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June 15, 2015

Why Fixed Investment is Critical to the US Recovery

The financial sector normally acts as a conduit, channeling savings from private investors to the corporate sector. When the conduit works effectively, the injection of demand from corporate Investment is sufficient to offset the ‘leakage’ from demand caused by Savings. Savings patterns alter during a financial crisis, however, with concerned households cutting back on expenditure and using any surplus to pay down debt, rather than depositing with the bank or buying stocks. Household Savings rise but corporate Investment contracts. The resulting ‘leakage’ from demand causes GDP to spiral downward.

When Investment contracts, unemployment rises. The relationship is evident on the graph below, but it could also be said that Investment rises when employment grows — businesses invest in anticipation of rising demand. Either way, it is safe to conclude that rising investment and job growth go hand-in-hand.

Employment Growth and Private Nonresidential Fixed Investment

Fixed Investment and Corporate Profits

Rising corporate profits also lead to increased investment. The lag on the graph below — investment growth follows profit growth — clearly illustrates the causative relationship.

Employment Growth and Private Nonresidential Fixed Investment

This is an encouraging sign, as the current surge in corporate profits is likely to be followed by rising investment — and further job growth.

Weekly Earnings and GDP

Rising weekly earnings already point to improving aggregate demand and consequent investment growth.

Weekly Earnings Growth

All that is missing is for the federal government to increase investment in productive* infrastructure to further boost job growth.

*Infrastructure investment needs to generate a sufficient return to repay debt incurred to fund the spending. Something many politicians seem to forget when preoccupied with buying votes for the next election.

February 11, 2014

The hole in US employment

US employment is topical after two months of poor jobs figures. Employers added 113,000 new jobs, against an expected 185,000, last month and a low 75,000 in December. Rather than focus on monthly data, let’s take a long-term view.

The number of full-time employed as a percentage of total population [red line below] fell dramatically during the GFC, with about 1 in 10 employees losing their jobs. Since then, roughly 1 out of 4 full-time jobs lost has been restored, while the other 3 are still missing (population growth fell from 1.0% to around 0.7% post-GFC, limiting the distortion).

Employed Normally Full-time as Percentage of Population

Comparing employment levels to the 1980s is little consolation because this is skewed by the rising participation rate of women in the work-force. The pink line below shows how the number of women employed grew from under 14% of total population in the late 1960s to more than 22% prior to the GFC. The effect on total employment [green line] was dramatic, while employment of men [blue line] oscillated between 24% and 26%.

US Men & Women Employment Levels as Percentage of Population

Part-time employment — the difference between total employment [green] and full-time employed [red] below — has leveled off since 2000 at roughly 6% of the total population. So loss of full-time positions has not been compensated by a rise in casual work. Both have been affected.

US Full-time and Total Employment as Percentage of Population

The “good news” is that a soft labor market will lead to low wages growth for a considerable period, boosting corporate profits.

The bad news is that low employment levels will depress sales growth [green line]….

Total US Business Sales Percentage Growth and over GDP

And discourage new investment…..

Which would harm future growth.

February 2, 2014

The hole in US employment

The “good news” is that a soft labor market will lead to low wages growth for a considerable period, boosting corporate profits.

The bad news is that low employment levels will depress sales growth [green line]….

And discourage new investment…..

Which would harm future growth.

May 15, 2013

Sorry, World, U.S. Consumers Can’t Save You | WSJ

Kathleen Madigan at WSJ observes:

In order to increase spending, consumers have been saving less to offset the money lost when tax rates rose this year. That strategy is unsustainable. Unless job and wage growth pick up, U.S. consumers don’t have the financial heft to save the global economy.

May 12, 2013

The monetary policy revolution

James Alexander, head of Equity Research at UK-based M&G Equities, sums up the evolution of central bank thinking. He describes the traditional problem of inadequate response by central banks to market shocks like the collapse of Lehman Brothers:

Although wages hold steady when nominal income falls, unemployment tends to rise as companies scramble to cut costs. In the wake of the crash, rising joblessness created a vicious circle of declining consumption and investment that proved very difficult to reverse, particularly as central banks remained preoccupied with inflation.

Failure of both austerity and quantitative easing has left central bankers looking for new alternatives:

…..Economist Michael Woodford presented a paper [at Jackson Hole last August] suggesting that the US Federal Reserve (Fed) should give markets and businesses a bigger steer about where the economy was headed by adopting a nominal economic growth target. In September, the Fed announced its third round of QE, which it has indicated will continue until unemployment falls below 6.5% – the first time US monetary policy has been explicitly tied to an unemployment rate. US stocks have since soared, shrugging off continued inaction surrounding the country’s ongoing debt crisis.

While targeting unemployment is preferable to targeting inflation, it is still a subjective measure that can be influenced by rises or falls in labor participation rates and exclusion of casual workers seeking full-time employment. Market Monetarists such as Scott Sumner and Lars Christensen advocate targeting nominal GDP growth instead — a hard, objective number that can be forecast with greater accuracy. Mark Carney, due to take over as governor of the BOE in July, seems to be on a similar path:

Echoing Michael Woodford’s comments at Jackson Hole, he advocated dropping inflation targets if economies were struggling to grow. He has since proposed easing UK monetary policy, adopting a nominal growth target and boosting recovery by convincing households and businesses that rates will remain low until growth resumes.

While NGDP targeting has been criticized as a “recipe for runaway inflation”, experiences so far have not borne this out. In fact NGDP targeting would have the opposite effect when growth has resumed, curbing inflation and credit growth and preventing a repeat of recent housing and stock bubbles.

March 2, 2013

Matt Busigin On Peak Capitalism | Business Insider

Joe Weisenthal presents the following two charts to illustrate how government is coping with falling manufacturing wages:

You’ve probably seen this chart many times, which shows wages declining as a percent of GDP over the last few decades.

But things look a tad different when you look at wages PLUS government transfer payments (predominantly entitlement programs) as a share of GDP.

What the writer fails to recognize is that lifting government welfare payments is not a solution. It is part of the problem. Increasing transfer payments encourages welfare dependancy and hinders the adaptive process that allows capitalism to adjust to new challenges.

Eventually the tail begins to wag the dog, with welfare dependents voting themselves increases. Economic stagnation evolves into economic deterioration, hindering new capital formation with excessive red tape and a rising welfare burden.

…..The road to hell is paved with good intentions.
via Matt Busigin On Peak Capitalism – Business Insider.

March 2, 2013

Nations Must Prepare For Robots Destroying The Low-Skill Job Market | Business Insider

This opinion piece from the Economist proposes redistribution on a grand scale to remedy massive unemployment from mechanization of assembly lines.

If society wishes to avoid such an outcome, the only real option is redistribution and a lot of it. That, in turn, could be managed in a few ways. Society could make a go at raising the earnings potential of less skilled workers by investing heavily in education. That will strike many as the most attractive solution, but it is also one that will face limits. Not everyone can be educated to Google-engineer level.

More skilled or richer elements of society could effectively tax themselves by protecting certain job categories in order to maintain employment opportunities for the less skilled. So, driverless cars may soon be an operating reality. But society could pass laws banning or limiting AVs in order to protect certain jobs: taxi driver, for instance, or trucker. Depending on the size and organisation of less-skilled groups, that’s conceivably a benefit they could vote themselves.

This is why socialism does not work. The typical reaction of a central planned economy would be to increase taxes or outlaw technological advances in order to protect jobs. Capitalism coped comfortably with the mechanization of agriculture, introduction of the automobile and the computer. Should we have banned the use of tractors, automobiles and automatic teller machines to protect the jobs of farm laborers, ostlers and bank tellers? The first instinct of central planning is to protect the status quo — which is why socialist countries fail to grow. Visitors to communist bloc countries during the Cold War felt they were going through a time warp: the contrast with Western advancement was striking. A more recent example is the economic stagnation in Southern Europe. Without the creative destructive process that allows capitalist economies to adapt to changing needs, progress grinds to a halt and economic gridlock develops.

Adaptation to new technologies will not come from government think-tanks, ivory tower academics or even big business. It will come from thousands of start-ups, all trying to take advantage of the changes. And the millions of lost jobs will be absorbed into other sectors of the economy as new needs arise.

Larger profit margins from mechanization will be eroded by increased competition. Prices of manufactured goods will fall, leaving consumers with more money to spend. Man has unlimited wants and only finite resources. As Abraham Maslow described: when one need is satisfied, new needs surface to take their place. Increased consumption in other sectors — whether bigger houses, more flat screen TVs, or longer holidays — will generate employment opportunities.

Like evolution, the beauty of the capitalist system is its simplicity. Recent failures like the global financial crisis are not the fault of capitalism but the result of central planners — at the Fed and in government — attempting to meddle with the system. The road to hell is paved with good intentions.

via Nations Must Prepare For Robots Destroying The Low-Skill Job Market – Business Insider.

February 24, 2013

Scott Minerd: The Keynesian Depression | John Mauldin

Scott Minerd, Chief Investment Officer at Guggenheim Funds, writes:

Though some may be cheered by the relative policy successes this time around, at the current trajectory it will still take almost as long for total employment to fully recover as it did in the 1930s. While job loss was not as severe this time, the recovery in job creation has been much slower. Although nominal and real gross domestic production have returned to new highs on a per capita basis, we are still below 2007 levels. In the same way the Great Depression and the depressions before it lasted eight to 10 years, we will likely continue to see constrained economic growth until 2015-2016 roughly nine years after U.S. home prices began to slide.

December 5, 2011

Romer: Expectations Wallop Needed to Avert 40-Year Recovery

The Federal Reserve should set a “nominal target” for growth in the nation’s gross domestic product that is well above its current low rate for coming out of a recession, said Christina Romer, now an economics professor at the University Of California, Berkeley.“One thing I think it would do is pack a really big expectations wallop,’’ said Romer, speaking at the Super Bowl of Indexing wealth management conference here. “A new operating strategy is something that could really break through and affect people’s behavior.” Such a “new operating strategy” is needed to get the economy on the kind of course normally seen after a recession. In the first nine quarters after the 1982 version, the economy grew at an annual rate of 6.3 percent. In the first nine quarters of this edition, the rate has been 2.4 percent, barely at the nation’s historical rate of growth. And if a new approach is not taken, it could be decades before the nation is back at full employment.

via Romer: Expectations Wallop Needed to Avert 40-Year Recovery.

December 4, 2011

Would all those who are unemployed please raise their hand

US unemployment fell to 8.6 percent in November, the lowest level in more than 2 years. But let’s take a look at the real figures — without the spin. The unemployment rate only includes those who have actively looked for work in the prior 4 weeks. That excludes anyone who has abandoned hope of finding a job and is no longer seeking work. The Jobless Rate below paints a far bleaker picture, reflecting all unemployed, either full-time or part-time, whether or not they are seeking work. The chart is restricted to males aged 25 to 54 in order to minimize demographic factors that could cause wider variations among females, youth under the age of 25, or 55 or older.

US Males 25 To 54 Jobless Rate

There is a visible improvement, with a fall below 18 percent, but we are a long way from the lows of 12 percent recorded in the last boom. Apart from the massive spike in 2008, what is also evident is the long-term up-trend: the jobless rate has increased steadily over the last 60 years — from a low of just 3.6 percent in 1953. We are a long way from being able to congratulate ourselves on the recovery.