4% in July 2015, however.

The Establishment survey paints a far healthier picture. The index of aggregate hours worked, index of aggregate payroll have expanded meaningfully in July.

‘Charting the labour market’ is a monthly chart pack put out by the Bureau of Labour Statistics. It is updated every month. For July, the chart pack was updated on August 5 and you can find it here. Charts 3, 4, 8, 12, 18 and 20 show the fragility of the labour market recovery compared to previous two recoveries which were not the strongest of the post-WWII recoveries either. BLS also publishes ‘Highlights of Current Employment Statistics’ which is a detailed Industry Employment Analysis. For July, the publication is here. Undoubtedly, the US has done better than Japan or Europe from their (non) recoveries from financial crises. But, clearly, the United States’ economic health is fragile and not sturdy.