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Friday, April 04, 2008

Employment Lags This

The Rockefeller Institute publishes an extremely good dataset which follows three major categories of state tax revenue - personal income tax, corporate income tax, and sales tax receipts (but not motor fuels). It adjusts the raw receipts for changes produced by legislation, and it then adjusts for inflation. The numbers are published quarterly here, and the latest figures are for the fourth quarter of 2007:

Click on the graph for a larger version. 2007 is on the left, and on the right it begins during 1991. That big collapse in the left middle is the result of the 2001 recession. By this measure, we moved into recession in the third quarter of 2007.

However gross private domestic investment started going negative YoY at the end of 2006. By the end of 2007 both were diving well into negative territory. The two vertical bars on this graph are points at which it was clear that the economy was probably entering recession. Gross private domestic investment is volatile and can go negative in a mid-cycle slowdown, but when it does incomes and spending must remain high. We haven't had the necessary figures for two years.

Since then, the European economy has generally shown signs of weakening, Japan's economy is slow or declining, and growth in Asia has definitely dropped.

All of this comes well before we get serious about dealing with some pressing international problems, although odd allies are popping up as oil pressures create internal domestic problems for other countries.

Needless to say, the effects on employment are now trickling through. The household survey reported the loss of 24,000 jobs, and the establishment sector reported the loss of 80,000 non-farm jobs. The official unemployment rate is still only 5.1%, but alternative measures are rising somewhat faster.

I hate to deal in anecdote but in this case I have no choice as the data is deliberately concealed. SoCal appears to be shedding jobs rapidly. The large casual economy is just masking the effect. We are pretty close to having squeezed the casual economy so when the formal jobs contraction starts showing up it will be sudden and deep in continuation of a trend
That makes sense.

I don't know that anyone is concealing reality. The B/D adjustments make employment indicators quite uncertain during trend changes.

Rob, I think it is mostly incomes vs inflation. A lot of people live on moderate incomes and spend a relatively high portion of after-tax income on food, fuel and medical. Those people are just not able to do the discretionary shopping. You can't cut 10% effective off the incomes of over half the population over a few years and not expect to see that show up in services.

The debt explosion is what kept this from dropping out earlier, but now it will be a multiplier on the services side. It's not a pretty picture.
And another thing - there is no doubt that the global factors leading to suppressed inflation before are now leading to increased inflation. The fundamental driver of the consumer side economy is not susceptible to Fed policy, or ECB policy, etc.
My once every two weeks housekeeper bought a house Sept 2006 for about three times what I paid in 1995 for roughly 1/3rd the amount of house. $650,000 houses to green card casual employment housekeepers was my Joe Kennedy shoe shine boy moment. The mortgage on my nice and safe but unostentatious house is now what a small one bedroom apartment in a marginal neighborhood rents for. Trust me, there is a huge underground economy in places like SoCal. I hire landscapers regularly and they are an interesting market snapshot. A lot of the work they've been doing for years is drying up but they are also cutting into the edges of the formal construction market as times get tougher and also as so many of the blatantly informal workers leave for cheaper places and/or better job prospects. This is a classical buffered solution in chemistry. You can keep dropping acid with no visible effect until suddenly poof the pool turns blood red with the very next drop.

You can't talk about this formally because you have acknowledge that there is such a pool of mobile and adaptable workers in your community. do that and you are on the hook for a lot of difficult public policy scrutiny. We have 22 translators on county rolls. They translate Mixteca to Spanish and back. No English necessary. They do this at the free public health clinics and other social services outlets.

Nice chemistry analogy, I wonder if the surfeit of derivatives in the markets isn't creating a similar situation...things appear steady as she goes until the titration hits the critical point.
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