Today the employment report was released by the government’s BLS showing unemployment dropped to 4.1%. This occurred only because of a massive number of discouraged jobseekers who dropped out of looking for work. The Labor Force Participation Rate dropped from 63.1% to 62.7%, which is more than the percentage improvement in unemployment. There is no wage inflation when compensation costs are covered by increasing productivity. Unit labor costs fell 0.1% YoY rate. Most of the loss of jobs to EM low wage countries is hurting the least skilled people who are inherently less productive than highly skilled people. If there is a predominance of highly skilled people remaining in the labor force and they are increasing their productivity then
The proposed tax cuts offered today in Congress are not a huge game changer that will stimulate the economy and trigger inflation. Regardless of which party is in power, the problem is a bipartisan problem, that the country’s excessive debt and government spending commitments mean the government is trapped and can’t afford a serious tax cut. When people or a government have too much debt then they become debt slaves and are unable to engage in increasing consumption and instead have to labor long hours just to keep their credit score from crashing. The appointment of Jerome Powell to be Federal Reserve chief is an affirmation of a continuation of traditional Federal Reserve moderate bubble making policies. He will
Yesterday the “Bond King” Jeff Gundlach said the bond bull market is over since the ten year Note hit 2.4%. He’s has been concerned that rates will rise a lot. I disagree. I strongly believe in fundamentals rather than technicals. So what if a data point broke thru a line on a chart? The fundamentals for bonds are ultimately governed by unemployment. But unemployment data is misleading and unclear since people with fake jobs like independent contractors, temps, rookie Realtors with no customers, Uber drivers, waiters with a tipable job with a $2.50 an hour minimum wage are distorting labor market data. First these people lost a good traditional job, then they remained unemployed several years, and finally re-enter
Interest rates rose because of news reports that Congress might finally be able to pass tax cut legislation. The 10 year Treasury Note, now at 2.38%, has the highest yield since March 20, 2017. Fundamentally Congress is unlikely to pass a true net tax cut because the deficit is so huge and growing. Thus the “cut” will simply move money around from one taxpayer to another. For example, they could offer a cut but then raise “effective” taxes by reducing the annual contribution to a 401k from $18,000 to $2,400, thus costing some people about $5,000 in extra federal taxes and more in state taxes, since states usually conform to federal tax rules. Congress could cut taxes on high
The economic research firm ECRI wrote an article showing that wage growth can increase when the number of hours worked decreases. For example, when it is layoff time the boss lays off the weakest, lowest paid workers, because he prefers to keep the strongest, best qualified ones. This is called labor hoarding, which is useful for the company in case it suddenly becomes time to expand. Thus the weakening of the economy that leads to less hours worked actually raises average wages, creating a hugely misleading signal. When a worker who has suffered a devastating decline in employment opportunities seeks to reenter the labor force they will need to take whatever minimum wage job they can find instead of holding
Janet Yellen wonders why inflation remains low and why traditional metrics no longer work to predict inflation. I believe this is explained by structural changes over three eras since the 1929 crash. The first era was during the depression of 1930s and continued through to the great inflation era of the 1970’s business managers were very cautious not to over-expand their businesses and thus there was a tight correlation between wage inflation, and economic growth, etc. The second era was when people got used to the 1970’s inflation they forgot some of the lessons of the Great Depression and began to take on more risk. But even then, they still made reasonable decisions not to unduly over-expand their businesses.
Today’s retail sales report by the Commerce Department’s Census Bureau showed sales were down 0.2% from the previous month. The best indicator for consumer spending is restaurants and that dropped 0.6% and has not been positive in four of the past five months. Core inflation, ex-rents or owner’s hypothetical rent, is 0.6%. Since many homeowners have fixed costs or no mortgage then they would be experiencing an inflation rate of 0.6%. Based on an old rule of thumb that the ten year Treasury yield should be equal to nominal GDP then, assuming inflation drops to 0.6%, and GDP comes in at 1.3% then nominal GDP would be 1.9%, thus justifying a sub 2% yield. The yield is 2.32% today.
Clearly the Fed is tightening, raising short term rates, to fight the stock market bubble and not because of inflation. It is inevitable that it will end in a recession as did other acts of Fed tightening. The Conference Board’s labor conditions index “jobs harder to fill” will provoke the Fed to raise rates when data released is released next month. Rates went up today because of a slight upward revision of GDP. This is normal for GDP to get revised several times. I think the new paradigm is that real reference rates (Treasuries and Fed funds) return to more normal levels, because it was a dangerous deflationary mistake for central banks to make real rates so low, and
A key component of CPI inflation is rent. 62% of “rent” comes from owner-occupied homes that the BLS uses to calculate a theoretical “owner’s equivalent rent” and is not actual rent. This figure comes from estimates offered by naïve homeowners who get surveyed by the BLS. These homeowners look to actually rented comparable buildings to estimate what their hypothetical rent should be. The fair market value of rent on owner occupied homes should be higher than that of a generic apartment house since they are better quality properties. If the affluent upper-end rental properties suddenly experience a sharp drop in rents then this change will influence owner-occupied hypothetical rent. In recent years much of the new construction of homes and
Regarding the recent GDP data issued 4-28-17, the Q1 oil drilling investment capital expenditures (some 0.4% of the economy) was up 450% annualized, which is why investment in non-residential assets went up 22% annualized in Q1. This would have been zero, except for the sudden burst of economic activity in drilling for oil. The other 99.6% share of economy that was not in oil drilling investment had no growth. The GDP for the quarter was only 0.7% annualized instead of the usual 2% range. Real GDP would have been flat if not for the recovery in the drilling sector. Recently more evidence has emerged of a lower breakeven cost level (possibly at the high 20’s a barrel instead of