Data Watch

Two Labor Markets: The “Strong” & the “Weak”

“We need the concept of a natural rate of unemployment … we need to have some sense of whether unemployment is high, low or just right,” Jay Powell says (at AEA). Keep on looking Mr. Powell, you won´t find it. As the panel indicates, a “low” unemployment rate can be a feature of both a “strong” and a “weak” labor market. In all other dimensions, this labor market is relatively weak. Employment has grown much less. Wage growth has been much more subdued. Meanwhile, on average, inflation is similar (1.6% yoy now versus 1.7% then). The participation rate well reflects… Read More

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The TTC (Trump Tax Cut) & Retail Sales

The “optimist”: A drop in prices at the pump and a pick-up in wages at the low end of the income strata are delivering more broad-based gains in consumer spending. Look for consumers to remain a driver of GDP gains in the fourth quarter, even as overall growth moderates a bit. Trump on signing Tax Cut in December 2017: And just as I promised the American people from this podium 11 months ago, we enacted the biggest tax cuts and reforms in American history. Our massive tax cuts provide tremendous relief for the middle class and small business. Reality: Excluding… Read More

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Euro Area NGDP growth rate to keep dropping

It was all cheery waves as the governing CDU party in Germany elected a new leader after Angela Merkel stepped down. Eventually, Ms. Annegret Kramp-Karrenbauer will also take over from Merkel as Chancellor of the country. Well, she may do so, but there is the small matter of crashing German and dropping Euro Area economic growth rates that may derail these plans. We already knew that German economic success had come to a shuddering halt in 2018Q3 with a negative QoQ RGDP annualized growth rate of -0.8% and a YoY rate of just 1.2%. Maybe NGDP growth of 1.7% QoQ (3.1% YoY) will rescue… Read More

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Regarding inflation and unemployment, monetary policy plays no role!

According to Robert Gordon writing in 2000 about the “fabulous decade”: Sometimes we are satisfied to find a single “smoking gun” or “silver bullet” that alone is powerful enough to provide an explanation of a macroeconomic puzzle. However, on this occasion we have no fewer than 12 separate and largely unrelated explanations of why inflation has been so low given unemployment, or why unemployment has been so low without igniting inflation. These 12 factors in the order discussed here are (1) falling real import prices through early 1999, (2) falling real oil prices through early 1999, (3) measurement improvements that… Read More

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The Incredible Falling S&P 500

The big news in the last month or so has been the jarring volatility in the US stock market. At the time of writing, the S&P 500 is practically back to where it was a year ago and is down some -10% from the peak on 17 September, 2018. Despite the headline-making collapse in the share prices of internet companies such as Facebook, the Nasdaq is down “only” about -14% from peak, showing that the drop in the S&P 500 isn’t entirely due to the bear market in “tech”. The drop in share prices seems to be mostly due to… Read More

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Worker Compensation Still a Drag On Fed’s Inflation Target

The conventional financial-media headlines said the third-quarter employment cost index, out on Halloween, indicated “Pay Jumped.” What the headlines did not say (but should have) was, “Employment costs remain a drag on the Federal Reserve’s putative 2% inflation target.” The employment cost index, a broad measure of workers costs prepared by the Department of Labor that includes pay and benefits, rose 2.8% year-over-year in the third quarter. Of course, that means productivity gains in excess of 1% annually reduce unit labor costs to under 2% annually. Indeed. A day after the Halloween release, the Department of Labor released its second-quarter… Read More

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The “Bastiat Boom”

Retail sales frustrated expectations. It´s not that consumer spending is weakening but is now being properly measured again. After Harvey hit in August 2017, there were a lot of “broken windows” that had to be replaced. Auto is a case in point. Between May and August of this year, retail sales growth averaged 6.5% year-on-year. In September growth dropped to 3.1% (not seasonally adjusted). Some say it reflected Florence´s disruptions. That´s unlikely. In August 2017, retail sales increased 4.1% despite Harvey´s much greater destruction! The “windows replacement effect” has petered out, so now changes are reverting to type, a truer reflection… Read More

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“All the light you cannot see”

Powell´s first words at the press conference, after the usual disclaimers: “The economy is strong!” The economy is only “strong” compared to the low point of nominal spending (NGDP) growth in mid-2016, otherwise, it´s just as “strong”, or “weak”, as it has been since it only partially climbed up from the depths of the Great Recession. As such, as the chart illustrates, there is absolutely no danger of core PCE inflation getting “out of hand”, unless, quite unwittingly, the Fed allows nominal spending to go “on a binge”. The next chart shows how misleading, even dangerous, a headline target, which… Read More

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