October jobs report: Nice bounce back on payrolls, but labor force down and wage growth stalled.

November 3rd, 2017 at 9:35 am

Payrolls bounced back strongly from last month, up 261,000, while the unemployment rate ticked down to 4.1%, its lowest rate since 2000. However, the jobless rate fell for the “wrong” reason: a sharp decline in labor force participation. Other labor market indicators suggest a mixed report, with a tightening job market, a solid trend in payroll gains, but stagnant wage growth. Though convention wisdom is that the US labor market is at full employment, I’d say that’s wrong (see last figure). We’re getting there, for sure, but based on wage and inflation trends, we’re not there yet.

Revisions to the prior two months added 90,000 to the payroll count; September’s hurricane-induced loss of 33,000 was revised up to an 18,000 gain. Still, October’s spike is partially a rebound from the low September number and much as we discounted that month’s result, so must we discount October’s bounce-back. Note, for example, that employment in food services and drinking places–a weather-sensitive industry–increased by 89,000 in October after falling by 98,000 in September.

To squeeze out the impact of these outliers and gets a better sense of the underlying trend, monthly smoother takes this approach as well, showing average gains over 3, 6, and 12 month periods. The fact that all the bars are around the same height shows that payroll gains are averaging around 160K-170K per month, a growth rate that is certainly fast enough to continue to legitimately drive down the unemployment rate.

However, as noted, last months decline in unemployment was due to 765,000 people leaving the labor market, which drove the participation rate down by 0.4 of a percentage point, a large monthly loss. To be sure, this is a noisy number and could be quickly reversed. In fact, I would expect a reversal as such exits are hard to explain in a job market that is clearly tightening. Also, the decline could be concentrated in older, retirement-age persons, though the participation rate for prime-age workers–25-54–also fell in Oct, from 81.8% to 81.6%. At any rate, these changes imply that at least part of the decline in unemployment was due to labor force exits.

The underemployment also fell sharply, from 8.3% to 7.9%, its lowest rate in this expansion. Part of this decline is also due to the lower labor force, but it is also due to a sharp monthly fall in the number of involuntary part-timers (those who’d prefer full-time work), another sign of tightening.

That said, a key signal that the job market is not yet at full employment comes from the wage trends shown below. As noted in my report from a month ago, wage growth was thought to be slightly biased up in September by the hurricanes, as lower-wage workers temporarily left the sample. For October, as you can see at the end of the figure, there was a negative bounce-back, so here again, trend extraction is essential. The figures below show yearly wage growth for all private sector workers and for blue-collar and non-managerial workers, with a 6-month moving average to pick up that trend.

They both show that, at least in these wage series, nominal wage growth has stalled out at around 2.5%. Other series show a bit more acceleration, but among those of us who closely track such trends, it is pretty widely agreed that there is less wage acceleration than we’d expect in what otherwise looks like a pretty high-pressure job market.

As the next figure shows, unemployment is notably below the Federal Reserve’s estimate of the “natural rate”–the lowest rate consistent with stable prices–but not only has there been little in nominal wage acceleration (the yellow line), but core inflation is DEcelerating, and it remains well below the Fed’s 2% target. While I’m sympathetic to cautious Fed economists who worry about “de-anchored inflationary expectations”–though it’s worth noting that neither realized nor expected inflation give much support to such worries–we cannot write off these trends with hand waves about how spiraling prices must be around the next corner. We must be data driven, and the data are clearly suggesting that despite very low unemployment, we’re not yet at full employment. That means that even nine years into the expansion, too many workers are not benefiting as much as they should be from the growth they’re helping to generate, and this is problem that policy makers cannot ignore.


This GDP report is whispering some really important messages to us

October 27th, 2017 at 10:45 am

A bunch of notable points from this morning’s advanced GDP report for 2017Q3. The economy’s growing a good clip (though not at the 3% headline number), with no price pressures in sight. Consumer spending is solid, boosted by job and earnings growth as well as, I suspect, a wealth effect from the stock market (stock market gains are not in GDP, but if people feel wealthier, they spend a little bit more). The hurricanes didn’t faze the data flow (note: Puerto Rico is not counted in national GDP), and a few noisy factors, especially an inventory bump, helped boost the number (I smooth out the noise below).

Yes, the White House is going to brag on this report, as pretty much any White House would. But what they should see here is yet another great reason to not screw around with the Fed chair. Leave Yellen where she is, Trump, and go tweet about your awesome golf skills, or something.

Also, why, why, why—if the economy is percolating along at a solid, steady clip, do we need big-ass, wasteful tax cut? That’s a rhetorical question, but other than “because we won and that’s what our donors want!,” I’ve not heard anything like a decent answer to that question.

Look at the yearly, not annualized quarterly rates

First, readers know I’m all about discounting the annualized quarterly growth rates, which as you see below are choppy. So, while the White House will crow about the topline 3% number (the real, annualized growth from q2 to q3), I emphasize the 2.3% year-over-year growth rate. The figure shows both measures and the important bit is the way the yearly rate smooths out the bips/bops of the annualized quarterly one.

Source: BEA

Punchline: the underlying, trend growth rate of real GDP is around 2%, though slightly north of that, and the last six quarters do show a nice, steady acceleration of the yearly growth rate (I’ll get back to the price column of the table below):

Source: BEA

We’re realizing our diminished potential

The Congressional Budget Office estimates potential GDP, i.e., what the level of the economy’s output should be at full utilization of our stock of labor and capital, given our productivity (the latter being how efficiently were transforming said inputs into outputs). As of 2017q3, nominal GDP is back to potential, so by this measure, we’re at full employment (see figure; this is the first quarter in the expansion that both real and nominal GDP beat CBO’s potential). You’d get the same result from looking at the 4.2% unemployment rate and various estimates of the lowest rate believed to be consistent with stable prices.

Sources: BEA, CBO

That “believed to be” is important. As I’ll get to in a moment, actual inflation is inconsistent with these conclusions. If things were all that tight, we should be seeing faster price growth, which we’re not…at least not yet.

But there’s a more profound point in play here. The last bar in the figure is CBO’s 2007 forecast of potential GDP for this last quarter, and it’s about $2 trillion above its most recent potential estimate. That’s decline represents an income loss of over $6,000 per person.

What the heck happened? I’m working on a longer piece that tries to answer that question, but some economists, including myself, view part of that loss to stem from “hysteresis,” the lasting, structural damage done to the economy’s inputs due to long periods of persistent weakness. Think of somebody sitting out the recovery because there’s not enough opportunity for work (labor demand is too weak), and their skills, attitude, etc. atrophies such that they’re eventually no longer part of the labor force (here’s an NYT piece w/some evidence).

Phlat Phil

The Phillips Curve is the correlation between unemployment or potential GDP and inflation and man, is that correlation low. As you see in the second column of that little table above, core inflation is decelerating as real GDP accelerates.

Barrels of digital ink have been spilled trying to understand why Phil’s so phlat but let me save you weeks of your life by cutting to the chase: nobody knows.

I can tell that you that the curve has been flat for a while, at least at the national level (you can find some correlations in cities), such that claims that it’s temporarily out of commission due to some cherry-picked factor don’t seem very convincing. If we were to shave with Occam’s razor, we’d have to recognize that the simplest explanation is that we may well not be at full employment, and CBO’s potential estimate is too low, for which there’s actually some compelling evidence (all to be explored in my forthcoming paper).

It’s just one, advanced (meaning it will be revised) GDP report, but as a veteran GDP-report whisperer, let me tell you what this one is saying: reappoint Yellen and Fed, wherein she must continue to apply great patience in normalizing rates.

More lynx

October 25th, 2017 at 1:23 pm

First, here’s Hannah Katch and me over at WaPo, warning about the Trump admin’s attack on family planning/birth control/women’s rights, and the linkages between such rights and women’s economic mobility.  Leaked docs suggest Trump wants to defund effective programs in this space and go back to “fertility awareness” (“having women track their ovulation to identify and practice abstinence on their most fertile days”). Trump argued that this apparently worked for Wilma Flintstone, so why not now? OK, I made that up, but you must admit it sounds plausible.

Next, there’s this tweet storm, featuring highlights from a new paper by economist Josh Bivens showing the many dimensions on which the corporate-tax-cut-will-give-wages-a-huge-boost argument fails. If you want a quick read backing up my claim in tweet #3 (“with footloose global capital, the costs/benefits of corp cut become theoretically uncertain”) see Martin Sullivan’s new, family-friendly discussion of corporate tax incidence.

When econ models potentially mislead, econ profs should say so

October 23rd, 2017 at 6:42 pm

Last week saw an interesting and revealing dustup in the tax debate. President Trump’s economic council, headed by Kevin Hassett, released a piece claiming that the proposed corporate tax cut would immediately boost average household income by at least $4,000, a claim that was widely pilloried in the economics community. One of the authors of a paper CEA cited to defend their results claimed that the CEA misinterpreted their paper.

A particularly salient objection was the CEA’s claim that the incidence of the corporate tax cut fell not just wholly on workers, but that their aggregate wage gains from the cut would be multiples of the revenue lost. Their paychecks would grow more—a lot more, as much as 500% more!—than the revenues lost to the cut.

That sounds wrong, but as Greg Mankiw points out, the direction of Hassett’s result is consistent with a particular economic model (though even Greg’s model doesn’t get you the magnitudes Hassett claims). Mankiw was not per se defending Hassett, as much as teaching his students how to get a result like Hassett’s by imposing standard assumptions common to such models. Greg’s explanations, for the record, are lucid and instructive as always.

But, because the model he employs bears little resemblance to reality, his work does not provide information that would help someone answer the key question at hand. That is, Greg answers the question: is there an economic model that might defend Kevin’s findings, at least directionally if not their magnitudes? Answer: yes.

Yet, the much more pressing question for people trying to decide if $200 billion a year in corporate tax cuts will help workers is: what’s the real-world likelihood that corporate tax cuts will raise workers’ wages anywhere near the amount Hassett claims?

As many, including myself, have stressed, the answer to that question is “very low.” That’s based on both theory and evidence. The historical record is unconvincing regarding corporate cuts leading to wage gains, and in most of the models used by the Joint Tax Committee and CBO, corporate tax cuts that aren’t paid for lower GDP (relative to a baseline) and thus over time would reduce wages. Moreover, even if the wage effect is positive, it is highly unlikely to be large enough to offset the future cuts in benefits (or, less likely, increase in taxes) needed to pay for the plan either now or, more likely, later.

The interesting economics question is why the model predicts such an unrealistic result for the US economy? Which of the assumptions most fail to comport with reality? To the extent that we want to train students to be useful practitioners as opposed to proficient, yet unrealistic, modelers, answering those questions would also provide some real educational value-added.

In this case, the model assumes that the US is a small, open economy such that capital inflows instantaneously fund more investment, such investment immediately boosts productivity, and the benefits of faster productivity immediately accrue to paychecks. The simple model ignores the extent to which these inflows would raise the trade deficit as well as their impact on revenue losses and higher budget deficits.

The model assumes away imperfect competition, which is relevant today as a) monopolistic concentration is an increasing problem, and b) the one thing economists agree on in this space is that in these cases, the benefits of the corporate cut flows to profits and shareholders, not workers, other than maybe some “rent sharing” with high-end workers.

Larry Summers made a great point about this: The modelling of Mankiw and others “illustrate why well-resourced, team-based institutions with a strong culture of attention to detail like the Congressional Budget Office, the GAO, the Joint Tax Committee Staff or the Tax Policy Center are so important.” By “detail,” I take him to mean an unbiased use of literature (unlike Hassett, who totally cherry-picked), and more important, an historical perspective. As many critics of the White House analysis have shown, corporate tax cuts never come close to the wage impacts Hassett claims and Mankiw’s modelling supports. Real modelers analyzing real policy proposals must reference real empirical results, and not just the ones that go their way.

This all points to a bigger problem with contemporary economics, particularly as it is deployed in DC debates. A well-placed, highly-pedigreed economist (Hassett) makes an implausible claim, one that is likely to impose great costs on our fiscal outlook and on those who will ultimately pay the cost of the cuts (likely through spending cuts). Sure enough, his claims can be and are, if not defended, then apparently corroborated, by an economic model, in this case by other highly pedigreed economists.

This is lovely development from the perspective of the politicians and their donors who crave these high-end tax cuts. All they need is some “analysis,” regardless of how cherry-picked, and a little backup from other erudite economists saying “under certain conditions, yeah…this could happen.”

They—those other erudite economists—shouldn’t do that. That is, unless they too have a thumb on the scale, they should be explicit about how applicable the model is to the real world, and whether the assumptions it violates are germane to policy makers (Krugman does so here; Furman here). To do otherwise may seem neutral in the analytic community, but in the hurly-burly of political economy, it’s an egregious omission, one with the potential to mislead policy makers and, once the tax cuts fail to generate the result predicted by the model, reduce the trustworthiness of economic analysis.

A must listen-to podcast from steel country

October 20th, 2017 at 9:35 am

I’ve previously endorsed the New York Times podcast “The Daily,” to which I’m happily addicted. I found Wednesday’s episode particularly well done and important. It tells the story of Shannon Mulcahy, a steel worker from an Indiana plant (Rexnord) that recently moved much of its production to Mexico. If you’ve followed the issue of manufacturing job losses, which has of course been going on for decades, nothing in the podcast or article will surprise you. But, along with putting a human face in the story, it underscores many key points in the political economy. (Plus, you can listen to it while you’re exercising!)

First, many economists label anyone who isn’t college educated as “unskilled.” Decades ago, when I was a baby number cruncher, economist Larry Mishel taught me not to do this. I challenge anyone with half-a-brain to continue to do so after listening to Mulcahy’s story.

Second, anyone who’s running for national office needs to listen to this and figure out what you’re going to say to people like Mulcahy, which is anything but easy. Listen to her talk about Obama, for whom she voted and who she still considers a good president. But she voted for Trump, because he, more than other candidates, communicated an understanding of her plight. You can call her naïve for thinking he’d actually help (she’s since seen the light), but that’s not at all how she comes off to me.

Third, the reporter, Farah Stockman, makes a mistake that I’d like to correct. It doesn’t take anything away from her excellent reporting, but it warrants a correction. In a discussion about why white working-class people were more pessimistic than blacks, she suggested it might be because economic trends have been more punishing for the white than the black working class. Not so, at least if we compare real hourly wages of white and black men with at most high-school degrees. For whites since 1973, their real wage is down 8 percent; for blacks, it is down 10 percent. And, as you see, black male wages are always below those of whites, even within the same education categories.

Source: Economic Policy Institute

Fourth, in one of the most interesting parts of the podcast, the Mexican workers come to the US plant to be trained by the US workers they’d be replacing. Note how the executives did not tell the Mexican workers that they’d be replacing their trainers. I saw this as a way to preclude any potential solidarity between working class persons on both sides of the border.

Finally, it is not hard to see why people like Mulcahy and her fellow displaced workers are ill-disposed to globalization, and how out-of-touch the full-out cheerleaders for “free trade” must sound to them. Most recently in the NAFTA debate, I was struck by the extent to which purveyors of the status quo seem to have convinced themselves that nothing has changed and that they should be able to continue to essentially ignore the plights of those in the podcast.

Consider also at the current tax debate, with its emphasis on tax cuts for the wealthy, for corporations, for the richest 0.2 percent of estates, and most notably in this context, for multinationals (like the one is the story) whose foreign earnings will be untaxed by the US if this plan comes to fruition, incentivizing more offshoring.

People like Mulcahy must believe nobody in power has her back. The sad part is they they’re right. This may sound harsh, but I mean it: If you’re running for office and you have no help to offer her beyond “get educated” or “here’s the next trade agreement,” go away and don’t come back until you’ve figured out how to help. Not how to falsely promise help, ala Trump, but to actually help.