US light vehicles sales are back in the range of 16 to 18 million vehicles a year experienced during the (halcyon?) days of 1998 to 2007. An important indicator of consumer confidence.
Jobs growth slows (slightly)
The Wall Street Journal reports:
U.S. employers sharply slowed their hiring in March…….. Nonfarm payrolls rose by a seasonally adjusted 126,000 jobs in March, the Labor Department said Friday. That was the smallest gain since December 2013.
If we take a step back and look at US non-farm payrolls over the last 12 months, growth remains surprisingly strong. The economy added 2.9 million jobs in the year ending 31st March; down from 3.2 at the end of February, but still a robust recovery.
We haven’t seen this level of job growth since the Dotcom era.
The Catch-22 of energy storage | On Line Opinion
John Morgan questions whether wind and solar are viable energy sources when one considers energy returned on energy invested (EROEI).
There is a minimum EROEI, greater than 1, that is required for an energy source to be able to run society. An energy system must produce a surplus large enough to sustain things like food production, hospitals, and universities to train the engineers to build the plant, transport, construction, and all the elements of the civilization in which it is embedded. For countries like the US and Germany, Weißbach et al. estimate this minimum viable EROEI to be about 7……
The fossil fuel power sources we’re most accustomed to have a high EROEI of about 30, well above the minimum requirement. Wind power at 16, and concentrating solar power (CSP, or solar thermal power) at 19, are lower, but the energy surplus is still sufficient, in principle, to sustain a developed industrial society. Biomass, and solar photovoltaic (at least in Germany), however, cannot. With an EROEI of only 3.9 and 3.5 respectively, these power sources cannot support with their energy alone both their own fabrication and the societal services we use energy for in a first world country.
Energy Returned on Invested, from Weißbach et al.,1 with and without energy storage (buffering). CCGT is closed-cycle gas turbine. PWR is a Pressurized Water (conventional nuclear) Reactor. Energy sources must exceed the “economic threshold”, of about 7, to yield the surplus energy required to support an OECD level society.
These EROEI values are for energy directly delivered (the “unbuffered” values in the figure). But things change if we need to store energy. If we were to store energy in, say, batteries, we must invest energy in mining the materials and manufacturing those batteries. So a larger energy investment is required, and the EROEI consequently drops…[to the buffered level].
Read more at The Catch-22 of energy storage – On Line Opinion – 10/3/2015.
Deflation in Australia?
The Eurozone experienced negative CPI growth over December/January.
Australia shows consumer price growth declining at the end of 2014. The next CPI update (Q1 2015), at end of April, is likely to reflect further slowing.
Declining inflation expectations reported by Westpac (in the 0 to 5% range) tend to support this.
CPI unwinds as the Fed runs out of “patience”
From Seeking Alpha:
The euro fell to a fresh 12-year low on Wednesday, extending a broad decline just days after the ECB launched its €1T bond-buying program, while the dollar index soared to its highest in more than 11 years at 98.95, buoyed by expectations that the Fed could soon lift U.S. interest rates. Nearly all now believe the FOMC will remove the word “patient” from its policy statement after its March 17-18 meeting, opening the door for a rate increase in June.
Not so fast. US consumer price growth (annual % change) to end of January 2015 fell below zero.
Core CPI is slowing at a far gentler rate because it excludes energy prices (as well as food).
Wage pressures in the manufacturing sector are declining, despite solid job numbers, indicating there is still plenty of slack.
With inflationary pressures easing, why the haste to raise interest rates? I believe that Janet Yellen will move when the time is right. And not before.
Dad’s Army fumbles housing affordability | Macrobusiness
By Leith van Onselen — Published with kind permission from Macrobusiness.
After his shoddy effort yesterday defending Australia’s giant superannuation rort, Dad’s Army’s Robert Gottliebsen (“Gotti”), has backed Treasurer Hockey’s proposal to allow young home buyers to raid their superannuation accounts to purchase their first home:
Joe Hockey’s idea to allow first home buyers to use their superannuation to break into the housing market is not stupid…
Most young people in Australia are finding it impossible to gain a first home… we are watching a fundamental shift in the Australian landscape with huge implications for the intergenerational problem…
[Last weekend]…I found myself in the company of a typical first home buyer in today’s market… They can just manage a house or larger apartment but they are saddled with a huge mortgage…
So why would we not say to that couple: “you can invest up to $50,000 of your superannuation in your first home…
A whole generation of Australians could retire without a house because they are unable to get into the market…
A question, Gotti: What do you think the extra demand from first home buyers (FHBs) accessing their super would do to house prices? That’s right, it would raise them, making the scheme self-defeating, much like FHB grants did.
Meanwhile, young people’s retirement nest eggs would be put at risk, potentially increasing their reliance on the Aged Pension (increasing the burden on future taxpayers).
Thankfully, Business Spectator’s young gun, Callam Pickering, understands these issues, penning the following rebuke today:
Australia’s approach to housing is full of misguided policies and dumb ideas…
Australian housing policy can best be viewed as a remarkably successful anti-Robin Hood scheme. We take from the poor (usually those under 40) and give it to the wealthy (often but not always ‘baby boomers’).
Over the years we have introduced all sorts of dodgy schemes to continue this rort…
Allowing younger Australians to use their superannuation for a housing deposit would have a similar effect to the FHOG… It certainly did nothing to boost home ownership…
Exactly. How about policy address the root causes of unaffordable housing – tax lurks, supply constraints, loose capital rules, and over-investment by super funds – rather than applying a band aid solution that will impoverish young people further and fill the coffers of Gotti’s rent-class?
Colin’s Comment: In 1850 Frédéric Bastiat wrote an essay Ce qu’on voit et ce qu’on ne voit pas (That Which Is Seen and That Which Is Unseen) which describes the common mistake of politicians, economists and the general public when devising or assessing economic policy. They focus on the immediate, visible benefit and fail to consider the unseen, hidden costs.
Here is a simple video by Sam Selikoff that explains Bastiat’s Broken Window fallacy:
http://youtu.be/gG3AKoL0vEs
When good news is bad news
Jobs report redux:
?? +59,000 jobs
?? +51,000 jobs
?? +29,000 jobs
?? +24,000 jobs
Score: ☺️ http://t.co/z9xNQJA25N— CNN Business (@CNNBusiness) March 6, 2015
“The U.S. economy added 295,000 jobs in February, a strong gain that beat expectations by a mile. Unemployment fell to 5.5%.” You would expect stocks to surge on the strong employment numbers. Instead the S&P 500 fell 1.4% on Friday. Penetration of support at 2080 warns of a correction.
I can only ascribe this to fear of a rate rise. The stronger the employment data, the closer the prospect of the Fed raising interest rates. But Janet Yellen is likely to err on the side of caution, only raising rates when she is sure that the economy is on a sound footing and inflationary pressures are rising. That is far from the case at present, despite the good job numbers.
Chart: So much for "wage pressures" – pic.twitter.com/yGh9NbqwQa
— (((The Daily Shot))) (@SoberLook) March 6, 2015
There is plenty of short-term money in the market, however, that seems to think otherwise.
Dollar breaks out, Gold tests support
The 5-year breakeven rate for inflation — calculated by deducting the yield on 5-year TIPS from the 5-Year Treasury yield — rallied in recent weeks and is testing resistance at 1.60%. But the long-term trend is down and we should expect another test of support at 1.2%.
Apart from Japan, deflationary pressures are rising in all major OECD countries. Given the global trend, the Fed is likely to raise interest rates at a leisurely pace. Expect low inflation and low interest rates for the next 2 to 3 years.
Can you spot the direction of the trend? pic.twitter.com/75Gq9cAENp
— David Schawel (@DavidSchawel) March 1, 2015
10-Year Treasury yields rallied along with the inflation breakeven and are now testing resistance at 2.15%. Breakout would test the descending trendline around 2.40%. But reversal below 2.0% remains as likely and would signal another test of 1.65%.
The Dollar
The Dollar Index broke through resistance at 95.50, offering a medium-term target of 100*.
* Target calculation: 90 + ( 90 – 80 ) = 100
Gold
Low inflation undermines support for gold. Spot Gold is testing long-term support at $1200/ounce. Reversal of 13-week Twiggs Momentum below zero warns of another decline. Breach of support at $1200 would signal another decline, while follow-through below $1150 would confirm.
* Target calculation: 1200 – ( 1400 – 1200 ) = 1000
Sectoral imbalances: Where have all the jobs gone?
Great post on Twitter from Naufal Sanaullah depicting US sectoral balances using UK economist Wynne Godley’s analytical framework.
The key to understanding Godley’s analysis is that the sum of the four sectors is always zero. If one sector runs a deficit, it must be funded by a surplus in another sector — and vice versa. For example, if the government runs a deficit (i.e. spends more than it collects by way of taxes) it must borrow the shortfall from another sector — either the private sector (business or households) or foreign investors.
The federal government has run consistent deficits since 1970, apart from a short interval during the Dotcom era. Deficits were expanded massively during the GFC (2008 global financial crisis) to rescue the economy from a contraction in aggregate demand which, if left un-checked, would have resulted in a deflationary spiral on a scale similar to the 1930s. The government deficit was funded by private (household) saving until the early 1980s. Thereafter, household savings shrunk, gradually replaced by foreign investment. More on this later.
The business sector oscillated between deficit (i.e. borrowing more than they earn) and surplus until a massive investment splurge during the Dotcom era. Deficits by the business sector are not a real cause for concern, provided that borrowed funds are used to make productive investments. Unfortunately that was not always the case in the Dotcom era. Of far greater concern was the large surpluses run during the GFC, when the private sector stopped investing and used savings to repay debt. That is the major reason for the output gap (or GDP gap as it is sometimes called) and slow recovery depicted below.
One of the positives to come out of the GFC has been the resumption of household savings — a healthy sign in the economy if not carried to excess. But there are two glaring negatives.
First, the Federal government has been racking up public debt, kicking the can down the road since the 1970s with little effort to address the imbalance. When private sector savings dwindled in the 1980s, a new player appeared. Fiscal deficits were increasingly funded by foreign capital inflows, allowing government to deliver benefits in excess of taxes collected — like the sugar-plum fairy — without taxpayers being aware that the debt millstone around their necks was rapidly growing. Apart from a brief Clinton-era surplus, during the private sector Dotcom splurge, this has been going on for more than four decades — and is unlikely to change until Americans fix their political system.
A second threat is foreign capital inflows, shown in purple on the graph, which commenced in earnest with Japanese purchases of US Treasuries in the 1980s but reached a ‘nuclear’ scale when China joined the party in the early 2000s. While it may appear fairly benign, with foreign investors stepping in to lend Uncle Sam a helping hand, the damage is insidious. Foreign capital inflows are a major cause of the dwindling household surplus. Far from a friendly loan, these capital inflows were intended to undermine the competitiveness of US manufacturers in both domestic and export markets through currency manipulation.
To understand how currency manipulation works, we need to examine the foreign surplus in more detail. There are two parts to currency flows between nations: the current (income) account and the capital account. The current account comprises the trade surplus or deficit (the net sum of all trade flows between the two nations) and the smaller net income flow from investments.
The capital account reflects all capital flows, whether investment or loans, between the two countries. Again, the sum of the two is always zero. If there is a deficit on the current account (money flowing out), there must be a surplus on the capital account (loans and investments flowing in) to restore the balance. If not, and Japan/China had to increase their exports to the US without a reciprocal flow of capital, the value of the dollar would plummet against the yen/yuan until the trade balance was restored.
Think of it this way. If an importer in the US buys goods from China, they must purchase yuan to pay for the goods. If there are more imports than exports, the demand for yuan will be higher than demand for dollars; so the yuan will rise against the dollar until demand matches supply. But what currency manipulators do is invest money via capital account (mainly in US Treasuries), purchasing dollars to soak up the shortfall so that their currency doesn’t appreciate despite the massive trade surplus with the US.
The impact of this is two-fold. First US manufacturers shed jobs as they lose market share in both domestic and export markets. That cuts into the household surplus as unemployment rises and real wages fall. Second, the US government runs bigger deficits to make up for the demand shortfall in order to buoy economic growth. The end result is that US taxpayers grow poorer — as the size of the public debt millstone increases — while currency manipulators grow richer. The debt binge that led to the GFC was largely fueled by foreign capital inflows. The fact that this imbalance has been allowed to continue is a damning indictment of political leadership in Washington. There is no way that they can be unaware of the damage being caused to US manufacturers, households and to public finances. Change is long overdue.
Here’s How to Achieve Full Employment
Economic Policy Institute President Lawrence Mishel provides the U.S. House Committee on Education and the Workforce with a shopping list of measures he believes are necessary to achieve full employment. Some are right on the mark while others seem to have missed the basic rules of Supply and Demand taught in Econ 101. My comments are in bold.
The goals that economic policy must focus on are, thus, creating jobs and reaching robust full employment, generating broad-based wage growth, and improving the quality of jobs.
Jobs
Policies that help to achieve full employment are the following:
1. The Federal Reserve Board needs to target a full employment with wage growth matching productivity.
The most important economic policy decisions being made about job growth in the next few years are those of the Federal Reserve Board as it determines the scale and pace at which it raises interest rates. Let’s be clear that the decision to raise interest rates is a decision to slow the economy and weaken job and wage growth. There are many false concerns about accelerating wage growth and exploding inflation based on the mistaken sense that we are at or near full employment. Policymakers should not seek to slow the economy until wage growth is comfortably running at the 3.5 to 4.0 percent rate, the wage growth consistent with a 2 percent inflation target (since trend productivity is 1.5 to 2.0 percent, wage growth 2 percent faster than this yields rising unit labor costs, and therefore inflation, of 2 percent). The key danger is slowing the economy too soon rather than too late.
Fed monetary policy should not target one sector of the economy (i.e. wages) but the whole economy (i.e. nominal GDP).
2. Targeted employment programs
Even at 4 percent unemployment, there will be many communities that will still be suffering substantial unemployment, especially low-wage workers and many black and Hispanic workers. To obtain full employment for all, we will need to undertake policies that can direct jobs to areas of high unemployment……
Government programs don’t create jobs, they merely redistribute income from the taxed to the subsidised.
3. Public investment and infrastructure
There is widespread agreement that we face a substantial shortfall of public investment in transportation, broadband, R&D, and education. Undertaking a sustained (for at least a decade) program of public investment can create jobs and raise our productivity and growth…..
Agree. But we must invest in productive assets that generate income that can be used to repay the debt. Else we are left with a pile of debt and no means to repay it.
Policies that do not help us reach full employment include:
1. Corporate tax reform
There are many false claims that corporate tax reform is needed to make us competitive and bring us growth. First off, the evidence is that the corporate tax rates U.S. firms actually pay (their “effective rates”) are not higher than those of other advanced countries. Second, the tax reform that is being discussed is “revenue neutral,” necessarily meaning that tax rates on average are actually not being reduced; for every firm or sector that will see a lower tax rate, another will see a higher tax rate. It is hard to see how such tax reform sparks growth.
Zero-sum thinking. If we want to increase employment, we need to increase investment. Tax rates and allowances should encourage domestic investment rather than offshore expansion.
2. Cutting taxes
There will surely be many efforts in this Congress to cut corporate taxes and reduce taxes on capital income (e.g., capital gains, dividends) and individual marginal tax rates, especially on those with the highest incomes. It’s easy to see how those strategies will not work….
Same as above. We need to encourage investment by private corporations.
3. Raising interest rates
There are those worried about inflation who are calling on the Federal Reserve Board to raise interest rates soon and steadily thereafter. Their fears are, in my analysis, unfounded. But we should be clear that those seeking higher interest rates are asking our monetary policymakers to slow economic growth and job creation and reflect a far-too-pessimistic assumption of how far we can lower unemployment, seemingly aiming for unemployment at current levels or between 5.0 and 5.5 percent….
Agreed. Raising interest rates too soon is as dangerous as raising too late.
Wage growth
It is a welcome development that policymakers and presidential candidates in both parties have now acknowledged that stagnant wages are a critical economic challenge…… Over the 40 years since 1973, there has been productivity growth of 74 percent, yet the compensation (wages and benefits) of a typical worker grew far less, just 9 percent (again, mostly in the latter 1990s)……
Wage stagnation is conventionally described as being about globalization and technological change, explanations offered in the spirit of saying it is caused by trends we neither can nor want to restrain. In fact, technological change has had very little to do with wage stagnation. Such an explanation is grounded in the notion that workers have insufficient skills so employers are paying them less, while those with higher wages and skills (say, college graduates) are highly demanded so that employers are bidding up their wages…….
Misses the point. Technology has enabled employers in manufacturing, finance and service industries to cut the number of employees to a fraction of their former size.
Globalization has, in fact, served to suppress wage growth for non-college-educated workers (roughly two-thirds of the workforce). However, such trends as import competition from low-wage countries did not naturally develop; they were pushed by trade agreements and the tolerance of misaligned and manipulated exchange rates that undercut U.S. producers.
This small paragraph hits on the key reason for wage stagnation in the US. Workers are not only competing in a global labor market, but against countries who have manipulated their exchange rate to gain a competitive advantage.
There are two sets of policies that have greatly contributed to wage stagnation that receive far too little attention. One set is aggregate factors, which include factors that lead to excessive unemployment and others that have driven the financialization of the economy and excessive executive pay growth (which fueled the doubling of the top 1 percent’s wage and income growth). The other set of factors are the business practices, eroded labor standards, and weakened labor market institutions that have suppressed wage growth. I will examine these in turn.
Aggregate factors
1. Excessive unemployment
Unemployment has remained substantially above full employment for much of the last 40 years, especially relative to the post-war period before then. Since high unemployment depresses wages more for low-wage than middle-wage workers and more for middle-wage than high-wage workers, these slack conditions generate wage inequality. ……
The excessive unemployment in recent decades reflects a monetary policy overly concerned about inflation relative to unemployment and hostile to any signs of wage growth……
2. Unleashing the top 1 percent: finance and executive pay
The major forces behind the extraordinary income growth and the doubling of the top 1 percent’s income share since 1979 were the expansion of the finance sector (and escalating pay in that sector) and the remarkable growth of executive pay …… restraining the growth of such income will not adversely affect the size of our economy. Moreover, the failure to restrain these incomes leaves less income available to the vast majority……
Zero-sum thinking.
Labor standards, labor market institutions, and business practices
There are a variety of policies within the direct purview of this committee that can greatly help to lift wage growth:
1. Raising the minimum wageThe main reason wages at the lowest levels lag those at the middle has been the erosion of the value of the minimum wage, a policy undertaken in the 1980s that has never fully been reversed. The inflation-adjusted minimum wage is now about 25 percent below its 1968 level……
Will reduce demand for domestic labor and increase demand for offshoring jobs.
2. Updating overtime rules
The share of salaried workers eligible for overtime has fallen from 65 percent in 1975 to just 11 percent today……
This will continue for as long as the manufacturing sector is white-anted by offshoring jobs.
3. Strengthening rights to collective bargaining
The single largest factor suppressing wage growth for middle-wage workers over the last few decades has been the erosion of collective bargaining (which can explain one-third of the rise of wage inequality among men, and one-fifth among women)……
How will this improve Supply and Demand?
4. Regularizing undocumented workers
Regularizing undocumented workers will not only lift their wages but will also lift wages of those working in the same fields of work…..
How will this improve Supply and Demand?
5. Ending forced arbitration
One way for employees to challenge discriminatory or unfair personnel practices and wages is to go to court or a government agency that oversees such discrimination. However, a majority of large firms force their workers to give up their access to court and government agency remedies and agree to settle such disputes over wages and discrimination only in arbitration systems set up and overseen by the employers themselves…..
How will this improve Supply and Demand?
6. Modernizing labor standards: sick leave, paid family leave
We have not only seen the erosion of protections in the labor standards set up in the New Deal, we have also seen the United States fail to adopt new labor standards that respond to emerging needs……
No issue with this. But how will it improve Supply and Demand?
7. Closing race and gender inequities
Generating broader-based wage growth must also include efforts to close race and gender inequities that have been ever present in our labor markets…….
No issue with this. But how will it improve Supply and Demand?
8. Fair contracting
These new contracting rules can help reduce wage theft, obtain greater racial and gender equity and generally support wage growth……No issue with this. But how will it improve Supply and Demand?
9. Tackling misclassification, wage theft, prevailing wages
There are a variety of other policies that can support wage growth. Too many workers are deemed independent contractors by their employers when they are really employees……
No issue with this. But how will it improve Supply and Demand?
Policies that will not facilitate broad-based wage growth
1. Tax cuts: individual or corporate
The failure of wages to grow cannot be cured through tax cuts. Such policies are sometimes offered as propelling long-run job gains and economic growth (though they are not aimed at securing a stronger recovery from a recession, as the conservatives who offer tax cuts do not believe in counter-cyclical fiscal policy). These policies are not effective tools to promote growth, but even if they did create growth, it is clear that growth by itself will not lift wages of the typical worker…….
Zero-sum thinking. Compare economic growth in high-tax countries to growth in low tax countries and you will find this a highly effective policy tool.
2. Increasing college or community college completion
……advancing education completion is not an effective overall policy to generate higher wages……. What is needed are policies that lift wages of high school graduates, community college graduates, and college graduates, not simply a policy that changes the number of workers in each category.
Better available skills-base leads to increased competitiveness in global labor market and more investment opportunities in the domestic market.
3. Deregulation
There is no solid basis for believing that deregulation will lead to greater productivity growth or that doing so will lead to wage growth. Deregulation of finance certainly was a major factor in the financial crisis and relaxing Dodd–Frank rules will only make our economy more susceptible to crisis.
What we need is (simple) well-regulated markets rather than (complex) over-regulation.
4. Policies to promote long-term growth
Policies that can substantially help reduce unemployment in the next two years are welcomed and can serve to raise wage growth. Policies aimed at raising longer-term growth prospects may be beneficial but will not help wages soon or necessarily lead to wage growth in future years. This can be seen in the decoupling of wage growth from productivity over the last 40 years. Simply increasing investments and productivity will not necessarily improve the wages of a typical worker. What is missing are mechanisms that relink productivity and wage growth. Without such policies, an agenda of “growth” is playing “pretend” when it comes to wages.
Long-term investment is the only way forward. To dismiss this in favor of short-term band-aid solutions is nuts!
My proposal is a lot simpler, consisting of only five steps:
- Invest in productive infrastructure.
- A simplified tax regime with low rates and few deductions apart from incentives to increase domestic investment.
- Restrict capital inflows through trade agreements and maintain a fair exchange rate.
- Fed monetary policy supportive in the short-term but with long-term target of neutral debt growth — in line with GDP (nominal).
- Move education up the priority list for government spending. Improve the education standards and training of teachers — they are the lifeblood of the system — rather than increasing numbers.