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Thursday, April 25, 2013


We now have enough data to say with some confidence that the worst the US should do the rest of this year is bounce back and forth between contraction and expansion. That, btw, would look like slow expansion.

We've been through spring break-age in the initial claims series, and we came out the other side with a very favorable NSA 323K, with a four-week moving average of 357K. Further, continuing claims continue to drop.

If anything, the current employment data should be slightly influenced to the negative by the bad northern weather, which has slowed construction. 

And just simulating income flows this year indicates that we have some strong tenacity at the GDP +1.5% level, because if you were born in 1947, you turned 65 last year. And if you were born in 1948 you turn 65 this year. SS retirements are really picking up - over the last three months (Dec-March) the SS only bracket increased 416K, and the total increased 450K. It's not going to slow down from here. 

You can't have such large withdrawals from the workforce without dropping unemployment, unless you are in the middle of a deep recession. And these withdrawals come with increased income flows due to retirement checks. 

Also, the exit from the workforce generated by each retirement is more than one - it's at least 1.3. A lot of older couples will have one working in part-time employment or low-level who also leaves when the main one gets that SS check. The net additional income flow on that 416K should be be over 4.5 billion a month. Over the year, that alone goes a long way toward offsetting the FICA increase.

Assuming that 800,000 additional retirees exit in the first half of the year, the net SS bonus in net cash flow to the economy should be almost 9 billion a month in the second half. Employment may be slack, but as people exit most of these jobs will be filled. They may be filled at lower wages, but they will be filled, and by the time you add the tax subsidies for working it equates out. 

Further, I am ignoring an average Medicare monthly bonus which must be at least $200 a month for all those turning 65 and qualifying for Medicare. Those who were paying for insurance on their own, which was probably about 30%, get a nice monthly income supplement. 

So on income flows alone, the US cannot go into recession this year barring something truly remarkable. I think the Fed's employment forecasts are idiotic and I think their forecasting is done on the macro level and makes no sense given the massive demographic shift we have operating. Of course Congress is trying to give us massive unemployment by importing 15 million immigrants, but we'll see whether they succeed or not.

Next year things get rougher, because we don't really know the impact of Obamacare, but I think the big negative there hits in 2015. 

What about consumer inflation? Well, interestingly, everything I have shows that average household incomes should continue dropping, indicating that consumers will be very price-sensitive and that only government subsidies for consumption categories (food stamps, government insurance) can keep inflation above the GDP growth rate. 

Therefore I think the Fed is a bit drunk and dangerous. Too many Okun's Law cocktails are being imbibed over there.  It would not be able to fuel consumer inflation even if it bought 300 billion of bonds a month. The only thing it could possibly do is create a recession, but first it would create another large asset bubble. 

NOTE: In this post, I am trying to roughly annualize the figures so that they can be compared with the figures used by the Personal Income and Outlays report.  Annualizing the figures in that report allows them to be compared with GDP figures, but of course it can produce some startling effects, such as January's reported massive personal disposable income decrease. When March figures come out this will make more sense.

"Therefore I think the Fed is a bit drunk and dangerous....It would not be able to fuel consumer inflation even if it bought 300 billion of bonds a month."

Isn't this precisely what they're counting on? In order to prevent a collapse of the Treasury market due to the deficit, they have to be the major buyer of Treasuries. They can only get away with this (politically and fiscally) so long as there's no self-sustaining consumer inflation spiral.

Happily (for them), the USG is obliging by acting to reduce consumer discretionary cash flow as fast as the Fed buys Treasuries.

Neil, but although the US housing market is going to be no great shakes for a while, at least it should be a net positive.

In a few more years, it should shift to more first time purchasers, at which time lending starts to expand the money supply pretty rapidly, doesn't it?

At that point, I cannot see how the Fed holds things down without raising rates quite a bit. But because the fundamental mechanism is mortgage lending, and because car loans are also rate dependent, then they get into a hammer effect.

No matter how much I try, I cannot get this system back into stability.

I can't even get home prices to stability. Right now there is so much investor activity that it is pushing out would-be buyers. We're already at the second and third deal stage, where small investors are selling to larger investors, and smarter investors are selling to dumber investors.


I gotta find me one of these dumb investors.

I agree, there is a time limit on the Fed's game. I also think they are checkmated. I notice that official Washington is determined not to fix the fiscal problems. The consensus this week is that the fact that Rogoff and Reinhart made an error in their Excel spreadsheet PROVES that debt/GDP has no bearing on economic growth, and therefore austerity is a fool's errand forced on unwitting voters by evil Republicans. Or something.

Yes, I've noticed that. We're all going to find out that endless debt is impossible. It will be a thrill ride.

The debt ceiling is currently in abeyance, but either Congress is going to have to officially abandon the concept or raise it.

But really, Italy's going to 130% this year, so what's a mere 110%?

90%, 130%, 250%, it's all the same thing. It's a default as soon as U.S. demographics turn back up. May as well party while we can.

Apparently, some folks are thinking of making explicit the linkage between QE and asset prices:


Why not?

Oh dear Lord, I'm starting to sound like Snarky Mark.

Are you sure about this? "...the exit from the workforce generated by each retirement is more than one - it's at least 1.3. A lot of older couples will have one working in part-time employment or low-level who also leaves when the main one gets that SS check..."

Given the Social Security won't cover a median household's bills, folks can't quit their jobs in retirement unless they've got a lot of savings. And since most don't, don't they just collect Social Security and keep on working too? (ALL of the job growth since the recession is concentrated in the near-elderly demographic group.)

What I have been reading is that most folks in their 60s haven't got enough to retire (with or without SS), and the SS check will just help them get their retirement savings going (or they'll just work until they drop). Basically we have multiple generations of people who've generally been conditioned not to save (much), who've been fleeced by the financiers when they do try to save, and who aren't going to be able to start saving even though they blatantly "need to".

P.S. I've been wander over here occasionally over the past couple of years. Found you from Illusion of Prosperity. Love the site and will try to comment more in the future.

Are you sure that's "new money" and not simply moved from one pocket to another -or- is everyone supposed to live off ever-increasing government deficit spending?

Frankly, I haven't seen any chance of future stability for the past decade.

There is no way out for the Fed -- none whatsoever. Thus they'll continue to print until something literally breaks.
Wisdom - I think so. I think that's a bottom range.

Not every household heading toward retirement is flat broke. For those with some resources - often small private pensions or retirement accouts - it's very common for the first "real" retirement check to get them over the hump.

The employment level for women has been falling a bit. That's usually a sign of this process or the resumption of full employment by the man in the household. As these folks get older, many are entering retirement with at least one parent as a responsibility, and women tend to deal with that.

The employment level for married women shows the effect pretty clearly. Note the divergence from male employment levels.

All the rest of what you said is true - the participation rates for those over 65 keep edging up.

But remember, the real returns from a lot of casual part-time employment are very low right now. They provide no real living, and the costs of working can be very high.

Because of high heating costs and high taxes, a lot of retired couples tend to move further south to low living cost locations. Once there, the younger cohort may after a couple of years start up either part-time work or small businesses or casual labor.

The suppressive effect of labor slack on wages for the lower tier of jobs has been extreme in the last four years. What I have found is that older workers in these jobs tend to exit just as soon as they can get a near-full SS check. It is true that SS is very little, but what these folks are actually earning after expenses is even less!
Neil - we are all Snarky Mark now!

CBs buying equities. The end is nigh.
TJ - ah, you seem to have picked up the fallacy. Yes, the US economy is ever more dependent upon deficit spending.
Thanks for the thoughtful and detail reply to my comment. (I meant to follow up sooner.) I like your point about the arrival of SS checks being a tipping point in many households, where couples together can opt out of the workforce. The effect could be enhanced by social factors as well, such as (1) the man tends to be older and thus eligible for SS first and (2) I've read that it's socially uncomfortable (and uncommon) for the man to be retired and the woman to work (and earn more...), and in any case many couples will want to enjoy their retirement years together (at least until they find out what THAT'S like!). So frequently both will want to stop working at the same time.
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