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Tuesday, September 28, 2010

I Do Have Some Good News

One of the reasons I believe NBER felt safe in pegging the end of the recession was that wages crossed over into a yearly gain in August. Using the medicare (hospital insurance) tax receipts from the Monthly Treasury Statements:
This graph shows the one, two and three year rates of by month since January 08 (the first month of recession).

Right click on this thing and open it in a new tab or window. The blue (dark continuous) line is the one year (YoY) change. We broke the Zero Barrier in August.

Because HI tax is charged on all wages without a cap, it is a very accurate measure of changes in total wages. The orange (dashed) line is the two year rate of change. We have a while to go to get back there - it is improving only slowly. The third lighter (dotted) line is the three year change, and that has not yet quite made it home. You note that

The time of the recession according to NBER was peak 12/07 (end of growth cycle and beginning of recession cycle) to 06/09 (end of recession cycle and beginning of growth cycle). That's 17 or 18 months, so the two year line crosses the real YoY trough. You can make a stab at assessing this by seasonally adjusting the wage data, but I only do it by M_O_M quarter (yes, I have my own calendar).

I have a different, earlier start date for this recession. I have the recession beginning between the second and third quarter of 2007. If you look at the three year line on the graph above, you'll see that it comes back to zero this summer and then drops again. The three year will oscillate for a bit because in the second half of 2007 we were oscillating. Here's a long time series of wage changes since 2006:

It's very important to remember that this NOMINAL rather than real. Therefore the real YoY and multi-year drops are greater.

There's lots to look at in the first graph above. Note that in 08 (bonuses paid for 07) there is still a hefty hike for February, which represents mostly bonuses related to financial jobs. That's why you see two more spikes down in the beginning of 2009 and 2010. But barring those spikes, the one year rate of change described a slow fall and has been consistently climbing for months. This is all the more impressive because we have had the fall out of the Census jobs and the end to the housing tax credit. The housing tax credit does show up in this graph a bit due to sales commissions for brokers and realtors, but by this August that should have been gone too.

Here is a graph of the underlying data by year (using Medicare Hospital Insurance receipts for wages and self-employment). I worked very hard to get the colors so gloriously ugly and yet so clear. Note the yellow/orange sequence for 2006/2007 ties up with the red for 2010. In 2006 we dipped basically on industrials. Then we kind of powered out of that for about a year on a last desperate wave of credit bling, but the mortgages were already failing at the beginning of 2007. So our doom was clear.

It is so very strange to see a multi-year drop in wages. We have not seen this sort of thing in post-WWII recessions.

Because we never have had this before, it is very hard to use monetary policy to produce strong growth.

We have an income problem, a fiscal problem and a credit overhang. It rather seems as if the Fed has tended to produce asset speculation of late with loose monetary policies, because incomes for the general population are going to be mostly influenced by job growth, and since the general population is still over-stuffed with credit, it is difficult for creditors to lend and consumers to buy on credit. So instead of people buying stuff, investors use the extra money to buy stuff that they think eventually will be needed. But then the stuff gets too expensive for people to buy, and the investors have to go look for stuff abroad.

Without the ability to pump money through the population, you are left with Keynesian options which are basically direct income subsidies.

Worse yet, the further down the Fed pushes T-Bill yields, the further down the Fed pushes interest incomes. The wage/credit ratio of the general populace is such that the general populace can't invest in much for the higher incomes. But you can expect the threat of QE2 to support stock prices somewhat as T-bill yields drop.Here our older population comes into play. An increasingly large portion of the population derives a good chunk of its spendable incomes from interest income. Cutting interest income cuts their spending.

Since banks can't lend, throwing money into the marketplace doesn't produce the direct economic stimulus that it did, say, in the 80s. It does seem to induce waves of commodity speculation, but that just cuts real incomes for the majority of the population.

So my guess is that the Fed cannot avoid deflation. Only a shift in fiscal policy can avoid deflation, and there the options are very limited. Tax receipts will slowly rise on a nominal basis, but federal spending due to retirements alone will rise far faster. Borrowing (unless you intend to default on the debt) always cuts future spendable income. If you ratchet up our borrowing much more in the near term, you will wind up producing a staggeringly massive deflation just a few years down the road. By "a few years", I mean within a decade.

And you clearly can't raise taxes significantly next year on most of the population. It would cut money circulating in the economy enough to throw us back into contraction, and no, the Fed can't fix it with monetary policy. The only thing QE2 will probably accomplish will be to lower the dollar somewhat and help exports a little. But until domestic energy and taxation policies are fixed in such a way that domestic companies feel secure in future projections, they won't capitalize on that much. Instead, the lower dollar will increase prices on import goods enough to cut real incomes.

The other thing that just jumps right out at me is that the duration of this has placed a limit on the standard fixes. Because previous post-WWII recessions were of shorter duration, banks could really use the lower current interest rates to get a surge in incomes (their cost of funds fell much faster than their returns on loan portfolios). But with this effect gone, net interest margins for banks are additionally constrained. There is a fixed cost of funds on deposits, etc (there is a servicing cost on deposits, especially small deposits, which is not insignificant).

After a certain point, interest rates which return below inflation are deflationary, and very much more deflationary combined with high marginal tax rates on investment income, especially corporate/business income. That sends capital outside a country. And that is yet another countervailing force that QE2 will encounter. If the Fed dumps money into the pockets of investors, they probably will take some and bid up commodities and take some and invest it elsewhere, which will not drop the value of the dollar. Demand for carry-traded currencies tends to be pretty high.

The US could probably do very well in future growth if it were to adopt business-friendly energy, taxation and environmental policies. Yet we have no constituency pushing those policies, and even most our larger companies have switched to lobbying for business subsidies from the government.

With good news like that who needs enemies! ;)

So instead of people buying stuff, investors use the extra money to buy stuff that they think eventually will be needed. But then the stuff gets too expensive for people to buy, and the investors have to go look for stuff abroad.

If I have to look abroad to add to my toilet paper and canned goods reserves we're going to be in SERIOUS trouble, lol. Sigh.

I also have good news though. Ken Fisher says the "new normal" idea is idiotic and that the world has become "snarky". Woohoo!

Ken Fisher's Idiocy (Musical Tribute)
Well, you can see why I would wait to publish those graphs until we had broken the Zero Barrier. One would not want to cause suicides.

Ah, yes. Ken Fisher. I find that man so irritating....
Who can forget Ken Fisher's Housing Boom story in 2007? I can't.

January 26, 2007
Housing Boom!

Don't buy it. For months now the debate has been over whether America will have a hard landing or soft landing, the answer hinging on how big 2007's housing disaster turns out to be. Well, there won't be any housing disaster. We won't have a landing at all, soft or hard.
It would seem to me that with poor money velocity,
revenues should drop, putting pressure to cut expenses. Rinse and repeat. Something has to break the cycle. Eliminating the payroll tax and replacing it with a tariff on finished goods would reset the board
on our favor.

"Look, I'm pretty much an average woman."

Riiight. An "average woman" with her own calendar.

Used to be you had to be an empress or a pope to have your own calendar!
Yet we have no constituency pushing those policies, and even most our larger companies have switched to lobbying for business subsidies from the government.

This is what worries me. We're about 5 to 10 years away from the point where massive private investment in new energy systems will be productive. If we get there and the capital markets are all tied down with rules, the U.S. will simply miss out on the next industrial revolution.
Just my humble opinion, but one of the most important things the next administration could do is adopt an industrialization policy. We need to get back in the business of building things.

No subsidies, just lower corporate taxes (on all business). No preferences, just a determination that we need to do everything we can to make it easier and less expensive to manufacture here.
Gordon, I'll second your opinion.

That and a renewal of our extraction industries. Open up all the offshore areas and ANWR for drilling. Simplify and speed up the permitting for nuclear power plants. Quit trying to send the coal mining industry into extinction. Restart logging in the Pacific Northwest. Trees are a crop just like wheat. The Spotted Owl has been found living quiet happily in (gasp) new growth forests. So, that old chestnut has been roasted.

Even an administration that sounded business friendly would help a lot. Obama attacks the bankers, the doctors, the dentists, and small business people just about every time he gives another of his sermons on why
he has to raise taxes. If he'd just shut up that could increase confidence. Oh yeah, I forgot, Obama thinks constantly about how to get job creation going. My bad!
Jimmy - if he DOES think constantly about it, he's getting the wrong answers.

I know these graphs aren't terribly encouraging if you haven't been working with the data, but they are showing a long, slow improvement.

Perhaps we could try to capitalize on that instead of chasing rabbits.

Would changes in the benefit side of compensation
alter the graph ? What about reduced 401k contributions ?
Add to that 401k withdrawals.
Sporkfed - no, this is just wages. It doesn't include SS benefits, savings, benefits etc.

And also remember that this is nominal. If you correct for inflation the wage drop is worse.

If you correct for higher copays/insurance shares and drops in other benefits it is worse.

But if you are thinking about incomes, there has been a big increase in SS benefits (paid to more people) and social benefits, including unemployment. Admittedly, interest income has dropped, but the increase in social benefits so far probably outweighs that.

However what next? Because people are losing unemployment benefits without getting jobs, and it seems likely that unemployment will not improve that much in the next few years without further domestic investment.
I wouldn't celebrate just yet. High income earners are pulling income forward/ taking more out of the business this year to avoid the tax increase. This will speed up closer to Dec. Also the Aug YOY looks like an easy comparison.
Jimmy - when I used the phrase "chasing rabbits" I may have been unclear. I mean all the funding for things that are very unlikely to provide long-term benefits.

I'm with you - I think we need to step back and rationalize our economy. We can clip off the worst of this without sacrificing the environment. It is not as if Canada is a garbage heap.

I also think we need to invest heavily in more nuclear and rethink the hydropower issue. I think we need to build new large projects, and I think it can be done safely and effectively.
Anon - it is an easy comparison, but we have seen a slow steady improvement over the summer.

If you look at those graphs, we have a very long way to go! They are not the most optimistic looking items.
M_O_M, I agree about nuclear plants but disagree about hydro plants. Current-generation nukes would be relatively inexpensive to build if we were to reduce the licensing and lawsuit barriers. They're also very flexible as far as siting requirements and reliability of power delivery.

Even if we lower the regulatory barriers, hydro is just plain expensive to put in. That's largely due to the increase in land values in a lot of the really good locations because of a change in recreation habits. The recreational reservoir used to be a big positive to a dam, not so much now. There's also seasonality and droughts. In some locations hydro is reliable, but most of those locations already have a hydro dam. I'm skeptical...

Jimmy - when I used the phrase "chasing rabbits" I may have been unclear. I mean all the funding for things that are very unlikely to provide long-term benefits.

Although my girlfriend is unemployed and is receiving checks (at least in theory, she is *owed* money anyway), I think we need to get out of the mindset of sending checks to those without jobs who could be working.

We should be giving these people jobs! Any job. At the very least, it could be simply going to the library, reading a book, and taking a quiz in order to get an unemployment check. For those who can't read, it could be attending classes that would teach reading skills. The classes could be taught by unemployed teachers. The classrooms could be built by unemployed construction workers.

At least that would be *something* productive. Just a thought.

I was unemployed several times in the past. I turned down a $10 job once simply because I was making nearly that much in unemployment. My "job" was pretty much taking my dog to the park and flying a kite while also looking for work. Had unemployment been a real job I might have looked a bit harder. Shame on me but that's how the system works.
Neil's right. Most places where it would benefit you to put a dam, there is a dam already. The places where there isn't a dam, there's usually a good reason for not having one.

On a personal note, I've gone from 80% full time six weeks ago to overtime now. Seems like the customers have decided "screw it, I gotta get this done" and are going ahead with the high ROI projects now, instead of sitting on ALL projects (which is what they had been doing).
Mark-- I think we'd be better off turning unemployment insurance into a time-limited negative income tax. That way, it would behoove people to take minimum-wage jobs when they're on unemployment. The stipend goes away when they get a job paying more than $X or after some time period.

I shudder to think what Washington D.C. would come up with for make-work projects if we allowed them the opportunity.

"I shudder to think what Washington D.C. would come up with for make-work projects if we allowed them the opportunity."

Hoover dam? Interstate highways? Moon landings?

Hot Dam! The Hoover Dam Turns 75

Ken Rice, who manages the dam, thinks he understands the appeal.

"I think success. Power. I mean you look at Hoover Dam, 75 years doing what we've been doing for 75 years, storing that water, deliver that water and creating power, you know that's a story of success," Rice said.

Interstate Highway System

As of 2006, the system has a total length of 46,876 miles (75,440 km), making it both the largest highway system in the world and the largest public works project in history.

Apollo program

The Apollo program was the American spaceflight endeavor which landed the first humans on Earth's Moon. Conceived during the presidency of Dwight D. Eisenhower and conducted by NASA, Apollo began in earnest after President John F. Kennedy's 1961 special address to a joint session of Congress declaring a national goal of "landing a man on the Moon" by the end of the decade.

I'm not in the camp that believes *everything* the government does is bad. I trust government at least as much as I trust private companies such as Citigroup and Comcast, which I will freely admit... isn't much.
Under our present administation, it would be very difficult to build Hoover Dam or begin the Interstate Highway project. The reason? Extreme environmentalism. It would take years to get the permits and do the environmental impact statements. Same thing with even building new trails and campgrounds in the National Parks.

This economy will continue to contract until we can get the big Green Monkey off our backs. Sensible environmental regulation is fine. Few people, certainly not I, would object to it. We passed the point of reasonable regulation after Reagan's last term. The Greens have slowly but surely driven our extraction industries down. The AGW hoax has been a major part of their plan to stop industrialization and micro manage our lives. They can use the Endangered Species Act to tie up any project they don't like. And they don't like anything that makes life easier or better for large numbers of people.

Oh, I forgot. (Smacks forehead!)Obama put millions to work "weatherizing" homes. What a scam! I saw all this during Carter and the first oil embargoes in the 70s. Caulking homes is a good idea, but any competent home owner can spend $50 on caulk and do it themselves. It is not something that creates new jobs. Oil exploration, mining, logging, and building nuclear power plants all create good paying, lasting jobs. And, as MOM says, it hasn't ruined Canada.

One last point. In a study done in California back in the 80s, it was determined that every new household with a decent income created five new jobs in the community. The study was done to decide if it was a good idea to attract new industry in cities in the state. I guess they junked the study or it is sitting on a shelf somewhere accumulationg dust. They sure don't seem to be following it.
Yeah, what Jimmy said. Sure, the examples Mark gave were great--and let's not forget things like the Rural Electrification Associations, the state Farm Extension Services, and the USDA and FDA (when it was young). Unfortunately, our government (under any party) is no longer capable of doing anything remotely that great. It's been thoroughly captured by interests who have a strategy of gaining power by reducing the size of the pie and making us all fight for the scraps.

I'd feel much safer just letting people find useful work for themselves, and progressively scale back the unemployment payments depending on how much they get paid. At least if it's private-sector work, it's probably making a profit that will get re-invested at some point.

If I may paraphrase the philosopher: you fight the recession with the government you have, not with the government you wish you had.
Jimmy J.,

My girlfriend was pointing out a reader comment in the October 4th issue of Time magazine as I was reading yours. It is the only comment all in bold and supports your view of our messed up regulatory system.

"We allow people to buy cigarettes and alcohol. For criminy's sake, slap a warning label on it, and let 'em drink raw milk!" - Barbara Foster

It was in response to a raw milk article in the previous issue.

"If I may paraphrase the philosopher: you fight the recession with the government you have, not with the government you wish you had."

I agree. Unfortunately, we are also fighting the recession with the corporations we have, not the corporations we wish we had.

We're all getting what we should expect. It is a prisoner's dilemma. I am personally rewarded by shopping for cheap goods made in China, but perhaps not if we all do.
Regarding dams, I bet you could still do Tocks Island.

I don't think we have a lot of opportunities like Boulder, but we do have some opportunities.

We are spending tons of money for no return over time (or negative return). Let me just take a cynical banking view and suggest that we put some of that money into something that will return.
Regarding the "Big Green Monkey", it is a matter of moderating the situation. No one wants to go the other route and become China. There is a huge space in the middle though.

I was talking to a cousin of mine recently. He is a lawyer at DOJ and has been working on environmental cases for donkey's years. He brought the issue up - not me.

He told me that he doesn't think we can ever get our situation under control until we change our legal structure. As it is, anyone can sue to stop just about anything on environmental grounds.

We don't have an environmental policy or an energy policy. We have a court system and a bunch of wild-eyed fanatics. Thus we have no industrial policy.

But - to come back to Mark's complaints about companies - what type of industry have we mostly left open for them? You can't build a new chemical plant or refinery in most places. Existing plants are increasingly being mandated out of existence.

You know, if building plants just leaves you hostage, no one is going to do it.

"We don't have an environmental policy or an energy policy. We have a court system and a bunch of wild-eyed fanatics. Thus we have no industrial policy."

Cost benefit analysis debates are virtually impossible with wild-eyed fanatics. Sigh.

My personal pet peeve from roughly 20 years ago:

CPSC Bans Lawn Darts

If we were to ban everything that kills children then clearly we'd need to ban water too.

Accidental Death -- Do you know the risks?
Seems like the customers have decided "screw it, I gotta get this done" and are going ahead with the high ROI projects now, instead of sitting on ALL projects

I'm seeing something similar. The projects that have ANY ROI in 1 year or less are getting the go-ahead, anything with ROI starting after 2 years is shelved unless the bulk of the payments are after year 2. Most vendors won't bother because they need cash flow and they can see the piled up bills getting renegotiated.
MOM, I am sorry, but I am not convinced or even leaning in your direction. This post from Mish shows that the income gain is pretty much all from deficit spending and that spending cannot go on.


The charts are devastating. All the government is doing is making things a lot worse in the future for a status quo now.

Trucking fell off the cliff this month. I expect rail is acting the same:


To add to the woes, Bill Gross at Pimco is pointing out bond yield problem coupled with the total national debt that makes it possible to currently finance that debt. If we were to get to normal bond yields, the government will immediately go bankrupt. Denninger talks about that here:


Meanwhile the band plays on that stock market keeps going up. I will leave you with a quote that summarizes some of the comments on this thread:

"... the biggest problem is the inadequacy of our political system to address any of these problems. Disguised as a democracy, the United States government is nothing more than the will of a few individuals who managed to lie their way into positions of power. Unfortunately, lying cannot solve the nation's woes."

Ramsey Su

It is raining tdoay in South Florida and I am pessimistic.
Rick - I saw the trucking data for August, but rail continues to roar:
The Association of American Railroads (AAR) today reported solid gains in weekly rail traffic, with U.S. railroads posting the highest intermodal volume for 2010 and the highest container count on record. For the week ending Sept. 18, 2010, intermodal traffic on U.S. railroads totaled 240,013 trailers and containers, up 16.9 percent from the same week in 2009, and up 2.4 percent compared with 2008. Container volume last week increased 18.8 percent compared with 2009, and rose 11.4 percent compared with 2008. Trailer volume last week rose 6.5 percent compared with 2009, but dropped 30.8 percent compared with 2008.

U.S. railroads originated 304,679 carloads for the week, up 8.1 percent compared with the same week in 2009, but down 2.4 percent from the same week in 2008. In order to offer a complete picture of the progress in rail traffic, AAR reports 2010 weekly rail traffic with comparison weeks in both 2009 and 2008.

Seventeen of the 19 carload commodity groups increased from the comparable week in 2009 with only waste and scrap and non-metallic minerals, both down 3.3 percent, posting declines. Metallic ores, up 94.6 percent, led those commodity groups with increases from 2009. Compared with 2008, all but six commodity groups posted declines. Leaders among the groups posting increases from 2008 were farm products excluding grain, up 23.8 percent; chemicals, up 23.5 percent, and grain, up 20.5 percent.

Weekly carload volume on Eastern railroads was up 8.2 percent from last year, but down 9.1 percent from 2008. In the West, weekly carload volume was up 8 percent from last year and up 2.7 percent from two years ago.

For the first 37 weeks of 2010, U.S. railroads reported cumulative volume of 10,527,927 carloads, up 7.1 percent from 2009, but down 12.4 percent from 2008, and 7,941,287 trailers or containers, up 14.6 percent from 2009, but down 4.7 percent from 2008.

Speaking of the Big Green Monkey, the PJTV and the Washington Examiner are running a fivepart series on the environmental movement that's well worth reading.

Here's the link to one part which is a very well done video:
MoM & others, wonder what you think of this analysis of debt & interest rates:


First thing that strikes me is that it looks at government debt, but apparently not at *net debt* in that it is not offset by govt financial assets such as bailout loans at least some of which will be repaid.
MOM, I am baffled. How can intermodal be up on rail and trucking down. I can imagine some scenarios where the country suddenly decides everything should go intermodal, but that is unlikely.

Now, I look at intermodal as being shipping either trailers or sea containers via rail and then completing the journey via over the road truck. Perhaps my definition is too restrictive and there are some other intermodal options.

But, if not, I cannot account for the "disconnect" between rail and truck. They should move, at least in the short run, in tandem. Something is wrong here. I just don't know what.
Hmmm, rereading my post, intermodal could be filling a sea container at a plant, shipping via rail to a port and then exporting. So, if our exports suddenly went through the roof, trucking might not be impacted.

Last month we drove from South Florida to Charlotte and came back via Atlanta. I did notice a lot of trucks carrying sea containers. I didn't get a feel for whether the number of trucks on the road was increasing. But, since so many of the rail crossings in Florida are at grade, I have not noticed any increases in trains running through here. In the early 80's in Dallas, that was my clue the recession was ending: getting caught more often at railroad crossings.
Rick--intermodal: Imports frequently go by rail for the long-distance part of their journey, then by truck: so an increase in imports would increase the ton-miles measurement for rail more than for trucking.
But, David, we were talking about car loads and volumes, not ton miles.
Rick - I am not sure, but for some reason I have found the metals rail volumes to be very indicative of industrial activity.

Chicago PMI today would SEEM to bear this out.

That's a very solid report. Admittedly it is slower than earlier in the year, but new orders are up. At the end of that report, you get a page for historical comparisons. The mean for the overall index over 70-09 is 54.2. We are currently over 60.

The production mean/median is 57.5/58.7. We are currently at 64.3 SA. Inventories and backlogs are very close to their mean/median value ranges. Capital equipment is still WAY below mean/median values.

Everything isn't great, but according to the type of stats I watch and which showed me the initial 2006 industrial slump which led into all this, we are not currently falling off.

There are, however, over 9 million workers still on unemployment. By the end of Q1 2011, most of them will lose it, and that's when the crunch comes. Incomes are still a problem.

I have been doing some manual counts of trucking volumes, and I suspect that there may be a bit more capacity coming online which might be distorting the trucking values down a touch. Because the other thing I watch for a trucking indicator is diesel, and diesel is running very nicely up. The last four week period is up over 13% YoY. That's really exceptionally good under the circs.

So diesel and rail say one thing, and the flier is that August ATA trucking report.
You are much closer to the stats than I am. My take is more gross and I have a feeling of "flatness". The changes, to me, seem to lie in the statistical noise range. That is the way I feel about the new unemployment claims. We just seem to be in a range and things bounce up a bit and then back down a bit, but the the range is not violated.

I hope you are right and that we are seeing a slow improvement. We need it badly.
Rick - I think you are right that the end economic result is mostly "flat".

Even if you look at real retail sales, they have been in a flat mode.

But it is worth noting that recoveries from deep recessions do usually shift into "flat" periods on many different axes during the course of the recovery.

Your comment about the "noise" is astute. We are growing as far as I can see, but we are growing so slowly that tiny adverse changes in very isolated pieces of the economy show up as big bumps during some of these reports. Recent examples are initial claims, which really were shifted upward due to school-system layoffs, and before that in the spring some NY budgeting problems that laid off construction workers showed up in the employment report.
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