Real wage gains and energy prices

February 14th, 2019 at 2:19 pm

Readers know I’m a huge booster of the impact of low unemployment rates on wage gains, especially for middle and low-wage workers. This dynamic is alive and well in current data and those of us on team Full Employment should elevate and tout it!

But, when it comes to real wage gains in “high frequency data,” which have been notable of late–as in, beating productivity growth–it’s important to also parse out the role of low energy prices.

The most recent CPI report showed a low topline inflation rate of 1.6 percent over the past 12 months (core CPI inflation rose 2.2 percent). The main factor pushing down on price growth was energy, down 5 percent, with gas prices (a sub-category of energy), down 10 percent.

In my recent write-ups of the jobs and other reports with wage info, I’ve mentioned the role of low energy prices in real wage growth, but here I’d like to formalize the analysis a bit to try to get a more accurate feel of the importance of this factor.

The first figure below shows recent trends in real hourly wages of mid-level workers (the production, non-sup series from the Establishment survey) deflated by both the topline CPI and CPI less energy. Of course, given volatile energy prices, wages deflated by the sans-energy deflator are smoother and have been gradually climbing since 2015, hitting 1.3 percent last month. The other series hit 1.8 percent, suggesting the difference–0.5 percent–is due to low energy prices.


Source: BLS

How important is this energy-price effect? Well, a year ago, real wage growth for this series was 0.4 percent, meaning real growth has accelerated by 1.4 percent. But back then, rising energy prices were pushing the other way, i.e., slightly crimping real wage growth. Thus, the change in the energy effect–the difference in difference between the values in the two series above over the past year–is 0.8 percent. That means that 56 percent of the acceleration in real wages over the past year is due to falling energy prices. (See note for details)

That’s a sizable impact, but look back at 2015 to see even bigger effects. In Jan, 2015, energy prices were 20 percent below their year-ago level. That month, real wages were up a strong 2.2 percent, and acceleration of 1.5 percent over their year-ago level. The energy price effect more than explains that change.

Such findings do not undercut the longer-term full employment/wage growth connection, as both nominal and real gains are correlated with tighter job markets (I’ve argued non-linearities are in play but others find that not to be the case). Note, again, the smooth acceleration in real wages since 2015 using the non-energy deflator in the figure above.

But they’re also a reminder of the important role of energy prices in near-term, real wage trends. For what it’s worth, which isn’t a lot, the general consensus is that oil prices, while not expected to fall further, should stay roughly around where they are going forward, as strong global supply meets middling demand. However, there are some noises about OPEC constraining supply, so stay tuned.

Data note: What I’m calling the “energy effect” here is: d_rw_c – d_rw_ne, where the first term is the 12 month log change in the real wage deflated by the top line CPI and the second term is the 12 month log change in the real wage deflated by the CPI less energy. The acceleration calculations first difference d_rw_c and d_rw_ne with their values one year ago and then difference those differences to get the change in the energy effect.

Foreign holdings of US debt have been coming down a bit. Is that a problem?

February 7th, 2019 at 11:27 am

I remember when foreign ownership of U.S. government debt amounted to very little, as shown on the left end of the figure below (the share of total publicly held debt owned by foreigners).

Source: US Treasury

I next remember that this share was growing rapidly, closing in on half about a decade ago. What I didn’t know was that the share has been falling back a bit. In fact, it’s about 10 percentage points off of its peak.

I discovered this because I went to look at the data as part of the broader conversation I’ve been engaged in regarding the lack of attention to and concern about our growing fiscal imbalances, an unusual dynamic what with the economy closing in on full employment.

In the course of that conversation, some have raised the concern that because a significant share of our debt is held be foreign investors, we face risks that were not invoked in earlier decades.

There’s the “sudden stop” scenario that’s been deeply damaging to emerging economies, when foreign inflows quickly shut down, slamming the currency and forcing painful interest rate hikes.

There’s a less pressing but still concerning risk that foreign investors’ demand for US debt would fall at a time like the present, when the Treasury needs to borrow aggressively to finance our obligations in the face of large tax cuts and deficit spending. That scenario could lead to “crowd out,” as public debt competes with private debt for scarce funds, pushing up yields.

At the very least, it leads to more national income leaking out in debt service than when those shares in the figure were lower.

How serious are these concerns?

In contemplating this question, I see the WSJ has an interesting piece out this AM on this very question. One factor in play they note is that China’s share of our sovereign debt has fallen by half, from 14 to 7 percent. That reflects both China’s decline in dollar reserve holdings, and more internal investment. Also, the piece notes the role of the stronger dollar and the resulting increased price of holding dollar assets.

But the key point re our own debt and rate dynamics is this one:

“Deficit hawks have suggested government bond yields could jump if foreign investors shed their holdings of U.S. debt, which in turn could push up the cost of other debt throughout the economy, such as mortgages and business loans. Those warnings haven’t come to pass.”

The fact that Treasury yields remain low confirms that part of the story. Also, as Krugman and others have maintained, it just doesn’t make a ton of sense that countries with large dollar holdings would undertake actions, like dumping US debt, to debase their holdings. And, if they did, the cheaper dollar would make our exports more competitive.

So, while I worry more about our weird, upside-down fiscal stance right now than most progressives, the declining trend at the end of the figure above doesn’t give me too much pause.

January Jobs: Another upside surprise shows the benefits of closing in on full employment.

February 1st, 2019 at 9:46 am

The US labor market just keeps on rolling along, turning in one good jobs report after another. Payroll gains continue to outpace expectations, wages are handily beating inflation while not pushing it up much, participation continues to suggest more room-to-run than most economists expected, and even the slight uptick in the unemployment rate last month, to 4 percent, was likely a temporary blip caused by the government shutdown (more detail on that below). The underemployment rate, which also spiked last month, was another temporary victim of the shutdown, causing a sharp, temporary increase in involuntary part-timers (those working part-time who want to work full-time). These measures of increased slack should fully reverse in coming months, assuming the government remains open, of course.

Payrolls were up 304,000 in the first month of 2019, well ahead of economists’ expectations for a gain of about 170,000, and the jobless rate ticked up a tenth to 4 percent. As noted, the uptick in the jobless rate is likely due to the shutdown and should fully reverse next month. The big jobs number for December was revised down significantly, from 312K to 222K, and other revisions to today’s report (e.g., a small annual benchmark revision) suggest that we should smooth out the monthly data to better discern the underlying signal.

In other words, cue the JB/KB (Kathleen Bryant, who does all the work on this report) monthly smoother! It shows average monthly payroll gains over the past 3 months to be a very robust for this stage of the expansion: 241,000. The other bars, which take monthly averages over longer periods, are around the same height, implying an underlying monthly trend slightly north of 200,000. This is well above what most economists believed sustainable, given estimates of “supply-side constraints,” i.e., the size of the available labor pool. Importantly, it appears this constraint is less binding than many thought, meaning there’s more room-to-run in the job market, and that we’re closing in on, but not yet at, full employment.

Participation measures are a bit hard to compare this month because of changes to the population weights in the survey (the weights are used to make the survey sample representative of the national population), but data provided in the report suggest participation ticked up in January to 63.2 percent, the highest rate since September 2013. The closely watched prime-age employment rate ticked up significantly for men, from 86.1 to 86.5 percent, and was up one-tenth of a point for women as well, from 73.4 to 73.5 percent (again, this monthly number should be handled with care due to the weighting change, but the underlying, positive trend is real and important).

The tight job market continues to generate near-cyclical highs in terms of year-over-year wage gains. Overall private hourly wage growth fell back slightly to 3.2 percent, from 3.3 percent in both November and December. For middle-wage workers–the 80 percent of the workforce in blue-collar or non-managerial jobs–wage growth was 3.4 percent. My estimate for January inflation (the official change does not get released until later this month) is 1.6 percent, driven down by low energy prices. That implies mid-level, real wage gains of 1.8 percent, a solid increase in buying power for these workers, many of whom have long been left behind (of course, we’re talking averages here, and we know that even now, significant pockets of labor slack still persist in some places around the country).

This positive trend in wage growth is captured in the figures below, which use 6-month moving averages to smooth out the jumpy, underlying series. The acceleration is notable. The third figure, which includes my inflation forecast, zeros in on the growing gap between rising nominal wage gains for mid-wage workers and falling price movements. The gap between the two lines represents the real gains touted above.

This gap will like close somewhat as energy prices rise, but I expect some level of real wage gains to persist. Another important point about these real gains: given that productivity growth is running at around 1 percent, when real wages grow faster than output per hour, the share of national income shifts from profits to compensation. As much research has revealed, this share has long shifted in the other direction–the wage share has been historically low, meaning the profit share has been high. In other words, the current tight labor market appears to be delivering a long awaited re-balancing of these shares.

As noted, the government shutdown is likely playing a small, temporary role in today’s report, though mostly in the unemployment rate. In terms of direct impact, the BLS reports that both furloughed and unpaid federal government workers should be counted in the payroll data, though furloughed workers should be counted as temporarily unemployed in the household data, the survey which yields the unemployment rate. Indirect, or spillover effects, such as a private-sector restaurant worker on temporary layoff because she works near a national park that was closed during the shutdown, could also be in play in today’s data. That said, the strong topline jobs number underscores the BLS commissioner’s statement today: “Our evaluation of the establishment survey data indicates that there were no discernible impacts of the partial federal government shutdown on the January estimates of employment, hours, or earnings.”

I’ll have more to say later about some of the guts of the report, but especially once we remove temporary shutdown effects from some of the household survey indicators, we’re left with unequivocal evidence of a few very important facts. First, in an economy with too little worker bargaining power and too much inequality, the benefits of closing in on full employment are powerful and equalizing. And second, Chair Powell and the FOMC were smart to put interest-rate hikes on hold. There’s non-inflationary room-to-run in this job market!

No correlation between top tax rates and growth rates

January 28th, 2019 at 8:51 am

In a piece in WaPo today, I note in passing that there’s no persistent correlation between top tax rates and growth rates across the US time series, nor in oft-cited international data from Saez et al. This is widely understood among empirical public finance folks, but just in case, here are a few figures.

As Krugman did the other day, I’m using top marginal income tax rates and 10-year, annualized growth rates of real GDP per capita.

First, as Paul’s figure suggests, here’s a scatterplot that looks pretty random. One can, of course, plunk a regression line in there, and it has the “wrong” slope (higher rates associated with faster growth). To be clear, I neither think nor claim that higher top rates lead to faster growth (though such a case is sometimes made). These are just correlations. More on that in a moment.

Sources: TPC, BEA

In fact, 2o-year rolling correlations have a little something for everyone, which again, shows the absence of any systematic relationship supporting the high-top-rates-kill-growth story.

Sources: TPC, BEA

These are very simplistic ways to look at this, not at all dispositive. However, deeper looks yield similar results.

Moreover, I wouldn’t dismiss the simple correlations. My experience in this sort of work is that if the correlations aren’t there at this level over long time periods, you often–not always, of course–have torture the data to find them. In they are there, then you must check to see if the correlation is a function of a statistical problem (e.g., serial correlation) or a missing control variable. But if they’re not, it’s often telling you the argument that they are is going to be a heavy lift, very possibly involving more confirmation bias than honest analysis.

There’s heightened nervousness about the next recession and there are signs pointing in both directions.

January 11th, 2019 at 3:34 pm

I can’t turn around without seeing or hearing people worrying more about the next recession.

Google Trends: Web search for “next recession”

Source: Google Trends

My peeps at the Indicator have a nice podcast on the topic. The WSJ points out that more than half of economists they surveyed expect a downturn by 2020, which, in case you live under a rock, the article helpfully notes is an election year.

The reasons for the heightened anxiety are:
–Slower global growth, particularly in China (also Europe and Japan). Remember how Apple’s market cap fell 10 percent in one day a couple of weeks ago. That was on the news that their China sales were down. We’re all connected, man…also, trade war.

–Higher interest rates and the flat yield curve. Interest rates are up, which acts like a brake on growth and they’re up more for short- than long-term rates, meaning the yield curve is flat, though not inverted (inversions provide reliable recession warnings, though they don’t say precisely when).

–High levels of US sovereign and corporate debt could provoke a credit crisis. High private sector debt levels can proceed a deep and sudden credit contraction, and high government debt can lead to the perception of diminished fiscal space, discussed below.

–Overheating risk and the Fed. This has maybe faded in recent weeks as the Fed has sounded pretty dovish of late, while inflation–actual and expected–looks decidedly nonthreatening. But with historically low unemployment and bigger-than-expected job gains, there’s always some nervousness of the return of that 70s show, with inflation taking off and the Fed having to slam on the brakes.

–Trumpian cray-cray. I mentioned the trade war. Then there’s the shutdown. And…how can I say this?…our current leadership fails to inspire confidence in this (or any other) space.

These are all real things, but here’s a realer thing: economists can’t tell you with any authority when the next recession is coming. If you forced me to take a stand, I’d stand with Powell. Heather Long reports the following:

“I don’t see a recession” in 2019, Powell said Thursday in an interview at the Economic Club of Washington, D.C. “The U.S. economy is solid. It has good momentum coming into this year.”

To be clear, the “solid U.S. economy” still leaves too many people and places behind, and real middle-wages, incomes and earnings haven’t been nearly as strong as, say, corporate profitability.

Just to be a contrarian, let me tell you about a few indicators that underscore Powell’s near-term optimism.

First, economist Jan Hatzius from Goldman Sachs has long emphasized the private sector balance sheet (those of us of a certain age recall that the great Keynesian economist Wynne Godley emphasized this metric).  Jan writes that: “…a financial deficit in the private sector—i.e., an excess of private sector spending over private sector income—…makes aggregate demand highly vulnerable to disruptions in asset prices or the supply of credit.”

Well, private balance sheets look pretty good–they’re around their historical average. Hatzius calls this “an unusually benign reading this deep into an expansion” and adds that “it is not only the household sector that runs a surplus but also the nonfinancial corporate sector, which is reassuring given the concerns around leveraged loans and corporate credit more broadly.”

I agree. However, the figure does show that this balance can spike pretty quickly, so here’s some positive indicators to which I’d give more weight: the strong labor market, rising real wages, and their correlation with real consumer spending. The figure below plots the yearly change in real aggregate earnings–real wage*jobs*hrs/wk–for middle-wage workers against consumer spending, which, ftr, is just under 70 percent of US GDP. To be fair, this is a much less forward looking indicator than say, the yield curve, but here’s the punchline: unless you have a story about the US job market heading south in a big way this year, I don’t think you have much of a near-term recession story.

Sources: BEA, BLS

Moreover, my labor market story goes the other way. I suspect unemployment–a lagging indicator–falls further this year and that the combination of strong labor markets and low energy prices leads to decent real wage gains. In fact, just this AM, we learned the real, mid-level hourly wages rose 1.3 percent in 2018, its strongest showing since August 2016.

To be clear, in much of my analysis, I have emphasized the expected slowing of growth later this year as fiscal stimulus fades. But, again, it’s not obvious that this doesn’t mean a return to the pre-stimulus trend growth rate of around 2 percent as opposed to a recession.

Finally, while we just can’t know when and why the next downturn will hit, we can get a sense of whether we’re ready for it (listen to the Indicator link above on this question). I say we’re not (though if we did the stuff in here, we could be). Monetary space may be constrained by an historically low federal funds rate, and if the debt/GDP level is =>80 percent, which may well be the case, history shows that the fiscal authorities, politically constrained by this higher-than-average debt level, tend to do less by way of discretionary, counter-cyclical offsets.

Such austerity would be a terrible mistake, for a lot of reasons. Depending on the depth of the downturn, it’s a great way to consign millions of people and families to unnecessary job and income losses. And such losses, depending on how deep they are, have been shown to leave lasting scars on people well into their post-recession lives. Also, as I wrote yesterday, Blanchard’s new work shows the fiscal and welfare costs of public debt to be far below where the convention debate places them (and in my framework, countercyclical offsets in recession are definitely GD–read the piece).

I’ll continue to heed all the warnings of my fellow tradesmen and women–no question, there are headwinds now that were not upon the land a year ago. But I’ll be more guided by the fact that nobody can time a recession, while anyone who’s paying attention can raise trenchant warnings about whether we’re ready for it, wherever it is.