A nice wage pop in January should be welcomed, not feared!

February 2nd, 2018 at 9:59 am

Payrolls rose 200,000 last month, the unemployment rate held steady at 4.1% and wage growth popped up to 2.9%, it’s the fastest year-over-year growth rate since mid-2009. In other words, here’s yet another strong jobs report.

Our jobs-day smoother averages out some of the monthly noise in the payroll data by taking averages over 3, 6, and 12-month periods. As shown below, payrolls are up a strong 192,000, on average, over the past three months, a very nice job-growth pace at this point in the expansion. In fact, the slight acceleration in the figure suggests there may be more room-to-run in this economy than we previously thought, which—co-inky-dink!—happens to be the punchline of a new paper from our Full Employment Project.

As CNBC anchor Becky Quick pointed out this morning during their segment in which I joined, we may be entering that phase of the cycle where good news on Main St. is bad news on Wall St. That is, accelerating wage growth may lead the Federal Reserve to tighten faster, slowing overall growth more than currently expected. That certainly was the market reaction this morning, as the 10-year bond yield spiked on the report, suggesting concerns about future inflation and a more aggressive rate-hike schedule at the Fed.

However, as I note below, there are excellent reasons to embrace and welcome, not fear, faster wage growth.

First, some other notable aspects of the report:

–The African-American unemployment rate jumped up from its record low of 6.8% to 7.7%, another reminder of the volatility in these monthly numbers.

–The employment rate of prime-age workers (25-54) is an alternative metric of the strength of labor demand. Its peak was 80.3% in January 2007, and it eventually fell to a trough of 74.8%. Last month, it was 79%, meaning it has recovered 4.2 out of 5.5 percentage points, or about three-quarters of its lost ground. Whether this labor-demand proxy can continue to make back its losses (and more) is a key and hotly debated question. The figure below suggests a strong, ongoing response to the expansion, underscoring the more-room-to-run point. On the other hand, the series has been stuck at around 79% for the past five months, so it could be at its ceiling.

–Job growth was solid across most industries with one notable exception being state government, down 11,000 last month and 39,000 over the past year. This may reflect budget squeezes still facing some state governments.

–There were some weak spots in the report. Wage growth for the lower-paid 80% of the workforce that have production or non-managerial jobs was up only 2.4%, implying that faster wage growth last month mostly benefited higher-paid workers.

–Also, weekly hours pulled back a bit, leading to a 0.5% decline in total weekly hours in the private sector, an early measure of macroeconomic strength in the quarter.

Turning to why faster wage growth is good news, consider these points.

–People who depend on their paychecks rather than their stock portfolios, which is, of course, most working-age people, need a chance to make up lost ground. One place to see this is in the national share of income going to compensation, which took a big hit in the last recession and has yet to recover.

–Don’t assume wage growth is inflationary. Productivity plus the Fed’s target inflation rate equals about 1%+2% right now, meaning 3% nominal wage growth is consistent with stable prices. But re-balancing the labor share of income—from profits to paychecks—is also non-inflationary.

–Another thing you shouldn’t assume is that wage growth will automatically map onto price growth. That correlation has been very low in this economy.

–One month does not a new trend make! Check on the figures below, which show the trend in annual hourly wage growth for all private sector workers and for the lower-paid group noted above. The 6-month moving average is the right way to look at this, and it still looks pretty flat.

That said, it’s true that some other wage series show a bit more acceleration, which is, of course, exactly what you’d expect at this point in the cycle! So, fear not wage growth, my friends, but welcome it with open arms…and patience at the Fed.

Trump’s Department of Labor suppresses an inconvenient fact re their tip-retention proposal.

February 1st, 2018 at 2:43 pm

[These are the comments I made on a press call just now about the revelations from this article by Ben Penn. He tells of how the Labor Dept. is denying the public access to its estimates regarding the costs to tipped workers of the Trump admin’s proposed rule to let employers take the tips of minimum wage workers. Heidi Shierholz was also on the call–I recently interviewed her on this issue.]

I’ve developed an awfully high outrage bar over the past year, but this Dept. of Labor suppression of evidence incident clears it by a mile, for at least 3 reasons.

First, consider what this rule change goes after: The tips of minimum wage workers. I know of none–not one—bit of evidence that the fact the waitpersons get tips is an economic problem in America. To the contrary, tips are one way low-wage workers in tipped industries, many of whom these days are family breadwinners, meet their family budgets while holding minimum-wage jobs.

So, let’s be clear. The Trump Labor Dept is doing the bidding of the Nat’l Rest Assoc, not low-wage workers. And trust me, we’ve already got a whole administration and Congressional majority that’s tilted against working people. We don’t need the DoL, an agency that is supposed to represent workers’ needs, to pile on.

Second, while this rule is wholly unnecessary—tip-pooling arrangements are, of course, common—it would have been perfectly easy to write it in such a way as to prohibit employers from pocketing the tips. But the pen of the DoL was guided by the hand of the restaurant lobby, such that if this rule takes effect, employers will be able to legally pocket workers tips.

Finally, let’s also be clear about what happened here. The DoL’s analytic staff did what it always does in these situations—based on its best knowledge of the industry and the affected workers, it estimated the transfer costs of the rule. Then, as we understand it, political appointees didn’t like the answer so they instructed the analysts to knock it down. They still didn’t like the answer—and I should point out here that it is still the case that no one outside the DoL knows that answer—and so they buried it.

We are thus left with are two disturbing realities of politics in the Trump administration: a behind the scenes attack on economically vulnerable workers, and a willingness to dispose of inconvenient facts. History is replete with governments driven by these sorts of motivations, but I assure you, they are not called democracies.

Real-time estimates of potential GDP: An important, new paper from the Full Employment Project

January 31st, 2018 at 7:43 am

You ask me, the important DC event of the moment wasn’t last night’s State of the Union address. It’s the far less scrutinized meeting going on at the other end of town, over at the Federal Reserve.

Later this afternoon, the Fed’s interest-rate-setting committee will release their monetary policy statement. They are widely expected to pause this month in their “normalization” campaign, i.e., not further raise the interest rate they control.  But their statement will likely reinforce their view that the economy is at full employment, its resources are fully utilized, and their policy thrust will continue to shift from achieving full employment to maintaining price stability. Simply put, more rate hikes are forthcoming.

Their view is not broadly supported by the inflation data, as I’ll show in a moment, but according to an important new paper released this morning by CBPP’s Full Employment Project (FEP), the Fed’s perspective, along with that of other influential economic institutions, like the CBO, has a more fundamental problem: potential GDP is higher than they think it is.

Potential GDP is the level of economic output produced by an economy at full utilization. If you think of the economy as a water glass, full employment implies the glass is filled to the brim. Now, if you’re the Fed, to avoid a spill (inflation), you must stop pouring when you think you’re at the brim. But what if the glass is bigger than you thought? Then the risk is that you’ll stop pouring too soon, at great cost to those who haven’t yet had a drink!

Our new FEP paper, by Olivier Coibion, Yuriy Gorodnichenko, and Mauricio Ulate (CGU) makes precisely that latter case:

“CBO’s and other similar estimates of potential output are too pessimistic, and as such, they encourage policymakers, such as those at the Federal Reserve, to accept lower levels of potential than those which could be achieved. This pessimistic view and associated policies could be extremely costly to U.S. households…Most recently, this has led to some frequently used estimates of potential GDP that are as much as $1.2 trillion, or nearly $10,000 per household, below our preferred estimate.”

What do CGU know that the potential-GDP low-ballers don’t? They borrow a statistical method from a paper by Blanchard and Quah that they claim does a better job separating out temporary and permanent shocks to the economy, thereby getting a more accurate bead on the size of the water glass.

Here’s why that’s so important. Suppose the economy gets whacked by a negative shock like the bursting of a credit bubble. Demand falls sharply and a bunch of people temporarily leave the labor market. A bunch of firms cut back on their investment. Recession ensues. That’s a classic, temporary demand shock. The fundamental supply factors that drive long-term economic growth—labor supply, innovation, the amount of capital per worker—haven’t been permanently thrown of course. Once balance sheets recover and credit flows resume, the economy should make up its losses and revert back to its previous growth rate.

Contrast that with a permanent supply shock, like the one with which we and some other advanced economies are currently dealing: an aging population. Absent a big increase in immigration flows (now we’re back to Trump’s speech), that lastingly slows the long-term growth of the labor force and thus lowers potential GDP.

The problem that CGU document is that current statistical methods employed by the Fed, CBO, and others conflate these two types of shocks, often mistaking temporary downgrades for permanent ones. That, in turn, leads policy makers, like those meeting across town as we speak, to underestimate the size of potential GDP. There’s more room in the glass than they think.

To be clear and fair to all, no one, including CGU, knows the actual size of the glass, which is growing and shrinking all the time in ways that are beyond our capacity to accurately measure, especially in real time. So, while their method is an improvement over the dominant ones in use today, we must be humble about our ability to accurately measure potential.

This is one of the points emphasized by Olivier Blanchard (recall that he was one of the progenitors of the method used by CGU) who was kind enough to provide the FEP with a short comment on CGUs paper. Blanchard writes:

“The basic point of the note by Coibion et al is an extremely important one. Current methods of estimation of potential output do not distinguish between different sources of shocks behind output fluctuations…[CGU’s analysis] is clearly an improvement upon existing methods…But there are limits to it.  Some of these limits can be addressed, by looking at more variables, and so on. Some not so easily. In short, it is a better tool, but it is not a magic one. It must be added to, not replace, the existing panoply.

To me, the best tool remains the inflation signal, at least as far as the labor market, and unemployment, goes. Inflation is the canary in the mine, and a very reliable canary. If the labor market is too tight, if unemployment is below the natural rate, workers will ask for higher wages, firms will be willing to offer higher wages either to keep them or recruit new ones, firms will start increasing prices in order to cover higher marginal cost, etc.”

Which brings us full circle back to the Fed’s meeting. The last reading of their preferred inflation gauge—the core PCE—was up 1.5 percent in 2017, another in a multi-year series of downside misses re their 2 percent target. Some gauges of inflation expectations are tilting up some, and market interest rates have nudged up a bit too, but none of the indicators are signaling serious price pressures. I agree with Blanchard re the limits of CGUs or anyone else’s statistical estimates of potential GDP. But the fact is that the inflation record is strongly consistent with their findings.

We must, therefore, consider the possibility that the glass is bigger than we thought it was, that current methods conflate temporary with permanent shocks, and that there’s more space between actual and potential GDP than the Fed thinks. Closing that gap could make a world of difference to those who are still thirsting for the benefits of the current expansion to come their way.

Links from JB, LLC

January 29th, 2018 at 1:33 pm

Obviously, you want catch up on the latest from JB, LLC (in which I’m a passive investor…bring on that tax cut!…JK!!), so here are some links:

–From WaPo, why Mnuchin’s comment on the weak dollar making US exports more competitive was, of course, correct; and why Treasury secretaries should be neutral on currencies, not go around pretending they always prefer a strong dollar. Because they don’t. EG, we hit a recession and the dollar falls as part of a natural corrective. Trust me, they’re fine with that.

–From WaPo, all this cheerleading about the stock market, GDP growth, and awesome impacts from the tax cuts is working my last good nerve. Obviously, I’m happy to see positive animal spirits, but we’re losing the thread here, friends. In the era of inequality, growth is necessary, but not sufficient for broadly shared prosperity.

–Two tweets for your consideration. 1) It’s not a good use of time to argue data with our president, but his claiming credit for the relatively low black unemployment rate is so over the top, I couldn’t take it without responding. For those interested, that trend is from a one-sided HP filter, estimated through 2016 and forecast through 2017. 2) Goldman Sachs has some metric of financial investors appetite for risk, and it’s apparently higher than ever. That led me to unearth this recent oped from the NYT on how this is, as per the late economist Hy Minsky, precisely the time when policy makers flip from risk aversion to risk under-pricing, and therefore, the worst time to take down regulatory guardrails.

Populism, Globalization, Trump at Davos, Tariffs, the Dollar…

January 25th, 2018 at 9:51 am

As my title betrays, I’m trying to organize my thoughts around all of the above. There’s a unifying theme to all this, and maybe if I noodle on about it here for a bit, I’ll trip over it. But let me stipulate from the outset that I’m pretty sure the underlying theme of the moment will link up to the extremely important and deeply insightful recent work of the economist Dani Rodrik.

–Trump and a bunch of his staff are at the World Economic Forum in Davos, Switzerland. This feels like one of those teen movies where the good kids’ parents are away and the kids have a party, which the bad kids show up to trash. The good kids act all scared and annoyed, but they’re secretly titillated to have the bad kids at their party, hoping they’ll set off some fireworks.

–Trump at Davos creates a collision of many strains of global political economics and Trumpian psychology, as Noah Bierman nicely covers here. Trump’s populism is largely phony, so to the extent that he hits the Davos elites with America-first protectionism, it will be accompanied by an implicit wink, as if to signal: “Hey, fellow billionaires. This globalization stuff is working out great for us. But watch and learn, Davos. If you want to keep this deal going, you’ve got to shout a lot more about the ‘forgotten man and women.’ You might even need to slap a tariff on something here and there. But that’s a small cost of doing business. You guys saw my tax cut, right?! You’re welcome!”

–Well, Treasury Sec’y Mnuchin certainly let the cat out of the bag yesterday. He said “a weaker dollar is good for trade,” which knocked already declining currency down even further, to its lowest level since late 2014 by the WSJ ICE index. The thing is, what he said is…um…true, and the nonsense that Treasury officials have had to spout about how the US is always and everywhere for a strong dollar is false and non-economic. Readers know I have no love at all for the Trump administration’s economic policies, but I have to say that I appreciate this example of dumping a DC trope that never made sense in the first place.

–Which brings me to the tariffs. Between Mnuchin’s dollar comment, the TPP-11 (the revival of the multi-lateral trade deal without the US), tariffs/quotas on solar panels and washers (but not dryers!), and possible forthcoming “section 232” tariffs on steel (the rationale for 232 tariffs is national security), the DC trade establishment has to be reaching for their vapors.

–These actions have generated lots of hand-wringing from the usual suspects, but what do they amount to? Presidents of all stripes have long invoked measures against countries that dump alleged under-priced goods on our shores, or unfairly hurt our own manufacturers (as the non-partisan ITC found in these cases; see this USTR fact sheet). Such measure make those goods more expensive, but at least in recent history, they’ve  never been large enough or long-lasting enough to change the underlying structure of the industry, domestic or foreign. At this point, 95 percent of our solar panels are imports! The tariff can have but a marginal impact on that share, and changes in the dollar and industrial policy have much greater long-run impacts on trade flows and balances. This then raises the good question as to why raise the tariffs? Typically, they’ve been used as a chess move, signalling to trading partners that we’re unhappy with their pricing practices. To be clear, that’s not an endorsement. I’m not crazy about this chess move, especially re solar panels. Why make them more expensive? If I were to intervene re renewables, it would be to make them cheaper! That said, do yourself a favor and discount hyperventilating “trade war!” warnings by the usual critics. Forget the trade deals, the tariffs, and the noise they engender. Watch the trade and capital flows, which go up and down, but remain robust and will likely be boosted this year by synchronized global growth.

–Trump is apparently slated to argue that his “America first” nationalism must be a fine thing because, you know, the stock market’s up and the unemployment rate is down. This makes absolutely zero sense. Other countries stock markets are up more than ours and growth is accelerating across the globe. Any trends Trump is enjoying were inherited. If he can claim credit for anything, it’s not screwing up the economy Obama left him. Finally, there is no nationalist agenda, just a bunch of hot air accompanied by standard-issue, establishment Republican trickle-down tax cuts and industry deregulation.

–Still, even amidst all this posturing, what’s most interesting about Trump in Davos is the collision of the cheerleaders of globalization with the president who ran against them, even while his legislative agenda is comforting and familiar to some of them. This collision invokes conflicts far more interesting than the Trump show, as masterfully covered in recent work by the economist Dani Rodrik. His survey of the history of globalization, clear-eyed look at the actual predictions (vs. the sugar-coated ones) of trade theory, documentation of the empirical outcomes of expanded trade, along with his fundamental understanding of the interactions between politics, institutions, and trade provide the deepest insights I’ve seen into this moment in global political economy. Read this for a somewhat technical, but still readable, version summarizing his sweeping take on these issues, and then read his highly accessible new book, which I’m working through and will have more to say about when I’m done. For me, and I suspect you’ll feel similarly, this work perfectly crystallizes much of what got us to where we are today.