References/Links to stuff you might like: recession, race, and trade

July 11th, 2016 at 2:32 pm

First, the NYT’s Room for Debate series asks the important question: Are we ready for the next recession?

As OTE regulars know, I say “no,” based on monetary policy, fiscal policy, and politics (otherwise, we’re fine…). I enjoyed other entries that stressed the importance of direct job creation programs, which make a lot of sense, especially in disadvantaged communities that won’t be reached by full employment.

OTOH, the entry by Ms. de Rugy makes a point that I found curious. She argues that “the uncertainty the government injects in the economy plays a major role in the length and severity of recessions. For instance, massive regulations, such as Dodd-Frank, take years to implement and can exacerbate a crisis.”

We can argue about that, but there’s no denying that D-F was put in place precisely because under-regulated financial markets helped inflate the housing bubble which kinda blew up the economy. So, if we’re thinking about ways to stave off the next downturn, I think it’s a very bad idea, if not downright amnesiac, to advocate deregulating financial markets.

Next, a piece of persistent racial disparities in the economy, with many compelling pics, over at WaPo. I didn’t include the figure below, in part because it is not racial specific. But these are very important data showing the extent to which the US fails to invest in early childhood, a choice with serious long-term costs and obvious negative racial implications.

Source: OECD

Source: OECD

Here’s how I described this figure in an earlier post:

It compares average public spending per child, by age and type of spending, between the United States, Denmark and the OECD countries combined (that’s the Organization of Economic Cooperation and Development, which includes the advanced economies and some of the emerging ones). While we clearly invest a lot less in kids than the Danes, at first glance, the United States doesn’t look that different from the rest of the OECD.

But look at the left end of the graphs. We invest much less in young children, and that stems largely from the fact that most other advanced economies view early childhood education, child care and other benefits targeted at parents with young children as “public goods,” meaning investments that, absent public support, would be insufficiently made from the perspective of society’s well-being.

Finally, the Brussels branch of Politico asked a number of us to hold forth on the question: is free trade dead? Here’s my entry, but see others, as well. How we got here is an interesting and relevant question, but I’m glad we’re having this debate.

Invest in people to revive support for trade agreements

Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities. From 2009 to 2011, he was chief economist to U.S. Vice President Joe Biden and a member of President Obama’s economic team.

Free trade is not dead, but it’s in serious need of a progressive overhaul.

In advanced economies across the globe, expanded trade and globalization face an existential crisis: for large swaths of the European and American electorate, the current trade model is non-representative, undemocratic, and perceived — often justly — as contrary to their economic interests.

For decades, arrogant economic elites have told voters and communities negatively impacted by free trade deals that they simply failed to appreciate the benefits of the global economy. Out-of-touch trade advocates ignored the growing divergence of economic outcomes. They failed to forecast the predictable backlash by those unwilling to accept low wages and the loss of factory jobs as a fair price to pay for the benefits of free trade.

Those of us who recognize these social costs and yet still value globalization must introduce a new model, or yield to the atavism of Trump and Brexit.

Working people, not corporate and investor interests, must be at the center of this model. Trade deals must enforce labor and environmental standards, eschew patent extensions and intellectual property rules that are more in line with protectionism than free trade, and block currency manipulation.

We should eliminate provisions that allow investors to challenge sovereign laws, and make the negotiating process more transparent. We must also invest in those people hurt by free trade agreements. In the European context, this means targeting unemployment and wage stagnation as opposed to fiscal austerity.

By putting working people at the center of our trade regimes, we may be able revive support for them.


Jobs Report: June’s big number reveals welcome bounceback, but you’ve gotta smooth these noisy data.

July 8th, 2016 at 10:11 am

[Before I jump into analysis of the jobs report, I’m compelled to add a brief note about the violence and deaths in Dallas last night and the deaths of Alton Sterling and Philando Castile earlier this week. I will not try to hold forth on these tragedies other than to say that I’m both indelibly saddened and deeply enraged. That said, I’m sure my pain and anger are a fraction of that of many others directly affected by these murders. My heart goes out to all the victims.]

Payrolls posted a big 287,000 jump in June in stark contrast to revised gains of just 11,000 in May. Such monthly volatility provides an extremely clear example of why we should never over-interpret one month’s worth of jobs data. You have to “smooth,” or average out the gains over numerous months, as I do below. When you do so, you get a picture of a solid job market, adding somewhat fewer jobs than a year ago, but still making progress towards full employment.

The unemployment rate ticked up to 4.9% as more people entered the labor market, leading to a small but welcome uptick in the participation rate, up one-tenth to 62.7%. Year-over-year wage growth ticked up slightly as well, from 2.5% to 2.6%, a positive sign that some of the benefits of the ongoing recovery are finally reaching workers’ paychecks. As shown below, this pace of wage growth remains well below Fed chair Yellen’s benchmark target of 3.5%. In other words, this trend should be very much welcomed, not feared! It’s what’s supposed to happen as the job market improves and working people get a little more bargaining power.

The punchlines are thus as follows: May’s dismal report was an outlier; the US recovery proceeds apace; Brexit hasn’t shown up in the jobs numbers; wage growth is slowly picking up a bit of speed, as I’d expect; and the job growth engine has downshifted from around 200K/month to around 150K/month, once you smooth out the monthly noise. That’s also to be expected as we get closer to full employment, though given that we’re not there yet, both monetary and fiscal policy needs to continue to be as pro-growth as possible. This policy stance is underscored by the absence of inflationary pressures.

JB’s patented monthly smoother is particularly important this month. The monthly trend job gains over the past 3 months is about 150K, 6 months: ~170K; 12 months: ~200K. There’s the downshift noted above.

Source: my analysis of BLS data.

Source: my analysis of BLS data.

A few other highlights from the report:

–The underemployment rate ticked down from 9.7% to 9.6%, but this more comprehensive measure of labor market slack (it includes part-time workers who’d rather be working full-time and those “marginally attached” to the labor force) shows we’re not yet at full employment, which calls for an underemployment rate about a full point lower.

–As noted, there’s a positive trend in average hourly earnings (see figure below). But note also Chair Yellen’s wage benchmark of 3.5% shown in the figure. There’s considerable room for wages to continue to accelerate. Those calling on the Fed to raise rates and thwart this trend are both wrong on the substance—wage-growth is not pushing up price growth—and implicitly suggesting that those who’ve gained the least from the recovery thus far need to take a hit. This, in my view, is the monetary policy version of “the system is rigged.”

Source: BLS

Source: BLS

–After losing 16,000 jobs in May, manufacturing rebounded in June, adding 14,000 factory jobs.  Smoothing over recent months, employment in the sector is down 4,000 jobs/month this year, compared to +10K/month in 2014-15. This reversal is partly a function of the stronger dollar, which makes our manufactured exports less competitive, leading to larger trade deficits. More broadly, it reinforces the need for better rules of the road in our trade deals, a topic that’s become highly elevated in the presidential campaign.

Federal Reserve economists are just as good at taking averages as I am, and thus I’m very confident the Fed won’t overreact to the big June jobs number and resume their rate normalization campaign. Brexit uncertainty, the risk of further strengthening of the dollar, and labor market volatility all push against an interest rate increase. Once you average over the past few months, choppy waters smooth out a bit, suggesting a generally solid, ongoing labor market recovery.

Jobs day tomorrow

July 7th, 2016 at 5:26 pm

I know I always say this but coming off of last month’s extremely weak report, this is an important one. The key word is “bounceback.” Consensus expectations are for 180,000 on payrolls and for the unemployment rate to tick up to 4.8%. My model says 150K, fwiw, which ain’t much (not being self-deprecating; that holds for everybody else’s model too).

I’ll be a bit late with my write-up because I’m supposed to be on CNBC when the numbers come out, so if you’re dying to hear my live reaction (which will likely range between “that’s about what I expected” or “that’s a surprise!”), tune on in.

One interesting question. If it’s a weak or middling report, the Fed remains on cautious hold, I’d say. But what if it’s surprisingly strong? Same thing, probably–just too much conflicting incoming information, Brexit uncertainty, strengthening dollar, and relatively weak price pressures to think too hard about raising. But a strong jobs report would complicate that picture a bit.

Breaking (not so) Bad: Why monthly job gains below 200,000 are OK.

July 7th, 2016 at 6:00 am

This Friday morning at 8:30, the Bureau of Labor Statistics will release the jobs report for June. Those of us who scrutinize such things will be watching closely to see if there’s a bounce-back from last month’s dismal count of 38,000 jobs. The consensus expectation is for 180,000, but last month, the consensus was for around 160,000, so you’ve got to take these monthly guesses with a big grain of sodium.

If you take an average of the monthly job gains from 2012 forward, you come up with about 200,000 jobs per month, and many job watchers got used to that number, such that months that came in under 200,000 were considered disappointing. But while we’re not yet at full employment – and obviously, the more jobs the better* – payroll numbers below 200K, say in the 100K-150K range, still represent a solid job market.

To see where I’m coming from, we need to talk about the “breakeven level” (BL) of job growth. The BL is the number of payroll jobs consistent with a steady unemployment rate. It’s a pretty straightforward calculation but it’s dependent on a few assumptions. For example, every BL is specific to a given unemployment rate and labor force participation rate (LFPR, or the share of the adult population that’s either working or looking for work).

These assumptions are necessary because having more people in the labor force implies we’ll need more jobs to employ the new entrants; similarly, a lower unemployment rate means the BL must account for new job holders.

The box below shows the monthly average BLs under four different scenarios for the LFPR and unemployment rate by late 2018: 1) both variables hold constant at today’s values, 2) unemployment falls gradually to 4 percent and the LFPR holds constant, 3) unemployment holds constant and the LFPR gradually rebounds by a percentage point, and 4) the unemployment rate falls and the LFPR grows by the amounts assumed in the earlier scenarios.


Before we get to the BLs themselves, let’s noodle over those assumptions for a minute. Most economists still think an unemployment rate of around 5 percent is the lowest rate consistent with stable inflation. But at this point, that’s more force of habit than rigorous analysis. After all, unemployment’s fallen sharply over the last few years while inflation’s hardly budged. So I can easily defend shooting for 4 percent unemployment while keeping a close eye on inflation.

The LFPR is trickier. It’s down more than three percentage points from its pre-recession peak, but part of that decline is due to retiring baby boomers. It’s hard to say how much of those three points we could get back in a truly full employment economy, but I’d argue at least one point is up for grabs.

Now, let’s look at the breakeven box. It really reduces to a simple point: given the progress we’ve made in the job market and the growth in our working-age population, monthly job gains of roughly 100,000 aren’t cause for alarm. While much lower numbers, like May’s initial count (we’ll see if it gets revised on Friday), are unacceptably low, we can still make with payroll gains below 200,000.

That doesn’t mean, of course, that we—and by “we” I mean the Fed—should be constrained by these BLs. The underemployment rate, at 9.7 percent, is still at least a point too high, elevated by millions of part-timers who seek full-time work. And though the overall LFPR has fallen in part because of retirement, it’s depressed for “prime-age” workers (25-54 year olds) as well. That’s partially a long-term trend, too, so it would be hard to achieve past peaks on that measure, but there’s definitely room for growth there. Faster job growth will help tighten things up sooner rather than later.

With that background, tune back in on Friday and we’ll see how we’re doing relative to these benchmarks.


*That’s not obvious if you’re an inflation hawk, but the correlation between the tightening job market and price pressures has been persistently very low.

Bond yields are just so damn low…what is that telling us?

July 6th, 2016 at 8:51 am

I pour the morning cup of mud, schlep out to the stoop to get my paper, and open my WSJ to learn that the yield curve is awfully flat (i.e., the difference between the interest rates of bonds of different maturities is low). In fact, the yield on the 10-yr–1.367% yesterday–is the lowest on record. And the difference between the 10 and 2-yr Treasury yields, at about 0.8, is the same as it was in November, 2007.

Source: WSJ

Source: WSJ

Not good, and very much worth noticing. There are those who will tell you the yield curve is a revealing recession indicator and that a narrow 10/2 year spread is flashing red. But now isn’t late 2007. Most importantly, of course, the housing bubble was imploding back then, whacking bank portfolios, wiping out trillions in wealth, and generating both a credit freeze and a demand-killing negative wealth effect. Also, the Fed funds rate has been at or near zero since around 2009, so that’s also very much in the mix here, holding down Treas yields.

One must be steely-eyed in these circs and avoid unnecessary bedwetting. On the negative side, along with the flat yield curve, we have:

–the strong dollar: it hurts our trade competitiveness and puts downward pressure on inflation and thus props up the real interest rate;

–volatile markets/uncertainty: surely a bigger problem for the UK than us/US, but watch our equity markets for wealth effects; still, credit flows here seem largely untouched;

–possible weakening job growth: that’s a big one of which I’ll have more to say later this week.

On the plus side:

–low unemployment, a bit of wage growth, and low inflation, while a problem re propping up real interest rates, is helping paychecks go further;

–growth: kind of the bottom line here, and while it’s been bumpy, we’re basically posting growth rates of around 2%, yr/yr, which ain’t great (and reflects a nasty downshift in productivity growth) but is actually the envy of most other advanced economies right now.

Two other things. I suspect the probability of a near-term recession remains relatively low here, well below 50%, though who knows? But what I’m absolutely certain of, as I wrote here, is that we’re not ready for it, either re monetary or fiscal responses.

Finally, I couldn’t be more flummoxed by this next point: these historically low Treasury rates amidst sluggish growth and an engine of job growth that could be downshifting are absolutely SCREAMING for policy makers to borrow and invest in public infrastructure. That would help on many levels now, from labor demand to productivity.

I won’t make free lunch arguments, but given these yields and the potential benefits of the investments, this is lunch with a very large discount. I realize I’m screaming into the gridlocked, political void, but scream I will. And you should too, IMHO.