Lynx; Trump/Erdogan: compare and contrast

August 14th, 2018 at 12:43 pm

Recent links to WaPo pieces:

Productivity and wages: They’re connected, of course, but the extent of the connection requires nuanced analysis of wages at different percentiles and movements in labor’s share of national income.

There’s an interesting dichotomy here in how economists and people think about productivity and wages. For many economists, it’s the determinant of wage growth. For many people, it’s irrelevant, in that powerful forces divert productivity growth from paychecks to profits. The truth, especially once you get away from averages, lies in-between. Productivity matters a great deal, but it is not by itself sufficient to drive broadly shared prosperity.

Employment rates also matter a lot: They take the elevator down in recessions and the stairs up in recoveries. They also may carry some info about the arrival of next recession. Plus, their recent movements reveal the disproportionate benefits of full employment to the least advantaged.

Are politicians no longer listening to economists? You wish. In fact, they’re listening to the wrong ones telling them what they want to hear.

Now, a quick note on current events.

As regards the tanking of the Turkish lira, the business press is largely concerned with the contagion question: to what extent will Turkey’s problems spillover into European and American economies? The consensus is “not much,” based on Turkey’s size and financial markets’ limited exposure to Turkish debt, much of which is dollar-denominated, meaning it becomes more expensive to service when the Turkish currency depreciates.

That’s probably right, and Turkey has uniquely weak fundamentals among emerging market economies: “current account deficit of 6.3% of GDP, Corporate foreign exchange debt is 35% of GDP, inflation rate of 16%.” But the situation bears close watching, of course, and the strengthening dollar has important implications for the trade war, i.e., it pushes in the opposite direction of the tariffs (tariffs make imports more expensive; the stronger dollar makes them less expensive).

But another interesting aspect of the Turkish meltdown is how much Trump and Erdogan have in common. In one sense, that’s not surprising, as the strongman, faux populist playbook is pretty straightforward, and history is replete with examples.

In this case, Trump and Erdogan both pursue: reckless fiscal policy, muscling the central bank to keep rates down (though Trump doesn’t use anything like the muscle that Ergodan does), appointing family members to high places (sons-in-law, to be specific), vilifying other countries/media as the source of any woes (in a Trumpian flourish, Erdogan recently blamed “economic terrorists on social media” for spreading misinformation).

And yet, the economic outcomes, particularly via the currency and capital flows couldn’t be more different. In fact, the relative currency moves show foreign exchange traders are pulling out of the riskier emerging markets and buying dollars and U.S. debt.

It’s a reminder of the dominant size and durability of US economy, the role of the dollar as the reserve currency, and our still independent central bank. More broadly, there’s just a lot that insulates the U.S. economy from terrible leadership.

At least there is for now…

Trump 2020 game plan: Fake Laffer, Go Keynes.

August 5th, 2018 at 10:51 am

I’m genuinely sorry to intrude on your Sunday like this, but this new forecast (no link) from the highly-skilled Goldman Sachs economic research team (GS) has me completely on shpilkes. I’ll make it brief, but not painless.

Back when the tax cut passed, this figure, also from GS, previewed an important fiscal fact about to unfold: outside of wartime, the Republican tax cuts and other deficit spending would add more fiscal juice to an economy already closing in on full employment than we’d ever tried before (note that the right-side scale is inverted; the point is low unemployment is usually associated much smaller deficits than we have now).

Here’s what I wrote at the time:

How unusual is [the divergence at the end of the above figure]? Well, looking at data back to the late 1940s, the average deficit-to-GDP ratio when unemployment was below 5 percent was close to zero. Since 1980, that same calculation yields an average deficit-to-GDP ratio of 0.5 percent. As I mentioned, the jobless rate this year may average less than 4 percent while the deficit-to-GDP ratio could be about the same, and closer to 5 percent next year. So, pretty unusual.

This is all known, and no reason to bother your Sunday. That recent, big 4% pop in GDP was widely and correctly labeled a function of this stimulus and thereby unsustainable.

But here’s what’s new. The GS team has an updated forecast based on key, upward revisions, most notably, the doubling of the U.S. savings rate as a share of spendable income. Their reasoning as to why this is going to notably boost growth and lower unemployment to close to 3% by the end of 2020 is this: the savings rate is well above where it usually is given the variables that typically drive it (income, slack, net worth). That means it should fall, implying more consumer spending, the latter of which accounts for 70% of GDP.

Based on this revision, the figure below shows their updated prediction for GDP growth and unemployment. First, note that GDP comes off its unsustainable peak, underscoring the point that if GS is right, we’re looking at Keynesian stimulus, not Laffer suppy-side. But check out the jobless rate, which hits a low of almost 3% by the end of 2020.

Now, far be it from me to wax political rather than economical, but a potted plant could get re-elected president at 3% unemployment. Of course, a potted plant might be preferable (lots of potential angles there: steady leadership, solid green credentials, growth oriented, doesn’t lie/tweet), and there are many caveats I’ll get to next, but jeez…

Now, 2020’s a long way off and while GS is better at this forecasting stuff than most, nobody’s very good at it. And, of course, conditions in the macro-economy are but one factor in play. If Trump was getting credit for the economy thus far, his approval rating would be a lot higher (though stagnant real wages are also in play, as I’ve stressed). Also, conditional on price/wage acceleration, the Fed might get spooked by the above scenario and move from brake-tapping to brake-slamming.

A couple of final thoughts. First, at one level, the above is a crushing example of the self-imposed budget austerity, back when the expansion was first taking off (see circled area in figure below).

Relatedly, let me try to be clear about my beef with all of this. I’ve argued that when an economy closes in on full employment, we want our fiscal accounts to begin to consolidate, as has historically been the case as shown in the first figure (here’s why). But at the same time, if this fiscal experiment takes the unemployment rate down to 3% without triggering overheating and Fed-rate risk, workers may well finally have the full-employment-induced bargaining clout they’ve long lacked, and that will be a very good thing.

So…let’s hear it for PPP (Potted-Plant for President!!).

July’s Jobs Report: Solid jobs but little wage acceleration

August 3rd, 2018 at 9:13 am

Summary: Today’s jobs report shows the U.S. labor market remains in a strong groove, with payrolls up 157,000 last month as the unemployment rate ticked down to 3.9 percent. The broader underemployment rate (“U-6”)–a more comprehensive measure of labor market slack–fell to 7.5%, its lowest rate since 2001, thanks to more part-timers finding the full-time jobs they seek.

Wage growth, however, remains a sore spot and despite further tightening, did not accelerate.

Expectations were for a higher payroll number–190,000–but these monthly data are noisy. To better pull out the underlying signal, we apply JB’s monthly smoother that takes average job gains over 3, 6, and 12-month periods (these averages include a combined revision of 59,000 jobs added to the May and June payroll gains). As shown, trend growth rate for job growth is north of 200,000, a strong trend at this stage of expansion.

I dig deeper into the wage story below, but the figures below show year-over-year percent changes in hourly earnings for all private-sector workers and for middle-wage workers (blue-collar factory workers and non-managers in services), along with a 6-months average to smooth out the noise. Over the past year, average hourly earnings before inflation were up 2.7% last month for both groups, the same growth rate as in June. For all private-sector workers, yearly wage growth has stayed remarkably steady, growing between 2.6-2.8 percent since last December.

The moving average reveals a slight, welcome acceleration for middle-wage workers, but given recent pressures in topline consumer inflation (including energy prices), their real hourly wage growth is flat. Below, I offer a Q&A on these critical wage issues.

Broken “Breakevens?” Many labor market watchers have long maintained that the “breakeven rate” for job growth–the monthly payroll gain associated with a stable unemployment rate–is 100,000 or less. But as the smoother shows, over the past year, monthly job gains have averaged 200,000, twice the alleged breakeven rate. Meanwhile, the jobless rate hasn’t fallen particularly sharply–it’s wiggled around between the high-3’s and the low-4’s–implying more labor supply than the low breakeven number implies.

The labor force participation rate held steady at 62.9% last month–its same level as last July. But the closely watched employment rate for prime-age workers (25-54 year-olds) continues to slowly climb, up from 79.3% in June to 79.5% in July. The peak employment rate for this growth was 80.3% in January 2007, while its trough in 2011 was 74.8%. Thus, prime-age workers have recovered 4.7 out of 5.5 lost percentage points, or 85.5%, of their decline since the downturn.

All told, this is simply a technical way to suggest that we have probably not hit full capacity in the job market; there are still sideliners to be pulled in. Low, stable core inflation (last seen at 1.9 percent; inflation including energy prices has grown faster) and only slowly accelerating wage growth corroborate this suspicion that there’s more room-to-run in the job market than is commonly believed.

Wage Dive: There’s been a lot of wage commentary lately, which I’d like to take a quick stab at sorting out here, with more to come in a longer paper out soon.

For now, a quick Q&A:

Q: Is there a wage problem in the current labor market?

A: There is, as real wages for middle-wage workers, as in today’s data, are flat (growing at about the same rate as inflation), meaning the only way working families can grow their incomes is working more hours.

Q: Is that a function of slow nominal wage growth or faster inflation?

A: It’s really about faster inflation, most recently, as the figures below reveal. They plot the yearly growth rate of the mid-level wage against inflation (I’ve forecasted the July inflation value as it’s not out yet). The difference between the wage and the inflation lines represent real growth. As you see in this figure for an important sector for mid-wage workers–health care and education– inflation grew from very low levels and has caught up with pay rates in the sector.

At the same time, mid-level wage growth before inflation, as described above, has been slower in this recovery than in previous ones, especially at such low unemployment.

Q: What factors explain the faster prices and slower nominal wage growth?

A: Higher energy costs have been boosting prices (as noted, core inflation, which takes out energy and food, has been much tamer) of late, and these could trail off in coming months as oil supplies are up. The tariffs, especially if they escalate, could push prices up a bit, but topline inflation could slow in coming months, leading to faster real gains, especially if falling unemployment pushes up nominal wage growth.

Q: What other constraints are in play?

A: Economists point out that productivity growth puts a cap on real wage growth and there’s no question that a) the two variables are linked, and b) slow productivity is a constraint on current wage growth. But slow productivity growth certainly does not explain flat, mid-level real wages in such a tight job market. For example, business profits remain strong, firms are spending billions on share buybacks to boost their stock prices. If workers had stronger bargaining power, they could push for more profits to flow into paychecks.

And, of course, over the longer term, productivity has risen much faster than median compensation (see figure), again, a function of long-term, structural factors reducing worker bargaining power, including outsourcing of jobs, diminished union power, long periods of slack markets, eroding labor standards, and, especially in the Trump era, a politics that is incessantly hostile to workers and friendly to capital.

Source: EPI

Q: Will lower unemployment give workers more clout?

A: It likely will. Thus, a potential, positive near-term scenario is lower unemployment pushing up nominal pay. Should that occur as energy prices come down, we’ll see real gains in coming months. But there are enough links in that chain that it’s no slam dunk, even in the near term. As just noted, the fact that worker power has been in long-term decline while concentrated employer power is ascendant remains a critical determinant of the living standards of working families.

Breaking News: Trump’s chief economist says some reasonable things! (And some other stuff, too.)

July 27th, 2018 at 1:48 pm

I was just on MSNBC with Ali Velshi talking about today’s GDP report (here’s my take). I came on right after Ali interviewed Kevin Hassett, the chair of Trump’s Council of Economic Advisers. Since Ali and I were so engrossed in GDP talk, I didn’t get a chance to note some of the things Kevin said that were on point, and since you don’t get a lot of that from this crew, and because I’ve been highly critical of this CEA’s work in other areas, let me agree with some of Kevin’s points but also point out where I think he goes wrong on a very important matter: the lack of real wage growth in the current economy.

Kevin said:

–Real GDP growth is likely to hit the CEA’s 3 percent forecast for the year 2018: In an administration that’s constantly throwing around random 4s, 5s, and 6s re GDP growth, Kevin’s is a defensible forecast for this year, and it’s consistent with other forecasts. Goldman Sachs is at 3, and the Fed’s nearby at 2.8. He steps onto to shakier ground when he predicts 3% as the new long-term trend, but for 2018, he’s probably on-or-near target.

–Jawboning the Fed: He can’t say his boss screwed up by complaining about the Fed’s rate hikes, and he solidly underscored the critical importance of Fed independence. But he also said, in so many words, that the DC establishment need not clutch their pearls with one hand and reach for the vapors with the other every time an elected official mentions the Fed.

–His claim that there’s no natural rate. Hassett told of being attacked for criticizing the Fed when he publicly questioned the existence of an identifiable, natural rate of unemployment that could reliably guide policy. He’s surely right about that, and there’s absolutely nothing wrong for an official in his position to say so. Obama’s CEA published the figure below, which essentially says the same thing (the confidence interval around the estimate of the natural rate goes from 0-6 percent).

Source: 2016 ERP

Of course, he couldn’t stop there and had to say some stuff that was wrong.

In so many words, he claimed the tax cut is having its predicted supply-side effects by boosting investment. Business investment has been solid, for sure, but nothing more than what you’d expect at this point in the expansion, especially given high corporate profitability. The figure below shows that while investment has bounced around in this recovery, it is now commensurate with earlier cyclical peaks as a share of GDP. It may well climb higher before the expansion is over, but we know firms are using much of their excess pre- and especially post-tax earnings right now to buyback stock shares and pay dividends, as opposed to invest, so we’ll have to wait and see where this goes.

Source: CEA

Sticking with the tax cuts, Kevin’s CEA bought themselves a tough problem by claiming the cuts would quickly and bigly trickle down into workers’ paychecks. That ain’t happening, and Kevin telegraphed the CEA’s forthcoming pushback to the stagnant real wage story, which sounds inconsistent with recent analysis. He said they’re working on a piece that will show that the stagnation is a compositional effect, driven by above-average shares of low-wage workers joining the labor market.

I’ll certainly check out their analysis, but EPI’s Heidi Shierholz and Elise Gould already looked at this, finding:

Composition was certainly a factor during the early part of the recovery from the Great Recession. In the first few years of the recovery, the jobs being added were very disproportionately low-wage jobs, which had the effect of pulling wage growth down over that period. But since 2013, as the recovery has strengthened, the opposite has been true—low-wage jobs are actually declining on net while middle and high wage jobs are being added, which has the effect of raising average wages. In other words, the composition effect is currently putting upward pressure on wages. [See their intuitive figures]

The CEA could also look at the Atlanta Fed’s wage tracker which controls for compositional changes by tracking the same wage earners across 12-month periods. Wage growth for these workers in each age group has slowed or stagnated for about tw0 years now, and note that these are nominal changes, so as consumer inflation has sped up considerably over this period, real wage growth in these series has significantly decelerated.

Source: Atlanta Fed

So, credit to Kevin where it’s due, but nothing’s trickling down because it pretty much never does.

Prepping for Friday: What’s trend GDP growth?

July 22nd, 2018 at 8:58 pm

This Friday morning at 8:30, we’ll see the first estimate of GDP for 2018Q2. Various trackers have it coming in at or above 4% (that’s the real, annualized quarterly growth rate). It’s that ballpark correct, as I expect it is—the trackers use much of the same incoming data as BEA—it will be a big political football, but that’s not the purpose of this post. Here, I’d like to think about the best way to pull out the underlying trend of real GDP growth.

While team Trump will be going bananas for any number with a handle of 4 on it (as would, to be fair, even a normal administration), it’s widely agreed upon by long-time GDP watchers that any single quarter should be down-weighted, and even more so if it’s an outlier (i.e., well above or below trend). But the concept of outlier implies the existence of a known trend, and that’s where things get a bit more confusing these days.

The first thing you want to do when hunting the trend is to get away from the noisy, annualized quarterly growth series. Figure 1 shows, for example, how the year-over-year change cuts through the volatile annualized quarterly data (for all of these figures I’ve plugged in 4.5%, as per the Atlanta Fed’s GDPNow, for 2018Q2).

Source: BEA

The end of the yr/yr series, juiced in part by my plug-in, shows a nice acceleration to around 3%, but it also shows rates of 3% achieved pretty recently, around 2014-15. Yet, most non-thumb-on-the-scale analysts estimate trend GDP growth to be closer to 2 than 3. I agree, meaning there is still be too much noise in the yr/yr series to pull out a reliable signal of the underlying trend.

If you didn’t know better, you’d use a simple HP filter to pull out the signal and call it a day, as in the next figure (most such examples apply the filter to log GDP, not to its annual change, as I do here, but the reasons to not use this filter pertain here as well). But as Jim Hamilton recently wrote, this approach risks bringing “all kinds of patterns into the HP-filtered series that have nothing to do with the original data-generating process and are solely an artifact of having applied the filter.”

Source: BEA, my analysis

The HP filter can be especially misleading at the end of series as its construction leads it to hew too close to the actual data. And that’s the part in which we’re often most interested.

Hamilton has his own recommended approach (follow the link above), and sure enough, if you run both the HP and Hamilton filters on log real GDP, the Hamilton trend is well below the actual data at the end of the series (remember, all these figures plug 4.5% in for Q2). The Hamilton filter, to its credit, is a tougher customer and requires more convincing than HP before it accepts a more persistent shift in the series, i.e., a change in the trend. The implied recent growth rate of the Hamilton series, btw, is around 2%, which, as noted, many of us still think of as real GDPs trend.

Source: BEA, my analysis

There is, however, the matter of the stimulus, which is clearly pushing growth above that trend rate as fiscal injections of more than $200 billion a year both this and next year are prone to do. Goldman Sachs researchers report a fiscal boost to real GDP growth of a bit north of 0.5 ppt in both 2018 and 2019.

But that’s Keynes, not Laffer, meaning once the fiscal impulse fades, it’s back down to trend (more precisely, negative fiscal impulse might will take GDP below trend for a few quarters).

So, beyond a wild card I’ll note in a moment, GDP is probably growing at a long-term trend around 2%, though near-term quarters will be above trend. And we should get no more elated by the 4.5% on Friday, if that’s the print, than we should be disappointed by the 2% final estimate for Q1.

The wild card is this: Though we could use more empirical evidence, I’m increasingly moved by reverse hysteresis arguments, where positive demand shocks can boost the economy’s supply side (here’s a nice empirical paper with some evidence from Coibion et al written for CBPP’s Full Employment Project). To the extent, for example, that the tight job market pulls in more labor market sideliners, there’s the potential for faster labor force growth. Also, as Bivens argues: “A ‘high-pressure economy’ that eliminates the remaining demand shortfall in the U.S. economy and leads to low rates of unemployment and rapid wage growth would likely induce faster productivity growth.”

The logic is that firms, in order to maintain profit margins in periods of high labor costs, must find efficiencies they can ignore in slack markets. [What’s that? This can’t be right because any firm not operating at the edge of their PPF will be forced out of businesses by more productive competitors? Yeah…no.]

Especially given relatively tame (core) price and wage inflation, what’s the downside of seeing if he’s right?!

At any rate, if BEA delivers unto us a GDP growth rate for Q2 that starts with a 4, go ahead and applaud. Then sit down and back out the trend.

Note 1: I’ll rerun some of these figures with the actual estimate on Friday, time permitting.

Note 2: I didn’t get into it here, but there are good arguments for gleaning real GDPs trend from sub-measures that leave out volatile components. One popular entry is real final sales to private domestic purchasers, which is C + I – inventories + imports. BEA itself says this series tracks “the more persistent movements in spending by consumers and businesses.”

This last figure plots real GDP and real final sales to domestic purchasers, yr/yr. There is less of an acceleration in final sales toward the end of the series, and I like that it’s smoother than GDP growth. But since 2010, they seem to telling a similar story.

Source: BEA

Note 3: For others who play in this sandbox, what’s your preferred method for GDP trend extraction? I only ask that it’s a technique we can all try at home, i.e., nothing too esoteric.