Jobs report: Some softening in May. Should the Fed hold off on next rate hike? I say…[read on]

June 2nd, 2017 at 9:29 am

Employers added only 138,000 jobs last month, well below expectations for 175,000. Revisions to payrolls for the prior two months reduced employment gains by 66,000. The unemployment rate fell to 4.3 percent, its lowest level since 2001, but for the wrong reason: labor force participation fell by two-tenths of a percent. In other words, this is a considerably weaker-than-expected jobs report.

Given the noise in the monthly data, the question is: does this report signal a real downshift in job growth or is it a blip? Also, if we’re really at full employment, we should expect some slowing in payroll gains as employers bump up against supply constraints. And what does this all mean for the Federal Reserve when they meet in a few weeks to consider another rate hike that is firmly priced into the markets?

A good place to start is by smoothing out the monthly noise with the official JB smoother, which takes monthly averages over the past 3, 6, and 12 months. It shows a marked deceleration in job growth, from about 190,000 over the 12-month period to 121,000 over the past three months. While this is suggestive of a softening of the job market, it is also consistent with supply constraints.

However, if such constraints were operative, we should see wage growth accelerating. Yet the next two figures show that while year-over-year wage growth did accelerate as the job market tightened, it has since settled in to about a 2.5 percent pace, showing little acceleration in recent months. That’s more of a softening than a tightening story.

The labor force participation rate is another important place to look in this regard, but it is a) a very noisy monthly indicator, and b) the overall rate is down in part due to retirement of aging boomers. A better indicator is thus the prime-age (25-54 year-old) employment rate. After falling 5.5 percentage points in the last recession, this rate has slowly been climbing back–score one for the tightening narrative. However, it ticked down a bit in May and, more importantly (this indicator is also noisy), is still about 2 percentage points below its pre-recession peak.

The underemployment rate, which includes 5.2 million involuntary part-time workers who’d rather be full-timers, fell to a cyclical low of 8.4 percent, though this too reflects May’s labor force exits. On the other hand, involuntary part-time work is down a solid 1.2 million over the past year.

Industry employment patterns reveal job losses in retail trade, down about 80,000 over the past four months, as brick and mortar stores lose demand to internet sales. Manufacturing remains soft, and state/local government shed 17,000 jobs in May. Health care continues to deliver, but gains in the sector have averaged 22,000 per month so far this year, compared to 32,000 per month last year.

So which is it: tightening or softening? I’ve got one more indicator to bring to bear before I render my judgement on this Talmudic question: core inflation.

Prior to the release of the jobs report, the futures market was assigning a 93.5 percent probability to another quarter-point rate hike by the Federal Reserve at their mid-June meeting. However, as the figure below shows, while unemployment is clearly below the Fed’s full-employment-unemployment rate of 4.7 percent, core inflation has been going the “wrong” way, i.e., slowing, not speeding up (see its down-tick at the end of the figure).

So, putting it all together, I think there’s enough evidence that the Fed’s tightening campaign has slowed the job market down for them to pause in their June meeting. I recognize that this will shock markets, but the Fed’s client is not the stock market. It’s the macroeconomy, and the dual mandate: full employment at stable prices. Given at least some evidence of softening in the job market in tandem with slower core price growth, a data-driven Fed should pause and take stock of where we are.

The members of the central bank apparently think the recent slowdown in price growth is transitory, and that at some point, price pressures will reflect the tightening of the job market. That’s certainly plausible, but the last figure shows that they’ve been missing their 2 percent inflation target for years now. More likely, the historical correlation between inflation and unemployment is much diminished, such that the Fed cannot reliably estimate the lowest unemployment rate consistent with stable, 2 percent inflation.

From this perspective, the Fed is being less data driven than they like to claim, and is in more of an ad hoc mode. They’re raising because the governors broadly believe that in year eight of an economic expansion closing in on full employment, rates should be at a more normal level. By doing so slowly, they can monitor the impact of their campaign, and I suspect that, as far as they can see, it looks to be going well–they’re “normalizing” the rate, yet, May’s results aside, not much dampening the pace of output or job growth.

There are two problems, however, with this approach. One, since they’re not data driven, at least as far as the inflation data are concerned, it is hard for observers to know where they’re going next. Ad hockery is tougher on expectations than following the data. Two, and this is a more serious concern, for the least advantaged workers to get ahead, the job market has to run very hot, and even small taps on the brakes push the wrong way in that regard.

Given some evidence–uncertain and shaky to be sure–that the job market has cooled a bit while inflation is non-threatening, from what I see from here, the Fed should revert to data-driven mode and punt on a June hike.

Wherein I admit that a Trump gaffe and tweet actually advanced economic thinking

June 1st, 2017 at 12:30 pm

Just a quick note to say I was very glad and a little surprised to see quite a number of articles and commentaries on the problem of Germany’s large trade surplus. I was out of the box early on Trump’s “Germans are bad” rant, as I’ve long inveighed against the dominant DC notion that trade deficits of any persistence and magnitude are always and everywhere benign. So it’s a very positive development to see others recognizing that there are important ways in which persistent imbalances can be very problematic.

The problem—and with Trump and trade there’s always a problem—is that to team Trump, bilateral trade deficits are scorecards: if we have a deficit with you, you’re bad, bad, bad. Besides being totally undiplomatic, that’s bigly wrong, and in fact, as I argued here, citing Michael Pettis’ work, playing bilateral whack-a-mole could easily exacerbate our trade deficit – by diverting capital flows that were going into Mexico, e.g., into coming here. (Such flows are the flip side of trade deficits, and the more countries with excess savings send them here – e.g., when they buy US financial assets – the larger will be our trade deficit.)

Certainly the fact that more mainstream economists, including Ben Bernanke and more recently Mervyn King (former head of the Bank of England), have been raising both the broader problem of sustained trade imbalances and the more narrow issue of Germany has helped surface the issue, which I’d put this way:

Because currencies don’t always adjust to forces that would reduce trade imbalances, these imbalances persist. When they do so, surplus countries can a) boost their own employment and output relative to deficit countries, and b) flood those countries with cheap capital that can lead to bubbles and busts.

So, Germany imports labor demand from weaker economies in the Eurozone, and the US real estate bubble was inflated in part with foreign capital inflows in the run-up to the financial crisis.

Unlike, say, China up until about five years ago, Germany doesn’t manage or manipulate its currency to suppress its value—it’s undervalued due to unique characteristics of the monetary union—but the result is the same. Along with Trump pillorying them, the Germans are getting lots of free advice on how to reduce their surpluses, for which I’m sure they’re “sehr” appreciative. People have suggested they reduce their high levels of national savings, which include record budget surpluses, most recently just below 1 percent of GDP, say through investing in public infrastructure. Or raise wages for domestic workers. Or spend more on imports. Or generate more inflation. Or expand the monetary union into a fiscal union so as to enforce reduced austerity in surplus countries.

All fine ideas, though with their unemployment rate at 3.9%, German authorities argue that they’d just as soon not go there. But though solutions in this case may not be quickly forthcoming, the first step is to recognize the problem. And even if it took a Trump gaffe and tweet to get there, that’s progress.

Lose the “H” and you’re back to the ACA: Why, contrary to A. Roy, the AHCA is not fixable.

May 31st, 2017 at 3:49 pm

Avik Roy, to his credit, had some appropriately harsh words for at least parts of the first version of the American Health Care Act, the House bill to replace the Affordable Care Act. He was particularly critical of those parts that would make coverage much more expensive for low-income and older persons. And yet, given that AHCA v. 2.0 is considerably worse than the original, I found a lot wrong with Roy’s claim in an NYT oped today that the House bill is “fixable.”

Roy claims that the CBOs score of the new version—the one that showed it to reduce coverage by 23 million—is “overly pessimistic” and that the bill can be fixed by raising premium subsidies to provide more help to those who can’t afford coverage (Roy wrongly dings the CBO, which has actually gotten much of this right).

Put aside for a moment that he is (reasonably) recommending an approach to premium subsidies that tracks existing ACA policy much more so than it does the R’s replacement. I wanted to highlight three misleading aspects of his critique, ones which underscore the extent to which this bill is far from fixable.

First, and most egregiously, Roy neglects to tell readers what the AHCA does to Medicaid, a shortcoming addressed by my CBPP colleagues in this new analysis:

“The [AHCA] would radically restructure Medicaid’s federal financing and effectively end the ACA’s Medicaid expansion, reducing enrollment by 14 million people by 2026 and cutting federal spending by $834 billion over ten years. The bill’s other Medicaid changes would cut another $19 billion over ten years. All told, the AHCA would have a devastating impact on health care for over 70 million people who rely on Medicaid, including over 30 million children and millions of seniors, people with disabilities, pregnant women, and low-income adults.”

Roy has consistently been highly critical of Medicaid and may view these cuts as more of a feature than a bug of the AHCA. But he’s wrong; Medicaid is an efficient program and provides access to care that is comparable to private insurance. It is more well-liked than private insurance for good reason (see second figure here; in fact, look at all of those figures; then look at this). As health analyst Tim Jost has written, studies upon which Roy bases his anti-Medicaid claims “do not actually show what Roy claims they do.” Ignoring the Medicaid cuts at the heart of the AHCA – cuts that are responsible for most of CBO’s projected coverage loss – may be a marginal improvement over making incorrect claims about the program, but it is hardly any more credible.

Second, Roy neglects to mention what makes AHCA v.2 even worse than v.1. Because the first version of the bill wasn’t harsh enough for hardliners in the House, the new one gives states the opportunity to seek waivers that would allow insurers to once again base premium charges on health status (i.e., it would usher in the return of “medical underwriting”). States can also waive out of covering essential health services required under the ACA.


Before the ACA, plans frequently excluded coverage for services like maternity care, mental health treatment, or prescription drugs. CBO estimates that, under the bill, half the population would live in states where plans would no longer cover such services.  That means that even if people with pre-existing conditions could afford their premiums, their health insurance might exclude the treatment they need.

  • Plans could again put annual and lifetime limits on coverage — including employer-sponsored coverage. Before the ACA, 105 million people, most with coverage through their employers, had plans with lifetime limits on benefits, meaning their insurance coverage could end exactly when they needed it most. Waiving the ACA’s standards for the services that plans must cover in effect waives its banson annual and lifetime limits as well.
  • People with pre-existing conditions could face unaffordable premiums. CBO estimates that one-sixth of Americans would live in states that would let insurers set premiums based on health status in a substantial part of the non-group market. In these states, CBO concludes, “less healthy individuals (including those with preexisting or newly acquired medical conditions) would be unable to purchase comprehensive coverage with premiums close to those under current law and might not be able to purchase coverage at all.”

Third, Roy’s premium cost comparisons are misleading, as he’s comparing (rotten) apples and oranges. That is, he compares premium costs in the pre-ACA market, where protections like those listed above didn’t exist and where less healthy people were excluded from the market entirely, to premiums in the post-ACA market (the study he cites uses the same wrong methodology). Analysis that tries to account for such differences finds that premium costs for the comparable benchmark ACA plan are growing more slowly post-ACA.

Moreover, as I stressed here, premium subsidies, which reach 85 percent of those in the exchanges, help to offset rising premium costs, though Roy and I might agree that they should be more generous.

To the extent the AHCA is “fixable,” and I don’t believe it is, it would mean keeping, if not raising, the subsidies in the ACA, as Roy acknowledges. But it would also mean getting rid of the very coverage changes hard right conservatives insisted upon, rejecting the proposal to convert the Medicaid program to a per capita cap or block grant, and restoring the ACA’s Medicaid expansion. In other words, fixing the AHCA means losing the “H” and actually building on the ACA’s progress towards affordable, quality coverage for more Americans.

The ACA, the myths and flaws of Republican reforms, and single payer

May 30th, 2017 at 9:17 am

Over at WaPo.

The piece was already too long so, while I didn’t have time to get into another germane point: the role of single-payer coverage in this debate.

A key point of my analysis is that the problem facing private insurers in the exchanges was that they initially underpriced premium costs, leading to high medical-loss ratios and thin to non-existent profit margins. They’ve since been recalibrating and are in the process of returning to profitability, though now they’re in a race with team Trump’s sabotage.

A reasonable response from progressives would be: the problem isn’t price calibration. The problem is this part of the ACA depends on profitable private insurers in the delivery of a partially non-market good (see my “fundamental flaw” point in the WaPo post). A single-payer plan would obviate such concerns.

[Note that I do mention the salient lack of a public option in the exchanges, and stress this irony:

Let’s pause on the irony here for a moment. Conservatives’ flawed ideology (explained below) that the private sector is the most efficient delivery mechanism for health coverage kept a public option out of the ACA. But the private insurers themselves said at the time, and maintain to this day, that they can’t serve the exchanges without government subsidies. Now, Republicans want to block those subsidies, because … you guessed it … the private market blah, blah, yada, yada.]

On one level, that’s a strong point–that a single-payer plan, by taking insurer profitability out of the picture, would ease a major constraint in the ACA–one which I support. The exchanges, though they cover a relatively small share of the population, have consistently been the most problematic part of the ACA.

But once again, I’m plagued by my adherence to path dependency, a point I often raise here and one which often raises the ire of the leap-froggers who are much less constrained by the challenge of getting from where we are to where we need to go.

But there are political constraints between here and there–big ones, protected by entrenched lobbies–and when we were crafting the ACA, it seemed clear to us that they needed to be brought on board. And there are economic constraints as well, including the disruption engendered by replacing a major, private insurance industry.

Thus, the path to single payer probably is an incremental one. Start with a public option in the exchanges, greater regulation of the industry, including cost controls (I also like Henry Aaron’s policy tweak: if an insurer offers coverage in a state, they must also offer it in that state’s exchange), and perhaps a slow reduction in the eligibility age for Medicare.

Trump, trade, and Germany

May 26th, 2017 at 1:58 pm

So, at a meeting in Brussels yesterday, President Trump appears to have told leaders of the European Union that “the Germans are bad, very bad.” I’ll let those with foreign diplomatic chops figure out how to clean that up—and good luck: When I plug the Spiegel Online headline—“Die Deutschen sind böse, sehr böse”—into Google translator, it spits back: “The Germans are evil, very evil.”

I’ll handle the economics, which actually are interesting. When Trump talks about trade, he sometimes gets a piece of it right, and it’s often a piece about which establishment politicians and the economists that support them are in denial: Germany’s trade surplus of over 8 percent of GDP really is a problem for the other countries with whom they trade.

That’s not just my view. Both Ben Bernanke and more recently, Lord Mervyn King, former governor of the Central Bank of England, have expressed serious concerns about the impact of Germany’s large trade surplus on other countries.

But here are two things that I’m sure Trump misunderstands. First, Germany is not manipulating its currency to build its surplus. Instead, it’s the single currency of the Eurozone that’s the culprit. Germany is the economic powerhouse of the region, with stronger growth and production practices than its Eurozone partners. Thus, if it’s currency could float, it would surely appreciate, but it can’t, so its goods are underpriced in export markets relative to those countries’ exports.

Second, as I’ll get to in a moment, it’s not clear what Germany should do about it.

In many posts, I’ve explained that, contrary to conventional wisdom, including the pushback I’ve already heard from German EU ministers, trade imbalances are not always benign, nor do they represent efficient markets at work. King stresses the damage of currency misalignments, as well as the fundamental arithmetic of global trade. Since trade must balance on a global scale, one country’s trade surplus must show up as other countries’ deficits. When a country like Germany produces so much more than it consumes (runs a trade surplus), other countries must consume more than they produce (run trade deficits). And when the magnitudes get this large as a share of GDP—Germany’s surplus hit a record 8.6 percent of GDP last year—the damage to other nations can be severe.

Bernanke in 2015:

“The fact that Germany is selling so much more than it is buying redirects demand from its neighbors (as well as from other countries around the world), reducing output and employment outside Germany at a time at which monetary policy in many countries is reaching its limits.”

Bernanke’s last point is key. When economies are percolating along at full employment, trade deficits can, in fact, be benign. But unemployment in the Eurozone is still 9.5 percent, which combines Germany’s 3.9 percent with Spain’s 18.2 percent, Greece’s 23.5 percent, Italy’s 11.7 percent, and so on. Germany’s massive surplus has cribbed labor demand from those high unemployment countries, but neither the fiscal nor monetary authorities in these nations have undertaken adequate counter-cyclical policies (“why not?” is a good question having to do with constraints of the monetary union and austerity economics).

To be clear, even at full employment, large, persistent trade deficits—which again, are the flipside of large, persistent surpluses—can be problematic. Here in the US, they’ve hurt our manufacturers and their communities, a fact that Trump exploited in the election. And one can, of course, see similar political dynamics in the weaker parts of European economies.

Trade deficits have also contributed to asset bubbles. They must be financed with borrowed capital, and such flows from surplus countries were clearly associated with our housing bubble in the 2000s, as well as the longer-term “secular stagnation” economist Larry Summers talks about (weak demand, even in mature recoveries).

At this point, the growing group of economists who recognize the importance of these international imbalances are pointing towards the capital flows themselves as the force behind persistent trade deficits. This is an important insight because it belies the simple solution we tend to hear from the mainstream: if only you’d save more, your trade deficit would shrink. But if other countries persist in exporting their savings to us, short of capital controls to block those flows, our trade deficit will also persist.

What could/should Germany do to be more of team player, spreading demand to others instead of hoarding it? The usual recommendation, made by Bernanke, is to take their excess savings and invest them at home, say through more public infrastructure or some other sort of fiscal stimulus. But King makes the good point that since Germany is already pretty much at full employment—recall their 3.9 percent unemployment rate–they may be disinclined to take this advice.

King suggests that they should instead do something to raise the value of their exchange rate (appreciate their currency), but here again, it’s not obvious how, as a member of the currency union, they’re supposed to go about that.

Surely, the solution Trump intimated—a big tariff on German exports into the US—wouldn’t work. For one, such actions invite retaliation, and not only do many of us want to tap the consumer benefits of our robust global supply chains, but Germany has factories here that employ a lot of people making cars and other equipment. That’s welcome investment.

Moreover, team Trump is consistently misguided with their unilateral approach to this problem of trade imbalances. As long as foreign capital continues to flow freely into the US from surplus countries, absorbing less from Germany simply implies absorbing more excess savings from somewhere else.

King suggests that the best solution is for deficit countries to get together with surplus countries and, a la Bretton Woods, figure out a “mutually advantageous path to restore growth.” That sounds a bit pie-in-the-sky until you consider the economic shampoo cycle (“bubble, bust, repeat”) that’s been so repeatedly damaging to countries across the globe. Perhaps that would be a motivator for our trading-partner countries, though the longer Trump’s out there on the road, the harder it’s getting to imagine such forward-looking international coordination.

I too have suggested that President Trump should convene such a commission, but sadly, I’m not the Jared he listens to. In the meantime, he should check out Google Translator before he mouths off.