An Obvious but Important Point Regarding Executive Orders

July 31st, 2014 at 5:52 pm

It was my privilege to visit the White House today to attend the signing of the new Executive Order to ensure that federal contracts don’t go to firms that violate labor laws.

As I wrote earlier, it’s a good idea for a number of reasons:

First, the federal government does a lot of business with private firms, something in the neighborhood of $500 billion per year, and many firms depend on the business. The new order thus raises the cost of labor violations and strengthens the incentives to do the right thing. In so doing, it puts scofflaws at a competitive disadvantage.

Second, since the minority of firms that have shoddy labor practices and/or ongoing labor disputes are likely lousy performers anyway, I suspect this new rule will improve contract efficiency.

As the White House put it: “Contractors who invest in their workers’ safety and maintain a fair and equitable workplace shouldn’t have to compete with contractors who offer low-ball bids—based on savings from skirting the law—and then ultimately deliver poorer performance to taxpayers.”

But here’s something that I didn’t mention which I thought about as I listened to President Obama: the next president could revoke this order day one of his or her term. In fact, it’s common practice to do so, depending of course on the party of the new president.

EO’s are not legislation, and while I know everyone knows this, it’s worth remembering, especially as regards an EO like this. I suspect that if it lives long enough, the positive impact of this new order will grow over time. It will become part of the embedded culture among firms that contract with the feds that it’s much better for your bottom line if you don’t break labor laws. And it will become a standard practice among procurement officers to enforce that discipline using the information they’ll now have on firms’ histories of such violations.

But that kind of cultural shift will take years to evolve and if the next president revokes this EO, it won’t happen. It’s just a thought worth reflecting upon when contemplating the costs of Congressional dysfunction, the shutting down of legislative options, and the stakes of the next presidency.


Heads Up: It’s Jobs Tomorrow…again

July 31st, 2014 at 5:25 pm

Here’s the expectations table from Bloomberg:



Source: Bloomberg

Jobs-watcher extraordinaire Heidi Shierholz asks this of tomorrow’s report:

…have we really kicked it into higher gear? A jobs number north of 270,000 would be a pretty clear sign that the answer is yes—but anything much less than that would push us back to “we have to wait and see” territory.

Her 270K is about the trend over the past three months, and while it’s a noisy indicator, GDP appears to have accelerated smartly in Q2 as well, based in part on faster consumer spending and investment, which may well have generated more jobs in July.

So, while I’ve not had time to run my model (not that it helps much), I’d look for a number on the upside of the consensus printed above (233K).

Look for “first impressions” shortly after the 8:30 release.

Parsing the Fed

July 30th, 2014 at 4:21 pm

Fed porn.

That’s what a guy I know who covers the Fed calls minutiae of the type I’m about to share with you. So be forewarned, but tracking the entrails of statements by the central bank is an occupational requirement.

It’s also made a whole lot easier by the Wall St. Journal’s Fed tracker, which allows you to compare the last FOMC statement to earlier ones, including the one that just came out this afternoon. (h/t: AM for reminding me of this cool tool.)

As you’d expect, the practiced data watchers on the committee are engaged in the type of smoothing I recommended earlier today in contemplating the bouncy GDP ball over the first two quarters of this year. Broadly speaking, as the GDP, jobs, and price data firm a bit, so has their language.

“The unemployment rate…remains elevated” from the mid-June statement morphed to “Labor market conditions improved, with the unemployment rate declining further.” What’s substantively notable in this observation, and this data point is perhaps somewhat underappreciated right now, is that the labor force participation rate, after falling sharply since the downturn, has been pretty stable in recent months. It held at 62.8% each month in Q2, and has wiggled between 62.8% and 63.2% since last August.

Thus, declines in unemployment in recent months have largely come from jobseekers finding work as opposed to giving up the search (remember, you’re only counted as unemployed if you’re looking for work).

Moving along, we see this change: “Inflation has been running belowmoved somewhat closer to the Committee’s longer-run objective, but l. Longer-term inflation expectations have remained stable.”

As of today’s GDP report, we learned that on an annualized quarterly basis, the Fed’s preferred inflation measure–the core PCE deflator–jumped from 1.2% in Q1 to 2% last quarter, a potentially eyebrow-raising acceleration.  But year-over-year, smoothing out some noise, the jump was from 1.2% to 1.5%, and like they said, expectations remain well-anchored. (And then there’s what little we actually know about the slack/inflation tradeoff these days…but that’s another discussion.)

That development also led them to change the language to suggest, reasonably, that they’re less worried about deflation.

From there on, the statement is pretty much identical to the last one, with of course the expected continuation of the taper on the asset buying program (they’re down to adding a measly $35 billion/month to their balance sheet).

So, like I said, a slightly firmer statement reflecting a slightly firmer economy. If there’s anything notable in here, it’s that Chair Yellen, to her credit, remains focused on labor market slack and the absence of full employment. Not to the exclusion of everything else, of course, but that, IMHO, is the right place for the FOMC to be.

OK, apologies for the lurid post.  Now back to our usual family-oriented entertainment…

Hey Kids: Keep the Noise Down! (GDP version…)

July 30th, 2014 at 12:57 pm

What parent, busily trying to make sense out jumpy data, hasn’t yelled that down to the basement, especially during summer, when the kids are out of school?

My kids, however, schooled in the volatility of high-frequency data, yell back: “Dad, if you want to filter out the noise, compute year-over-year changes!”

Ah, from the mouths of babes…

They’re right, of course, and this is especially important when you’re dealing with outliers like the big negative print for Q1 of this year: -2.1% (as revised). The figure below plots quarterly annual growth rates against year-over-year rates for real GDP over the recovery. The annualized quarterly growth rate for Q2–the one getting all the headlines–was 4%; the more-indicative-of-actual-trend-year-over-year rate was 2.4%.

I see two clear points: first, the annual changes provide a much more reliable view of the underlying growth rate, and second, since the yearly rates turned positive in 2010Q1, we’ve been growing at trend, about 2.2% on average. That would be a fine place to be if we’d first made up the deep losses from the downturn. But what happened in this recovery is that we settled into trend growth before we bounced back and repaired the damage. That’s why the job market in particular has taken so long to recover.

There are lots of reasons for that as I’ve discussed in many places, but fiscal drag–the premature pivot to deficit reduction–is certainly implicated, especially last year (see figure here).


Source: BEA

Same with inflation, by the way (re smoothing).  On an annualized quarterly basis, the core PCE deflator–the Fed’s preferred measure–jumped from 1.2% in Q1 to 2% last quarter, an eyebrow-raising acceleration.  But year-over-year, the jump was from 1.2% to 1.5%.

All’s I’m saying is that when the numbers are bouncing around like they’ve been, stay calm and smooth out the noise.