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Tuesday, April 12, 2011

Almost The First Time I've Grinned Ear to Ear Since 2006

This is just sweet.
Treasury Receipts (HI = Medicare Tax, charged on all wages and salaries)
HI March 2011:
Wages: 14,455
Self: 232
Total: 14,687

HI March 2010:
Wages: 13,601
Self: 349
Total: 13,950
Very consistent with February, btw, and it very clearly the result of renewed raises. In comparison with recent sad history:
HI March 2009:
Wages: 14,308
Self: 394
Total: 14,702
HI March 2008:
Wages: 15,013
Self: 454
Total: 15,467
HI March 2007
Wages: 14,425
Self: 476
Total: 14,890
So we made it almost back to 2007 levels, but we've also almost crossed the two-year increase finish line. Employment and wages tend to peak after a recession has already begun. They do tend to pop a bit when we have higher inflation rates.

The low self-employment number is a bit confusing.

In fall of 2006 I went to a bank to do an audit/walkthrough. It wasn't related to loan quality, but in the course of it I did locate this bank's loan files, and when I saw the ratio of commercial to consumer I knew. The bank was dead. (It has since met its official demise.) We had already been discussing a 2007 recession on various trends, and we were already sure that loan quality(collapse) was going to be a very bad reinforcing factor, but it wasn't until I walked around that bank that the likely extent of it truly hit me.

I could hardly even speak going home. It was almost like getting one of those phone "your dearly-loved is dead" phone calls. I was in a state of what I can only call shock for over a week, and when I emerged from that shock I was in a state of mourning, and this day marks the end of that grief.

It doesn't, btw, mean that we will not subside back into a contraction. Depending on policy decisions and the degree of reality recognition out there, we probably will, and it will start either at the end of this year or in 2012. But what these numbers mean to me is that we may be limping, but we are now strong enough to walk and over time the economy should get stronger.

I've been on tenterhooks for a month; some indicators have turned and started south already, and the Japanese tragedy is going to impact both the US and Chinese economies. So the future picture really depended on where we were now.

It looks to me like we are strong enough to get stronger without artificial life support, and it is the first time in almost five years that I've been able to say that.

Looking at commodities, the leaders have turned and backed off, so we will we just have to wait and see what happens. We have crossed the recession line of over 60% of households with declining real incomes, but it takes time for that to produce an actual contraction. So we have time to mitigate the next leg. Maybe we will and maybe we won't.

Because the US could face a future like Ireland's or Greece's if we don't stop playing with the funny money, we'd be well advised to adapt toward reality on the fiscal issues now, and stop trying to artificially boost GDP. A four to seven months of contraction is nothing compared to what we could be facing if we let this run a few more years.

The thing is that there are two parts to the price increases we are seeing. One is fundamental and inescapable. There was a long-term deflationary impact from shifting production into emerging countries which supported real incomes for over a decade in more developed countries. Now that pendulum is swinging back the other way. We shouldn't try to mitigate the effect (other than supporting people so they don't starve in the street), because doing so will only make the structural impact worse.

The other part is purely monetary/sexpectation. It's speculative; the trends in diesel seem to show that the first edge of that wave has already hit and is suppressing demand pretty strongly. In the US, the belief has been that the Fed will continue to put money out there after QE2 is officially over to support asset prices. I hope not. If the Fed does, probably the spec element won't be knocked out until late summer.

A whole cohort of younger people got economically knocked out in this epic downturn. They would normally have graduated, gotten jobs and started consuming. Their lives have changed forever, but as things improve they will recoup, and by mid 2014 they'll start to come strongly into play.

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we'd be well advised to adapt toward reality on the fiscal issues now, and stop trying to artificially boost GDP.

We're not going to fix the leaky roof because it's not leaking since it stopped raining.
I do not understand your observation that we are almost back to the levels of four years ago, when the observation is based on numbers not adjusted for inflation/deflation. If there has been two percent per year inflation on average then we would have to be eight percent above 2007 levels in nominal terms to be "even." What adjustment do you believe is appropriate to convert 2011 nominal dollars into 2007 dollars?
This is good news. However, I would be cautious in taking it as a trend. Accrued bonuses to executives has to paid by March 15 for them to be deductible in the prior year. This could be another example of the high income population receiving another boost. I am still seeing a lot of companies experience loss of US employees being replaced by new India hires.
Gregg - A very good point, and indeed at the current time, even with these figures, well more than half of US households are experiencing real income drops. As I noted in the post! Nor is that a guess; the profit margins in groceries bear it out.

However, getting back to nominal growth is a big step. We briefly made it last year and then turned back to YoY drops.

In terms of overall income, personal transfers from government have produced personal income increases in the US, along with a growing fiscal imbalance.

The significance of getting back to increasing nominal wages and salaries is real, however. While you still have nominal drops your fiscal position is doomed to degenerate.
Somebody better tell the Fed. I was at the Yellen lunch yesterday, and they got their foot locked on the gas pedal. There's some poem Churchill liked about the trainman being asleep at the switch.
Well CF, they are swinging at a tether ball now. If they smite the ball mightily again with the Fed bat the thing's just going to swing around the pole and bop them in the head from the other side.

Ya gotta know whether you are playing baseball or tether ball. In this case, not only is the ball tethered but the batter's also tied to a stake so he can't even duck much less run the bases.

Did you at least make some tactful comment about how you find you can't eat just one iPad because they are so deliciously crunchy? Like Pringles.
This is good stuff, but it just puts me back to worrying about the eventual federal debt crisis.
Re the FED:
When your only remaining tool is a hammer, all the consumers get nailed.
Unfortunately I was not allowed to ask questions at the lunch. That was reserved for the likes of Henry Kaufman and Ed Hyman. Equally refreshing was that the Fed Vice Chair doesn't understand how deferred futures contracts are priced, but we'll leave that for another rant.Allow me to share this with you;

"Who is in charge of the clattering train? The axles creak and couplings strain, And the pace is hot, and the points are near, And sleep has deadened the driver’s ear; And the signals flash through the night in vain, For Death is in charge of the clattering train."
The entire poem appears in this issue of Punch (Oct 4, 1890).

It helps to know that "points" is Brit-speak for a railroad switch.
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