Employment Situation, July 2017

This morning the Bureau of Labor Statistics released the latest monthly installment of its Employment Situation report, a long-standing series that monitors the state of the labor market in the US.

The report, a compilation of data from a large number of employers around the country,  estimates that a total of +209,000 new jobs were created last month (I’ve corrected a typo from an earlier version of this post).  Revisions to the prior two months’ data added another +2,000 new positions to that.

The unemployment rate came in at an ultra-low 4.3% of the workforce.  This figure is in line with recent experience, but one which would traditionally be regarded as indicating full employment plus a lot (the idea being that there’s a certain level (4.5%?) of frictional unemployment, basically people quitting one job to take another but not having yet started).

 

In the past, reaching full employment has also made itself known by accelerating wage gains, as employers bid up the price of the additional workers they need and raise wages all around for existing employees to ward off job poaching from rivals.

In perhaps the most perplexing aspect of this recovery, however, there’s still no sign of wage acceleration.  Wages are rising by a tad more than inflation but the rate of growth has remained steady at about 2.5%/year for a long time.

Although the +220,000 figure is 20% higher than the consensus guess of Wall Street economists, the stock market is regarding the ES with a shrug of the shoulders.  Only a sharp uptick in wage growth will make an impact (probably negative, at least at first) on stocks and bonds from this point on.

 

calling for higher inflation

Last week a group of prominent economists wrote an open letter to the Federal Reserve arguing that the current Fed target of 2% annual inflation is too low.

Their basic view is:

–circumstances have changed a lot in the US since 2% became the economists’ consensus for the right level of inflation a quarter-century ago, so it isn’t necessarily the right number anymore, and

–the lack of oomph in the US economy is a result of maintaining an inflation target that’s too low.  So let’s try 3% instead.

Having a 3% inflation target instead of 2% isn’t a new idea.  I heard it for the first time about 20 years ago, from an economist at the then Swiss Bank Corp.  Her argument was that getting from 3% to 2% inflation would require an enormous amount of effort without any obvious payoff.  The whole idea of inflation targeting is to eliminate the possibility of the kind of runaway inflation–and associated crazy economic choices–of the kind the US had begun to experience in the late 1970s.  Whether actual inflation is 3% or 2% matters little, just as long as the current level is not the launching pad for a progression of 4%, 6% 9%…

Another way of looking at this would be to say that the nominal figures matter much more than academic economists realize, and that 4% nominal GDP growth (2% trend economic growth + 2% inflation) feels too much like stagnation.  Therefore, it undermines the entrepreneurial tendencies of ordinary people.

 

How to create 3% inflation?  …slower interest rate increases and/or increased government stimulus (meaning tax cuts and infrastructure spending).

 

The letter certainly won’t affect the Fed’s thinking about a rate rise in June.  But it seems to me that the debate on this issue can only intensify.

By the way, I think 3% inflation would be good for stocks, neutral/bad for fixed income.

 

the September 7th Job Openings and Labor Turnover Survey (JOLTS) report

The Bureau of Labor Statistics of the Labor Department released its latest JOLTS report on Wednesday.

The main results:

–nationwide job openings are now at 5.9 million, the highest figure in the 16 year history of the report.  This is substantially above the 4.5 million level of 2006-07.

–the rate of new hires has been flat for about two years at just over 5 million monthly.  While this is 5% – 10% below the rate of 2006-07, the very high number of job openings would have been consistent with an unemployment rate of 3% ten years ago.  This seems to me to be a point in favor of the idea that the main impediment to filling jobs is finding workers with needed skills.

–3 million workers are voluntarily leaving their jobs monthly.  This is a sign they’re confident of finding employment again without much difficulty.  That’s back to the pre-recession levels of 2006, and almost double the recession lows.

All of this argues that the US is at or near full employment.  On the other hand, however, there’s little sign of the upward pressure on wages that this situation would have produced in the past.

 

Whatever the reason for slow-rising wages, it seems to me there’s no reason in the employment figures for the Fed to maintain anything near the current emergency-room-low level of short-term interest rates.

 

 

Stephen King on productivity and monetary policy

The Stephen King I’m writing about is an economic advisor to HSBC who was formerly the bank’s chief economist.  He’s one of the most interesting economists I’m aware of.  For instance, he was one of the first to warn of excesses in the US housing market a decade ago, and perhaps the most vocal in doing so.

Last week he weighed in on the issue of productivity in an Opinion article in the Financial Times.  His main points:

1. The current low level of productivity–+1% yearly in the US, flat to down elsewhere–may not be due to lack of infrastructure spending (Lawrence Summers) or that most productivity-enhancing inventions have already been made (Robert Gordon).  It may be instead that we’re seeing now is normal.  It’s the generation that rebuilt after WWII, creating high growth in productivity in the process, that’s the outlier.

2.  If #1 is true, then many of the mainstays of orthodox macroeconomic policy need to be reexamined.  In particular,

–if the world is being flooded with money, then capital is equally available at cheap prices to high productivity enterprises and low ones.  The result may be that the very process thought to be increasing economic growth is neutralizing the competitive advantage of high-productivity enterprises

–in a low-inflation, low-productivity world, interest rates will be “dragged down to incredibly low levels,” meaning recession-fighting monetary expansion may be difficult to achieve

–cultural expectations built over the past half century of ever increasing prosperity may prove to be too high.  This would be trouble for, say, pension or social security schemes around the world whose ability to deliver promised benefits assumes the robust real economic growth of the past can be extrapolated into the future.

3.  The ability of governments to create inflation may become increasingly important, as a means of keeping nominal GDP growth above zero during an economic downturn.  Monetary theorists around the globe have assumed that doing so involves only the simple expedient of increasing the money supply.  The past eight years in the US, however, have shown that creating inflation is much easier to theorize about than to do.

 

His overall conclusion:  the Lawrence Summers idea of secular stagnation–which can be addressed through increased infrastructure spending–is a much cheerier outlook than it appears at first blush.

human capital and the US presidential election

human capital

When we think of sources of capital, we typically imagine bank accounts, IRA/401ks, stocks, bonds, pensions, land/structures we can rent or mortgage…

For most people, though, the largest source of wealth they have is their human capital, a concept economist Gary Becker won the Nobel Prize in 1992 for articulating.

Basically, human capital is the collection of characteristics someone has that allows him to get a job and make money.  The three main ones, according to Becker, are: education, training and health.

The way human capital is generally quantified is by creating a present value of future expected earnings.  One implication of this is that an individual’s human capital gradually diminishes as he ages.  It’s often said that that figure reaches zero when he’s 65, although I think this is more because no one will hire you, rather than that you suddenly lose your skills.

investments and politics

Human capital is an important idea in managing our investments …as well as in politics today.

investments

The investment issue is risk and diversification.

A key employee in a tech startup who owns a house in Silicon Valley and a portfolio stuffed full of tech stocks has no diversification at all.  And, no matter what his faith in his skills, the circumstances that would cause him to lose his job likely also substantially impair the value of his dwelling and his stocks.

In contrast, a tenured professor at a top-10 university probably has a job for life (my philosophy mentor is retiring next year at 82–so much for human capital reaching zero at 65!).  Having a stock portfolio that contains only utilities is probably excessively conservative.

politics

The political issue is jobs.

For some years, China has been facing the problem that economic prosperity has made sewing t-shirts, and other simple, labor-intensive industrial operations, unprofitable there.  Affected companies are closing down and relocating to lower cost places like Bangladesh, creating substantial unemployment.

If all a person in China can do is make t-shirts, his human capital, no matter what his age, is reduced to zero as industry leaves the country.  Economically, this is devastating.

What to do?

The obvious, well-understood answer is for government to help retrain the t-shirt makers for another occupation.  This restores the value of his human capital, most likely to a higher level than before.  It’s good for the country as well as the individual.

Which brings us to the US…

We have a similar problem to China’s, except that we’ve had it for much longer.  Despite this, the US pays very little attention to worker retraining, spending about 1/6 per capita of what the average advanced country does.  If that spending is anything like the VA’s “service” for veterans, the government effort is even weaker than that low figure suggests.

The  deep discontent that this failure has produced is, I think, the nerve that Donald Trump and his scary, crackpot, Ned-Ludd-reads-Mein-Kampf ideas have touched.  Their sole merit is that they make clear the scale of the problem that Washington has brushed under the rug for years.

I was going to end this by comparing Trump to Silvio Berlusconi, the former Italian prime minister who did so much damage to that country’s economy during four terms.  Yes, Berlusconi promised to fix serious problems.  But he made them worse instead.  As I was googling to make sure spelled the name correctly, I found this article from Politico.