(What’s Left of) Our Economy: Why the Really Tight U.S. Job Market Isn’t Propping Up Much Inflation

Tags

CCP Virus, consumer spending, consumers, coronavirus, cost of living, COVID 19, Federal Reserve, headline PCE, inflation, inflation-adjusted wages, interest rates, Jerome Powell, monetary policy, PCE, personal consumption expenditures index, prices, recession, stagflation, stimulus, wages, {What's Left of) Our Economy

It’s been widely assumed that even though very tight U.S. labor markets haven’t yet touched off the kind of wage-price spiral that can supercharge inflation, they’ve been helping consumers offset the effects of rapidly rising prices – and therefore helping to keep living costs worrisomely high.

The intertwined reasons? Because even though when adjusted for inflation, wages generally have been falling since price increases took off in early 2021, rock-bottom unemployment rates and the wage hikes that have been received have enabled healthy consumer spending – and given business unusual pricing power.

Most important, this is what the Federal Reserve believes, and it’s the federal government institution with the prime responsibility for fighting inflation. According to Chair Jerome Powell, “demand for workers far exceeds the supply of available workers, and nominal wages have been growing at a pace well above what would be consistent with 2 percent inflation over time.”

For good measure, Powell said that the labor market “holds the key to understanding inflation” especially in U.S. services industries other than housing, which make up more than half of the set of inflation data favored by the Fed, and where “wages make up the largest cost.”

How come, then, when you look at the wage data put out by the federal government, it’s so hard to find evidence that recent wage levels have significantly bolstered U.S. workers’ spending power during this current high inflation period?

Given the Fed’s power, it makes sense to use the inflation measure it values most – which as RealityChek regulars know is the Personal Consumption Expenditures (PCE) Price Index. As the Fed prefers, we’ll focus on the “headline” gauge, which includes the food and energy prices that are stripped out of a different (“core”) reading supposedly because they’re volatile for reasons having nothing to do with the economy’s underlying prone-ess to inflation.

And for the best measure of the wages workers are taking home, we’ll use weekly wages. What they show is that since the headline PCE rate first breached the central bank’s two percent target, in March, 2021, inflation-adjusted weekly pay (as opposed to the pre-inflation wages Powell oddly emphasizes) is actually down – by 4.60 percent. For production and non-supervisory workers (call them “blue collar” workers for convenience’s sake), real weekly wages were off by a more modest but still non-trivial 3.52 percent.

And this has propped up American consumer spending exactly how?

The Fed actually looks more closely at a wider official measure of compensation than the wage figures. It’s called the Employment Cost Index (ECI) and it takes into account salaries as well as wages, along with non-wage benefits. The ECI only comes out quarterly, and the next one, for the fourth quarter,of last year, won’t be out till January 31. But from the second quarter of 2021 (roughly when headline annual PCE inflation rose higher than that two percent Fed target) through the end of the third quarter of 2022, the ECI for private sector workers) also dropped in after-inflation terms – by 2.39 percent.

But if American workers’ pay isn’t doing much to power their still-strong consumption, what is? Obviously, the answer is mainly the excess savings piled up thanks to pandemic stimulus programs and government measures aimed at…compensating them for high inflation.

When it comes to fighting inflation, there’s good news stemming from the status of these enormous amounts of cash injected into American bank accounts: They’re being run down significantly or are just about gone for everyone except the wealthy. That no doubt explains much of the recent evidence of the cooling of the white hot levels of consumer demand that filled so many businesses with confidence that they could jack up prices dramatically are cooling, and why headline PCE is showing some signs of ebbing.

The bad news remains what it always has – that meaningfully reduced consumer spending, combined with the Fed’s continued stated determination to keep increasing the price of the borrowing that spurs so much spending, could trigger more unemployment, even worse wage trends, and a possibly painful recession.

Yet as I wrote in that above-linked RealityChek post, the $64,000 questions that will determine inflation’s fate remains unanswered: Will recession fears lead the Fed to chicken out, and at least pause its inflation-fighting interest rate increases? And will Congress and the Executive Branch decide to ride to the rescue as well, with new politically popular stimulus programs – which are likely to stimulate inflation, too?  My answer remains a pretty confident “Yes,” which is why my forecast for the economy calls for a short, fairly shallow downturn followed by a significant stretch of “stagflation” – sluggish growth and above-Fed-target inflation.   

Advertisement

(What’s Left of) Our Economy: Dangerous New Bubbles or a Virus Mirage?

Tags

bubbles, business investment, CCP Virus, consumer spending, coronavirus, COVID 19, Financial Crisis, GDP, Great Recession, gross domestic product, housing, lockdowns, logistics, nonresidential fixed investment, real GDP, recession, recovery, reopening, Richard F. Moody, semiconductor shortage, toxic combination, transportation, West Coast ports, {What's Left of) Our Economy

Here’s a great example of how badly the U.S. economy might be getting distorted by last year’s steep, sharp, largely government-mandated recession, and by the V-shaped recovery experienced since then.as CCPVirus-related restrictions have been lifted. Therefore, it’s also a great example of how the many of the resulting statistics may still be of limited usefulness at best in figuring out the economy’s underlying health.

The possible example?  New official figures showing that, as of the second quarter of this year, the U.S. economy is even more dangerously bubble-ized than it was just before the financial crisis of 2007-08.

As RealityChek regulars might recall, for several years I wrote regularly on what I called the quality of America’s growth. (Here‘s my most recent post.) I viewed the subject as important because there’s broad agreement that a big reason the financial crisis erupted was the over-reliance earlier in that decade n the wrong kind of growth. Specifically, personal spending and housing had become predominant engines of expansion – and therefore prosperity. Their bloated roles inflated intertwined bubbles whose bursting nearly collapsed the U.S. and entire global economies, and produced the worst American economic downturn since the Great Depression of the 1930s.

As a result, there was equally broad agreement that the nation needed to transform what you might call its business model from one depending largely on borrowing, spending, and paying for them by counting on home prices to rise forever, to one based on saving, investing, and producing. As former President Obama cogently put it, America needed “an economy built to last.”

Therefore, I decided to track how well the nation was succeeding at this version of “build back better” by monitoring the official quarterly reports on economic growth to examine the importance of housing and consumption (which I called the “toxic combination”) in the nation’s economic profile and whether and how they were changing.

For some perspective, in the third quarter of 2005, as the spending and housing bubbles were at their worst, these two segments of the economy accounted for 73.90 percent of the gross domestic product (GDP – the standard measure of the economy’s size) adjusted for inflation (the most widely followed of the GDP data. By the end of the Great Recession caused by the bursting of these bubbles, in the second quarter of 2009, this figure was down to 71.55 percent – mainly because housing had crashed.

At the end of the Obama administration (the fourth quarter of 2016), the toxic combination has rebounded to represent 72.31 percent of after-inflation GDP. So in quality-of-growth terms, the economy was heading in the wrong direction. And under President Trump, this discouraging trend continued. As of the fourth quarter of 2019 (the last quarter before the pandemic began significantly affecting the economy), this figure rose further, to 73.19 percent.

Yesterday, the government reported on GDP for the second quarter of this year, and it revealed that the toxic combination share of the economy in constant dollar terms to 74.24 percent. In other words, the toxic combination had become a bigger part of the economy than during the most heated housing and spending bubble days.

But does that mean that the economy really is even more, and more worrisomely lopsided than it was back then? That’s far from clear. Pessimists could argue that recent growth has relied heavily on the unprecedented fiscal and monetary stimulus provided by Washington since spring, 2020. Optimists could point out that far from overspending, consumers have been saving massively. Something else of note: Business investment’s share of real GDP in the second quarter of this year came to 14.80 percent – awfully lofty by recent standards.  During the 2005 peak of the last bubble, that spending (officially called “nonresidential fixed investment”) was 11.62 percent. 

My own take is that this situation mainly reflects the unexpected strength of the reopening-driven recovery and the transportation and logistics bottlenecks it’s created. An succinct summary of the situation was provided by Richard F. Moody, chief economist of Regions Bank. He wrote yesterday that the new GDP data “embody the predicament facing the U.S. economy, which is that the supply side of the economy has simply been unable to keep pace with demand.” The result is not only the strong recent inflation figures, but a ballooning of personal spending’s share of the economy.

Moody expects that both problems will end “later rather than sooner,” and for all I know, he (and other inflation pessimists) are right. But unless you believe that West Coast ports will remain clogged forever, that semiconductors will remain in short supply forever, that truck drivers will remain scarce forever, that businesses will never adjust adequately to any of this, and/or that new CCP Virus variants will keep the whole economy on lockdown-related pins and needles forever, the important point is that these problems will end. Once they do, or when the end is in sight, we’ll be able to figure out just how bubbly the economy has or hasn’t grown – but not, I’m afraid, one moment sooner.

(What’s Left of) Our Economy: Green Shoots of Recovery in New York City?

Tags

(What's Left of) Our Economy, CCP Virus, consumer spending, coronavirus, COVID 19, election 2020, healthcare, Jobs, New York City, restaurants, stimulus package, subsidized private sector, The Partnership for New York City, Wuhan virus

Since I’m a New York City native, I’m a New York City fan. (At least I think that logically follows!) Therefore, one of the most disturbing trends I’ve followed in the CCP Virus era concerns the especially serious troubles the City has suffered this year, economically as well as medically.

I still haven’t made up my mind about whether New York has been pushed by the virus into a period of long-term decline, or whether we’ll see a return to normal once the pandemic has been brought under control (insert your own definition of this goal).

Yet for the last two months, whenever the case for pessimism seems to become conclusive (see, e.g., so much of the evidence in this recent New York Times piece), an email appears in my inbox from a friend who sends me the regular updates on the City’s economy from the Partnership for New York City.

The organization, comprised of hundreds of New York’s most prominent business leaders, says it seeks to “build bridges between the leaders of global industries and government, drawing on the resources and expertise of business to help solve public challenges, create jobs and strengthen neighborhoods throughout the five boroughs.”

Whatever you think of its sincerity or effectiveness or overall objectivity, the data it regularly releases tracks with statistics I monitor from other sources, so it seems reliable to me. And some of the figures it’s presented lately have been major stunners.

For example, as early as late July, the Partnership reported, consumer spending in the City had nearly returned to 2019 levels. In late March, it had plunged to 53 percent below them. Just as unexpected – the big laggards were New York’s wealthiest boroughs, Manhattan and Brooklyn (although maybe the Manhattan results weren’t so surprising, given its dependence on business from office workers, so many of whom weren’t commuting to their offices).

According to a late-September bulletin from the Partnership, not only had New York’s private sector employment increased on month, but “the city has outpaced U.S. private sector job growth for three consecutive months.” The leader here was the healthcare sector – which RealityChek regulars know are only partly private sector jobs, given the industry’s massive dependence on government subsidies. (See, e.g., here.) But the same problem distorts the national figures, so this finding still legitimately counts as a pleasant surprise.

Even more surprising: “209 business licenses were issued in September, up 11% from 189 licenses issued in August. The number of new business licenses has increased for four consecutive months and is up 260% since May.”

Of course, this number of businesses is less-than-tiny for such a gargantuan metropolis. But any signs of entrepreneurship these days are encouraging, and support the even more encouraging possibility that the City remains a powerful magnet for individuals with talent and drive.

No one can doubt that New York still faces massive challenges going forward, especially since the onset of winter, and the growth of lockdown fatigue, means that a second virus wave may hit. Moreover, the colder the weather gets, the greater the struggles of a hugely important restaurant sector that’s been able collectively to hang on with its fingernails thanks to regulatory reforms that helped eateries expand outdoor dining since late spring.

The fiscal situation seems dire as well – unless Democrats sweep to power in next week’s national elections and approve the kind of big aid package for cities and states that Republicans have generally resisted. (The continuing deadlock over a broader relief bill, which could drag on if Republicans retain the White House and/or Senate, obviously could remain a big problem, too.)

Even then, the City will be hard-pressed going forward to fund needed services adequately without the kinds of tax increases that tend to drive taxpayers away, cuts in more controversial outlays that tend to antagonize powerful constituencies like public employee unions, or some combination of both.

For now, however, these Partnership reports have been revealing impressive resilience in the New York City economy. And it bears remembering that, over any significant period of time, so far no one has ever made any serious money betting against it.

(What’s Left of) Our Economy: White House Fakeonomics on Tariffs and the Poorest Americans

Tags

China, consumer spending, Council of Economic Advisers, incomes, Jobs, Labor Department, NAFTA, North American Free Trade Agreement, Obama, offshoring, poverty, tariffs, Trade, White House, World Trade Organization, WTO, {What's Left of) Our Economy

We’ve heard a lot lately about fake news. But President Obama’s outgoing Council of Economic Advisers (CEA) has just reminded us that at least as great a problem is fake policy analysis. For its new report emphasizing that tariffs are “an arbitrary and regressive tax” that hits low-income Americans especially hard glosses over and ignores completely the biggest trade-related income questions that any intellectually honest researcher would ask.

CEA argues that “tariffs – taxes on imported goods – likely impose a heavier burden on lower-income households, as these households generally spend more on traded goods as a share of expenditure/income and because of the higher level of tariffs placed on some key consumer goods.”

But here’s the main point it glosses over: The vast majority of spending by poorer Americans goes to goods and service that are lightly traded, at best. Indeed, the White House economists provide the first clues themselves. As they show (in the figure below), even though the tariff burden on after-tax income does rise as such income falls, the absolute levels are very low – a little over 1.50 percent of such income for the poorest 10 percent of households.

Figure 2 Tariff burden relative to after-tax income

And as the next figure reveals, when totally untraded mortgage, rent, and utilities are removed, both the tariff burden gap between the richest and poorest Americans, and the absolute tariff burden, shrink dramatically. The latter falls all the way down to less than 0.60 percent of the total income of the lowest 10 percent.

Figure 3 Tariff burden relative to expenditures excluding mortgage, rent, and utilities

Looking at what lower-income households actually spend explains these rock-bottom numbers. According to the same Labor Department consumption data set used by the CEA economists, households in the lowest decile on the American income scale are spending fully 42 percent of their income on housing (which is not at all traded internationally) and another 17 percent on food (which is mainly produced domestically). Another six-plus percent of these households’ economic intake goes to health care, five percent to education, and a bit over four percent to entertainment (also all wholly or largely un-traded).

Interestingly, another 14 percent of the lowest-income group’s expenditures goes to transportation. U.S. oil imports are (lightly) tariffed. But assuming most of the poorest Americans don’t own, lease, or rent their own vehicles, the impact on their finances is surely minimal.

Add these numbers up, and clearly America’s lowest-income consumers spend hardly anything on imported goods that are subject to tariffs.

Moreover, here’s what the CEA economists completely ignore: The last few decades’ worth of trade policies they implicitly endorse here have wreaked havoc on the employment – and therefore incomes – of many of these same lower-income households.

Just look at what’s happened to domestic payrolls in two industries that used to provide jobs for many Americans who have no doubt fallen way down the income ladder: furniture and apparel. According to Labor Department data, since the North American Free Trade Agreement (NAFTA) went into effect in 1994 and ushered in the current era of U.S. trade policy, employment is down by more than a third in the former and by nearly 85 percent in the latter. Moreover, import- and offshoring-related job losses have been especially steep since China entered the World Trade Organization at the end of 2001 – as widely cited scholarship has emphasized.

As NAFTA also triggered a heated debate on trade policy in the United States, critics started printing up and handing out garments reading “My job went overseas and all I got was this lousy T-shirt.” Obviously, these are gifts that someone should have mailed the White House economists who suggest that tariffs have delivered the main trade-related hit to America’s poorest.

(What’s Left of) Our Economy: About that American Shopping Revolution….

Tags

consumer spending, consumers, consumption, goods, Great Recession, holiday shopping, hotels, recreation, restaurants, services, shopping, spending, {What's Left of) Our Economy

The final figures for the last holiday shopping season are in, and they seem to confirm a trend that students of the retail industry – and lots of retailers themselves – claim is becoming dominant: Shoppers are spending more and more of their dollars on services – especially those that offer “experiences” – and fewer and fewer on goods.

This Washington Post article handily sums up the evidence – both the data and the views of various retail executives and consultants. Even more telling, it describes the very substantial store closings recently announced by like companies like Macys. Nonetheless, if you look at the U.S. government figures on how Americans spend their money (as opposed to what’s sold by stores), the only significant increase visible in that “experience” spending has come over the last year. And so far, there’s no sign that it’s come at the expense of goods purchases.

The spending figures are found on the Commerce Department’s Bureau of Economic Analysis website, and they’re not only broader than the retail sales numbers (which are kept at the separate Census.gov). They also come adjusted for inflation. They show that, through the third quarter of this year, spending on restaurants and hotels and other forms of accommodation rose by more in real terms (4.45 percent) than overall after-inflation personal consumption (3.15 percent). But spending on “recreation” was up only 1.49 percent. And purchases of goods increased a relatively healthy 3.91 percent – also considerably faster than purchases as a whole.

But maybe the shopping priorities shift only becomes apparent if you look at the entire economic recovery? Not according to these statistics. Since the last recession ended in mid-2009, restaurant and hotel spending has risen by 17.45 percent in real terms – faster than the advance in total personal consumption (14.85 percent). But recreation services spending has increased by only 12.76 percent. And real consumption of goods beat them both – up 23.21 percent.

Nor is there much reason to think that the Great Recession ushered in big change in American consuming away from goods. If anything, quite the opposite. Since it began, in December, 2007, all real personal spending has risen by 11.71 percent, with goods spending leading the way with an increase of 14.94 percent. Restaurant and hotel spending is higher by just 10.54 percent – barely better than the increase in after-inflation overall services spending of 10.17 percent. The figures for recreation services? A mere 7.28 percent improvement.

And revealingly, the growth disparity between goods and the other spending categories is wider still since the start of the century. Between 2000 and 2014 (the last full-year data available), adjusting for inflation, restaurant and hotel spending increased by 25.51 percent, recreation spending by 27.67 percent, while goods spending jumped by 44.16 percent. The goods rise was also much faster than that for services overall (27.60 percent).

These numbers, in fact, challenge not only the claims about changing shopping tastes in the United States. They challenge claims about the entire economy being dominated by services. It turns out that that’s mainly true on the production side – where measured by real value-added (a different but comparable gauge) inflation-adjusted services output was up 31.87 percent between 2000 and 2014. That’s nearly three times faster than the real goods production increase of 10.98 percent. That is, Americans still buy huge and smartly growing quantities of goods. But more and more of them come from abroad.

(What’s Left of) Our Economy: Expect Imports to Keep Preventing Lift-Off

Tags

consumer spending, consumers, demographics, Employment Cost Index, health care, imports, manufacturing, medical equipment, National Institutes of Health, personal income, pharmaceuticals, recovery, retirement, savings, subsidies, Trade, Trade Deficits, wages, {What's Left of) Our Economy

Three new government reports have put the spotlight back on American consumers, and especially on whether they can quicken a U.S. recovery that continues to disappoint the conventional wisdom (though not me!). I’m no expert on consumer trends. But I do feel confident that whatever new vigor American shoppers start showing will provide only a limited growth boost – because so much of what they buy will continue to come from abroad.  As a result, this spending will generate more production and job creation overseas than at home.

The three reports I’m talking about were:

(a) yesterday’s preliminary reading on first quarter gross domestic product, which showed the economy slogging along at a pathetic 0.25 percent real annual rate;

(b) today’s reading on first quarter employment costs, which showed a decent (at least by recent standards) gain in wages and salaries (numbers that aren’t adjusted for inflation); and

(c) today’s report on March consumer spending and incomes, which showed the former up and the latter flat month-to-month. That made for the first monthly fall in the personal savings rate since November.

These results all reinforce a picture of the economy that’s gained traction in recent months – of workers doing somewhat better after years of stagnant, at best, incomes, and in fact getting a nice filip from falling energy prices but remaining cautious shoppers nonetheless. As a result, most analysts foresee a solid increase in spending and therefore growth for the rest of the year, as Americans open their wallets wide again.

As ever, though, and especially in recent years, the fly in the lift-off ointment is imports, whose scale and robust growth has greatly weakened the longstanding relationship between what Americans consume and how fast the economy grows. For despite the endless talk of the United States being a “consumer-driven economy,” it’s production that fuels GDP growth, not shopping.

As I wrote yesterday, the trade shortfall has grown fast enough to take a big bite out of growth since the last recession ended, in the middle of 2009. But yet another news item today helps illustrate how the process works. It’s a Fiscal Times piece claiming that fully 20 percent of U.S. household spending now goes to health care services and medicines – up from six percent in 1960. According to another calculation, that works out to more than $8,000 for every man, woman, and child in the country.

Since most health care spending winds up on the services side, that’s actually good news as far as growth itself is concerned, since nearly all of these services are supplied domestically. Yet when it comes to health care products, it’s another story entirely – as can be demonstrated by looking at trade balances in these sectors.

In a phrase, they’ve worsened greatly since 2000. In fact, a $9.71 billion deficit more than quadrupled to $46.78 billion by the end of last year. Some health care-related products have excelled – e.g., surgical and medical equipment and laboratory instruments, which improved on smallish surpluses. But others, often thought to be among the nation’s technological and industrial crown jewels, have fallen flat on their faces – notably electro-medical equipment. At the beginning of the millennium, America ran a $1.21 billion trade surplus in devices like CAT-scan and MRI machines. But by 2014, this trade had turned into a $2.03 billion deficit. And the 800-pound gorilla in the health care manufacturing category is the pharmaceutical sector, which saw a $955 million trade shortfall balloon to $31.52 million during this period.

Even worse, demand for all these health care products is heavily subsidized by government. And the nation wouldn’t even boast a world-class pharmaceutical industry without the research and development performed by the federal government’s National Institutes of Health. So increasingly, Americans’ tax dollars are being used to create and expand markets for products supplied by foreign factories and workers, and in many cases to create products themselves whose manufacture is offshored by U.S.-owned firms.

To add insult to this injury, thanks to a combination of those government subsidies and an aging population (in many foreign countries, too), health care is among the most promising future manufacturing growth markets. If the vast majority of these products were made in America, the employment, wages, and output would stay in the United States, and fuel more growth that’s healthy. On top of a recovery that’s faster and more sustainable, the resulting health care manufacturing boom could take some of the expected economic and financial sting out of the nation’s looming demographic crisis.

But because of Washington’s indifference to where goods are produced, and widespread ignorance over what really fuels prosperity, much of this golden opportunity will be squandered, and health care will be yet another sector where America’s spending bucks keep generating less and less vital growth bang.