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Friday, May 18, 2007

As The World Turns Economically....

The most meaningful economic release today (Yahoo Economic Calendar) will probably be the Michigan consumer confidence survey, which is not all that meaningful. By far and away the most meaningful economic release of the month will probably turn out to be BLS BED. The most current release covers 3rdQ 2006, and it shows that the discrepancy between UI tax receipts and the regular employment surveys in 2006, which generated a correction of about 750,000 jobs in the beginning of 2007, seemed to reverse itself in late 2006:
Opening and expanding private sector business establishments gained 7.4 million jobs in the third quarter of 2006, a decrease of 397,000 from the previous quarter. Over the third quarter, expanding establishments added 6.0 million jobs, while opening establishments added 1.4 million jobs.

Gross job losses totaled 7.3 million, an increase of 50,000 from the previous quarter. During the quarter, contracting establishments lost 6.0 million jobs, while closing establishments lost 1.3 million jobs. (See tables A, 1, and 3.)
This will have major implications for corrections to the Birth/Death model in 2008, and it would suggest that employment this year is being overstated (whereas last year it was understated). For more discussion, see this post at Calculated Risk. My guess, which is no better than anyone else's, is that the negative trend picked up again in the second quarter of 2007 due primarily to continued declines in residential employment. In the third quarter, my guess would be that the trend would spread to retail establishments (rising unemployment among teenagers is probably the first signal of this diffusion, and we saw that clearly in the last monthly unemployment survey; unemployment among Hispanic teenagers especially shot up).

CR comments on his own post that the BED release may indicate that more of the economic impact of the housing decline has already been felt than was believed, and so the future impact may be less than anticipated. I don't agree; I think that employment was strong enough that approximately the first 200,000 - 250,000 of lost construction jobs would be absorbed naturally, and that losses after that will have a much greater significance for the economy.

Anyone who was interested in my post about Quincy Howe's World Diary 1929-1934 will probably find this article about the Spanish economic situation worth a read:
Spain's foreign reserves have plummeted to wafer-thin levels, leaving the country exposed to a possible banking crisis if the property market swings from boom to bust - despite membership of the eurozone.
(To me, the Spanish building boom seems already to be busting. I know some bank funding has drawn back.)
"The current account is completely out of control," said Alberto Mattelan, an economist at Inverseguros in Madrid.

"We have the worst deficit in our history and worse than any other country in the western world. It has not yet become a 'street concern', but I can assure you that it is of great concern to us economists. This will turn bad over the next 18 months," he said.
Mind you, nothing shows in the Spanish economic stats as yet, but in this type of boom cycle the correction tends to happen very quickly indeed.

I have written about the problem of needs inflation. I'm not the only one worried; Thomas Kee discusses the problem in a non-hysterical manner at Seeking Alpha, asking and answering the question of why the FOMC is so worried about inflation:
The concern isn't so much in the core level of producer prices or consumer prices, the concern is in the prices of food and energy. Food and energy make up the non-core components of the consumer price and the producer price indexes. These are extracted on a monthly basis and the result is the core levels of PPI and CPI. On a monthly basis these represent potentially volatile levels, and that's why they are extracted from this data. However, on a longer-term basis this is very important information to use in evaluating inflation.

Over the past seven years, the non-core components of the CPI and PPI have increased at about 37%. Inflationary pressures clearly exist in these non-core components. In the past seven years, the non-core components have increased on average 5.3% per year. From an inflation standpoint, this is an extremely aggressive level of inflation. However, most economists on a month-to-month basis discount the increases in the non-core components. That's a mistake longer term. The non-core components are what we depend on for a day to day living. Every month, regardless of economic environment, we need to spend money on food and energy. If the prices of food and energy are increasing aggressively, then our cost of living increases aggressively too.

The recent concern is about wages. With a low level of unemployment, wage pressures are at the forefront of the Fed's watch list, at least it seemed so during Greenspan's era. However, wage pressures have been tame compared to the prices of the non-core components. During a time when the non-core components increased by 37%, wages only increased by about 18%.
With a substantial group in our population experiencing stagnant wages and escalating living costs, it is really no surprise that levels of consumer debt have ballooned. Obviously, something's got to give. Wages for a large group of the population neither support increased living standards nor increased debt levels, although increased debt levels have recently allowed for maintaining a better standard of living than would otherwise be possible, because this type of debt can be used to defer living costs. But not indefinitely, and the lower income levels of consumer debt are showing the same trends as subprime mortgages.

Because the subprime (and Alt-A) mortgages have been used disproportionately as a means to enter the housing market, the subprime mortgage correction is causing a step down in effective housing demand. Over the next year, we are now going to experience a similar phenomenon in other segments of the consumer economy that are debt-dependent, such as cars and other discretionary purchases. The problem with funding current short-term consumption out of debt on a consistent basis over time is that it magnifies future economic problems. As it turns out, it was unrealistic to expect that people could fund new car purchases by rolling over debt on the previous car for very long. Nor can people continue to buy big-screen TVs on credit cards forever. Spending at restaurants is going to take a hit; retail employment and profits will be pressured. This will then flow through to some very high-paying jobs in companies that manufacture or market products like consumer electronics and business suppliers. Lower tax receipts for municipalities and states are going to force a retrenchment in state and local spending which will also restrain job growth and wage growth in these sectors.

The public policy issues raised by effectively understated CPIs for the elderly are now going to smack us right in the face. Less affluent retirees are in exactly the same boat as less affluent wage earners - a far higher percentage of their incomes goes to pay for fuel, utility and food than the norm. Therefore they are disproportionately affected by this trend, and demographics makes it particularly urgent to deal with the reality of high needs inflation. Raising gas taxes and subsidizing ethanol is worsening economic conditions for far too many people not to affect the overall economy.

If we understand these realities, we can make better public policy choices in the future. If we don't, we are pissing in our own beer and it will gain us nothing to then complain about the taste. Neither the Democratic nor the Republican party wish to deal with economic reality at present, but the population of the United States does not have the option to live in the DC/NY bubble world.


I agree with you on middl-income seniors being disproportionately affected. The question is why their lobby (AARP) is not defending their interest.

It could be that rising home prices, and now rising stock prices, are making their contributor base better off, and that is who the AARP must pleast. I wonder whether they get more or less equal contributions from each member or whether its more of an 80/20 thing. That would explain a lot.

David Pearson
David - the dues are the same. They make quite a bit off selling insurance, etc. But their income flow is basically a quarterly/annual thing, and I don't think they will tumble to this until much later. Remember, the older population is highly segmented and in general has better benefits. The big drop on those benefits is for those now ~53 and younger. It's quite a shelf on just medical care.

Anyway, almost all mainstream economists are ignoring the effects of needs inflation because for so long more efficient distribution (WalMart & Chinese cheap imports) have offset the trend. So it hasn't been a problem until recently, and mainline economists are going to take a while to wake up to what is really happening.

The growth in local and state government revenues and employment is another trend which has concealed the long-term trend. It's like looking at a bunch of sine waves in which a number of down cycles are now coinciding (in one five year band).

Did you look carefully at the WalMart profits? They were amazingly concentrated on food and drugs. WalMart is only sustaining profitability by tightening its inventory - at times too much. I had noticed light stocking last year in some supermarkets, in Target, and now it is clearly showing up in WalMart.
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