Payrolls slow and the trade war is hurting manufacturing. But underlying job market still solid.

September 6th, 2019 at 9:58 am

Payrolls rose by 130,000 last month and the unemployment rate held at 3.7 percent, close to a 50-year low and the same level as the past 3 months. Still, job growth is cooling (25,000 of this month’s gains were temporary decennial Census workers), as the pace of monthly gains, while still strong enough to support low unemployment, has slowed. Wage growth also stayed parked at about where it has been in recent months, and there’s some evidence that the trade war is taking a toll on factory jobs. However, the job market remains strong, real wages are growing, and consumer spending will continue to be supported by these dynamics.

The slowdown in payrolls

To get a clearer take on the underlying trend in job growth, our monthly smoother shows the average monthly gain over 3, 6, and 12-month periods. This month, however, we add an extra bar to our usual smoother, as we believe it is important to begin to incorporate a recent BLS revision, based on more accurate jobs data, into our assessment of the US job market. This preliminary benchmark revision estimates that employers added 500,000 fewer jobs to US payrolls between April of 2018 and March of 2019 (BLS will officially wedge their final estimate into the payroll data by Feb 2020). The second bar includes the result of this revision, showing that over the past year, payroll growth was likely closer to 150K per month than 175K per month.

To be sure, this is still solid payroll growth at this stage of the expansion and as noted below, in tandem with real wage growth, it’s strong enough job growth to support the recovery and keep unemployment around where it is. However, using the preliminary revised data, the pace of payroll gains has slowed from 1.6% last year to 1.3% this year. Clearly, that’s not a big deceleration, and it’s also not unexpected in a job market closing in on full employment. But it is a slower trend which I expect to persist.

The trade war

The trade war that the Trump administration has been waging is clearly taking a toll on the global economy. While its impact is greater in countries more exposed to trade, like Germany, than the US, our manufacturers have been hit by these new taxes (tariffs) on their imported inputs and by retaliatory tariffs on their exports. To what extent is this showing up in factory employment, hours, and wages?

Manufacturing employment has slowed since the Trump administration began ramping up tariffs at the beginning of last year. Last month, factory jobs rose just 3K and durable manufacturing employment was unchanged. Thus far this year, the factory sector has added 5.5K jobs per month on average, compared to 22K for all of last year.

The product of manufacturing employment and weekly hours yields the aggregate hour index for the sector, a very good proxy for labor demand. The next figure looks at the year-over-year change in this index for blue collar and for all manufacturing workers. Starting about a year ago, a clear deceleration is evident, and for the non-managers—who comprise about 70 percent of the sector’s employment—total hours worked have outright declined in recent months (relative to a year ago).

After slowing in 2018, manufacturing wages for blue-collar workers have picked up pace in recent months and are now growing at about the same rate of other mid-level workers.

In sum, at least in terms of jobs and hours, the trade war is hurting manufacturing workers. I’m sure some will push back that this near-term pain is worth the longer-term gains from a “victory” in the trade war. I find this totally unconvincing, as victory apparently means getting China to be more accommodating to US multinationals. That is, were China to stop insisting on tech transfers, or issue more licenses to our multinationals, we’ll get more, not less, offshoring of US jobs.

Wages still stalled

Wage gains are still stalled, though at a level above inflation, so real paychecks are growing on average (see third figure below). The stalling is clear in the 6-months rolling average, and is not particularly surprising as the job market has not particularly tightened further over this period. That is, low unemployment is providing workers with more bargaining clout than they’d have in less tight job markets, but this force appears to be holding steady for now.

Stronger Household Survey

Participation ticked up and the closely watched employment rate for prime-age workers (25-54) hit a cyclical high of 80%, just 0.3 ppts below its 2007 peak. While we can’t say much about one month’s change, this important measure of core labor market capacity had previously been stalled. If it continues to rise, it will suggest there’s still more room-to-run in the job market, and especially given low inflation, a strong rationale for the Federal Reserve to do what they can to extend the run.

Bottom line, the job market will handily support consumer spending in the near term, staving off any recessionary threats from the trade war and the global slowing to which it has contributed. However, payroll gains have slowed somewhat, especially in manufacturing, and, I suspect, in any other sectors with global connections (i.e., tradeable goods and services). We will continue to monitor this and any other fragilities related to the trade war or whatever other unforced policy errors are forthcoming.

The NYT wrote a woefully imbalanced piece on Opportunity Zones.

September 3rd, 2019 at 9:30 am

A number of people (OK, four…but it’s early) have asked me to respond to the NYT piece from last Sunday on how the Opportunity Zone tax break is nothing but a boon to the rich. As I’ve written in a few opeds, I’ve been a cautious supporter of the program, though I’ve been careful to make the points that a) it’s too early to say much about outcomes, and b) while OZs have the potential to become a wasteful tax shelter mechanism, some early signs are hopeful. And, as the Times points out, some early signs are not.

The problem is, the piece was a list posing as an analysis. It just lists many examples of rich people getting the tax break through the program without a shred of evidence that poor people and places aren’t getting helped. That’s largely because, as noted, it’s simply too early to make this foundational assessment, which is why it’s too early to conclude that OZs are failing to have their intended effect.

In essence, the piece makes two points, neither of which should surprise anyone: rich people have capital gains, and rich investors are taking advantage of the OZ tax break. It then cherry picks a bunch of cases that look bad, where Opportunity Funds are supporting the building of luxury dwellings that would have been financed without the tax break.

Here’s a good example of what’s wrong with the article. In a typical example of why OZ’s don’t work, the Times writes:

Many others [taking advantage of the program] are lesser-known business executives who recently sold small companies or real estate and are looking for ways to avoid large tax bills.

Paul DeMoret, for example, recently sold his auto-industry software company in Oregon. He said he was using some of those capital gains to help finance a Courtyard by Marriott in Winston-Salem, N.C., and an apartment building in Tempe, Ariz., among other projects in opportunity zones. He is making the investments through a private equity firm, Virtua Partners.

This is not anywhere close to evidence of the article’s thesis that OZs are not having their intended impact. To the contrary, it’s showing the part two of the plan is working: investors are tapping the tax break to invest in the zones (part one was picking the zones; as I and others have argued, and the Times agrees, most—not all—of the zones were well chosen). Apparently, the reader is supposed to assume that building a hotel and an apartment building won’t help folks left behind. But without data on employment outcomes, which can’t possibly exist yet, there is no way of knowing this outcome. I could, based on the facts that hotels employ low-income workers who also often live in “apartment buildings” declare success! But that would make no more sense than declaring failure based on this anecdote.

Same with the line of argument that goes: X is a known, greedy jerk. X invests in OZs. Thus, OZs won’t help the poor. Again, not exactly the trenchant analysis we’re looking for from the paper of record. The point of the program is to incent patient capital investment in places that face historical disinvestment. There’s no requirement that the investors are good guys and gals.

And guess what? As Steve Glickman, one of the early designers of the program, points out in this Twitter thread, there are lots of great people—I mean serious non-jerks—who are investing in OZs. But you’ll learn almost nothing about them is this unbalanced piece.

I myself spoke to the authors of the piece for hours about such nuances, and earnestly gave what I believe was a balanced assessment of the program’s promise and risks. I’m perfectly willing to admit that my message—on-the-one-hand-this-on-the-other-hand-that—along with my strong assertion that it’s just too soon to tell, wasn’t definitive, sexy, or even that interesting. But it’s just irresponsible journalism to leave out informed voices (I was co-author, with Kevin Hassett, of the white paper that first introduced the idea) that don’t fit the authors’ slant.

A few other rants:

–The piece quotes someone as saying “Perhaps 95 percent of this is doing no good for people we care about.” There’s simply no possible way to know this, much less put a number on it. I don’t see how a supposed “fact” like that gets by an editor (and I hope the Times doesn’t think “perhaps” makes it okay to run false numbers). Ross Baird, who also has an excellent thread on the NYT piece, had the same reaction, and provides useful background on where the 95 percent comes from.

–A good chunk of what the piece bemoans is actually about building in mixed-income communities. Many of us view this as a potentially positive outcome of OZs. There’s solid social-science research showing the benefits to the poor, especially for young children, of growing up in such places relative to high poverty areas.

–Baird also drills down into just what early days these are re OZs: “The narrative that a “wave of developments” is happening is not yet true. Opportunity Zone funds across the country have raised less than 10% of their goals. It is a new market and most people are very cautious.” In fact, to my knowledge, no OZ project is up and running such that we can evaluate the outcomes on the variables about which I care most: jobs, poverty, incomes.

–My biggest concern about an imbalanced piece like this at this early point in the evolution of the program is its opportunity costs. Yes, we need to identify and stop wasteful projects, like some of those identified on the piece. But a more balanced take would have asked what else needs to be done to make sure the program has its intended effect. Most important, in this regard, is what Kenan Fikri of EIG notes in yet another useful thread reacting to the Times: “20 months have elapsed since passage; it’s time to get the data reporting regime in place.”

–The political framing of the piece is off. As Glickman notes: “Referring to this program as a Trump tax break is in itself disingenuous. The #OpportunityZones legislation was cosponsored by nearly 100 Members of Congress, proportionally divided between GOP & Dems, including several Dem candidates for President.” Sen. Booker (D-NJ) was the leading co-sponsor and is now pushing important legislation—again, bipartisan—to get the data we’ll need to make the evaluation that was lacking in the Times piece.

Let me, for the n_th time, be unequivocal about my own position, not because my view particularly matters, but because this is the view of other progressives who share my take. OZs pose promise and risk. At this point, one could write a piece featuring promising projects, as I recently did (while emphasizing the risks) as easily as the opposite tack taken by the Times. I’ve also been careful to cite the nuanced work by my CBPP colleagues who have legitimate concerns that Opportunity Funds could become wasteful tax shelters.

OZ advocates and close observers, including Glickman, EIG’s John Lettieri (cited in the NYT piece), Fikri, Baird, have been quick to point to developments that are counter to the intention of the law. The reason we do so is simple: we want this thing to work! I’ve been working in anti-poverty policy for over 30 years, and I have absolutely zero interest in a wasteful tax break for rich people. To the contrary, since Reagan, I’ve been one of the most outspoken critics of trickle-down tax cuts. But I and others with similar backgrounds (e.g., Bruce Katz) see potential in OZs.

Whether we realize that potential is the huge, outstanding question, currently unanswerable. The Times made a big mistake by assuming the answer is in and the program’s a flop. That’s wrong, and I and others will continue to do our best to make sure it stays wrong.

Recession Readiness and State UI Trust Funds

August 22nd, 2019 at 5:25 pm

[My colleague Kathleen Bryant took the lead on this piece–JB]

Given the recent dramatic spike in media coverage of our economic headwinds and recession readiness over the past week, we decided to take a closer look at the balance sheets of state unemployment insurance (UI) trust funds. While the Department of Labor (DOL) is responsible for overseeing the UI system and paying administrative costs, the basic program is managed and mostly funded by the states. Using the most recent final data available from the Treasury Department, we analyzed the number of state UI trust funds that meet DOL’s recommended minimum solvency standard. This standard is measured using a ratio called the  “Average High Cost Multiple,” where a value of 1 means that trust fund reserves could pay out at least 1 year of benefits during a recession of average depth– states with an AHCM greater than 1 have met DOL’s recommended minimum solvency level.

There are 18 states that have not met DOL’s minimum solvency standard (as of July 2019), including some of the most densely populated states in the country– California, Texas, and New York. Congress should be closely monitoring the balance sheets of state UI trust funds and should be prepared to ramp up federal spending on UI when the next recession hits, considering the financial status of many state trust funds.

Source: The Department of Labor, the Department of Treasury

A quick note on China’s devaluation

August 5th, 2019 at 6:50 am

Source: WSJ

Just back from ranting about this on CNBC so I’ll quickly share some thoughts on the news that the Chinese yuan broke 7/$, in a depreciation that threatens trade-war escalation.

Bottom line: the trade war may be about to get worse, and that won’t be good for markets, consumers, and the global economy. It’s hard to see a way out between these two sides, though electoral politics could force Trump to stand down next year.

The numbers:

–Depreciations offset tariffs. That is, a 10% tariff, paid by importers and passed forward to consumers, is fully offset by a 10% depreciation. This is especially relevant in the case of Trump’s latest plan to place a 10% tariff on $300 billion more in Chinese goods, two-thirds of which are consumer goods (shoes, apparel, toys, cell phones). Earlier tranches have mostly been intermediate goods.

–The yuan depreciated over 1% relative to the dollar since last night and about 13% since its peak in March of 2018 (see figure above).

–Markets, which have been highly sensitive to the ups and downs of the Trump/China trade war, ain’t loving this; Dow futures are down about 300 points prior to today’s opening.

–If the market’s trade-related losses (which began last week) continue, it raises the question of the extent to which worsening financial conditions counteract the impact of last week’s Fed rate cut, and thus raises the likelihood of further cuts.

The trade politics:

–What’s freaking out the markets is their expectation that Team Trump will view this as an escalation. In fact, China’s central bank said the move was “due to the effects of unilateralist and trade-protectionist measures and the expectations for tariffs against China.”

–I share the market’s expectation. Trump obviously has more weighty, tragic issues to deal with today, but one thing he seems to understand is the role of currency movements in this fight and I expect him to hit back.

–The most obvious response would be to raise the 10% on the $300bn to match the 25% already in place on the rest of our imports from China.

–These dynamics aren’t pretty for China either. They have to worry about the impact of the devaluation on capital flight, an increasing problem in China. Also, since many Chinese firms borrow in dollars, this makes their debt service more expensive.

–Meanwhile, the whole damn trade war looks to be going badly from Trump’s perspective, predictably so as such wars tend to ding both imports and exports. In fact, in the most recent quarter, exports/GDP were close to a 10-year low and the trade deficit hasn’t improved at all on Trump’s watch.

–Is there any way out of this mess? The only thing I can think of is a political pressure valve. If the escalating trade war whacks US consumers through inflation and real growth channels, and does so close enough to the 2020 election, Trump could decide to dial his protectionism way back, and fast.

–As noted, markets are highly elastic to such whipsawing, and businesses have probably held back investments as well due to trade-war-induced uncertainty. So, the economic impact of some sort of resolution could be quite positive.

–Analysts at Goldman Sachs made an interesting point about this possibility. Suppose the Fed lowers more aggressively to offset any forthcoming escalation. Then, for electoral reasons, Trump suspends the war. The Fed will be reluctant to raise much in an election year, so GS argues this could pose an overheating threat.

–I’m inherently skeptical of arguments with a lot of links in their chain, and predictions of overheating have consistently been wrong. But worth watching.

Still a solid job market, but with a cloud or two

August 2nd, 2019 at 9:35 am

Payrolls rose 164,000 last month and the unemployment rate held steady at 3.7 percent. Wage growth accelerated very slightly–3.1% in June to 3.2% in July (year-over-year nominal hourly pay)–but it has been roughly stalled just north of 3 so far this year.

Downward revisions for the prior two months–May and June–appear to have slowed the underlying trend in job growth. In our report from last month, we showed the 3 and 6-month trends to be 170K jobs per month. As this month’s jobs smoother shows, both the 3 and 6 month averages are now about 140K.

Part of this is deceleration is because two big job months–January and April–dropped out of the 6 and 3 month averages, so this slowdown may not stick. But if it does, it raises the question of whether job growth is slowing because long expansion is exhausting the supply of workers available to the job market, or whether employer demand is slightly softening (or some combination of the two). As always, it will take many more monthly reports to reliably answer the question, but recent wage trends offer a hint that softening demand could be the dominant factor.

As the figures below reveal, particularly the 6-month moving averages (dark line), wage growth is roughly stalled a bit above 3 percent. This could be a function of the unemployment rate low but stable–it has stayed between 3.7 and 4 percent since March of 2018–or it could represent less worker bargaining clout due to slightly weaker labor demand.

To be clear, however, these are nuanced reflections as the job market remains strong and, if not at full employment, closer to it than has been the case for most of the past few decades (with the latter 1990s as the most recent exception). In fact, as the next figure shows, while nominal wage growth of mid-wage workers has flattened over the past few months, low inflation has helped to generate solid real gains of about 1.5 percent.

Here are a few other notable findings from today’s report:

Manufacturing ain’t what it used to be. Over the past 6 months, the factory sector has added just 6,300 jobs/month. Over the prior 6 months, the sector was adding 19,800 per month. The trade war is part of the explanation, and that looks to be getting worse before it gets better.

Where are the Census jobs? Typically, by this time in years that end in a ‘9’ we see some hiring of Census takers for the decennial Census. It’s possible that budget issues or the squabble over the citizenship question are slowing hiring in this round, which could be worrisome for the process.

–Are prime-age epops topping out? This one’s a potential big deal. The prime-age (25-54) employment rate has been a go-to variable for those of us arguing there’s “room-to-run” in the job market. In July, it ticked down slightly from 79.7 to 79.5 percent, exclusively due to women: their rate fell by half-a-percent, from 73.5 to 73 percent. But more notable is the recent trend shown in the figure which shows the variable falling off its peak in recent months. In other work, I’ve noted that the prime-age epop tends to peak before a recession, so this bears close watching (see figure).

All told, we’ve got a solid job market with some very tentative softening signs. Manufacturing is being hit by destructive trade policy, and wage gains have stalled out a bit. But they’ve done so at a pace well above inflation, so paychecks are growing in real terms.