Talking Macro: WREL show February 20, 2014

Here are notes from my weekly radio show on WREL Lexington, Virginia. The actual show seldom covers all of the topics I prepare, as what I discuss depends in part on questions from the host, Jim Bresnahan. What follows is thus expands on what I said or prepared to say.

The Economy

The Fed released its January minutes that suggests a pragmatic approach to policy targets. As I've discussed in previous shows, you can't capture the dynamics of the US labor market in a single number. The economists at the Fed of course know that, and so the headline item is that the Fed is revising its guidance that it will keep interest rates low unless inflation picks up or unemployment falls below 6.5%. That latter item is what is more flexible because jobs growth is not moving in parallel with the drop in unemployment.

First, the latest CPI (Consumer Price Index) report came out just after the show, and indicates no uptick inflation; prices are up a mere 1.6% over the past year once volatile food and energy prices are excluded (and as it happens, when they are included). That is consistent with the PPI (Producer Price Index) report released yesterday, with a 1.2% rise over the previous year. Both are far below historic levels, and the CPI remains well below the 2% target level with no indication that the rate is rising.

Back to employment. At present we have 145 million people employed in the US, below the 154 million level consist with population growth – a gap of 8.5 million. Worse, while my population growth number incorporates baby boomer retirement, in fact the baby boomers are not retiring at the same rate as in the past. For people aged 60-64, today 52% are employed, in 2005 only 50% were. For the older 65-69 bracket, in 2005 only 30% were working but today it's 35%. That's bad news for those at the younger end of the age bracket. In 2005 some 68% of those age 20-24 were working, but today only 62% have jobs. So the Fed is sensibly treating the unemployment number as just one more indicator, and not tying policy to a single number.

Other indicators likewise suggest muted growth. Housing starts were 880,000 in January, seasonally adjusted to reflect normal winter weather. Obviously this year's not been normal. So perhaps we'll see things pick up in Spring, but the pre-bubble level was more like 1.6 million starts (the bubble level peaked at over 2 million). But the level remains far below what we need for robust growth, and of course bad weather means that construction workers and the stores that sell to them are having a very bad start in 2014.

Finally, there's a Bloomberg story on divorce rates rising from a 40-year low in 2009. The story claims that's good news, but I'm not so sure. Yes, hard times make it more challenging for spouses to find the jobs that enable survival after a break-up. But long-term unemployment is a destroyer of families, something observed in the Great Depression of the 1930s, which left many mothers single when their men hit the road in search of work and didn't come back. But more consistent of the "economy is better" interpretation is that new household formation is rising.

That's consistent with what I've seen of my son and his friends. None of them have girlfriends, and the reason they give is that without stable jobs, it's just not a responsible thing to do. For all the decrying by their elders of today's youth, other indicators suggest the same, including a drop in children born to single mothers and in abortions.

United Way of Rockbridge update

Let me close with an update on the local United Way of Rockbridge annual campaign. While the website calendar isn't yet updated, and the thermometer outside Walmart remains on its side with the new sign blown off, we are now just shy of $220,000 or 88% of our $250,000 goal with results from Mohawk, one major employer workplace campaign, still pending. We still very much need those in our residential campaign who have procrastinated to contribute – a check to UWR at 218 S Main in Lexington (zip 24450) would be very much appreciated, and we should have a "click and contribute" button added to our web site within the next week, as we no longer want to be given credit card numbers. [Next week I will talk about our Community Leaders program, recognizing small businesses who support us.]

We also held our Annual Meeting yesterday, with reports from 16 agencies. It was both heartening and sobering to hear their reports, heartening because of the dedication of the volunteers and staff of these local community-oriented non-profits, and sobering because they too report slower contributions amidst increased demands for their services. Since we want to keep pushing ahead with our Community Impact program, Rockbridge Reads!, without cutting back on our assistance to these agencies, we really need to hit our fundraising goal.

Over the next weeks I will introduce the groups to which we contribute. One is RAOC, the Rockbridge Area Occupation Center headquartered in Buena Vista, which provides jobs to physically able but mentally challenged individuals. Now others in the area do this, Kroger and Food Lion for example employ individuals as do others, working in conjunction with the Community Services Board. So RAOC complements other efforts, running yard care and cleaning services, providing supervised work environments for individuals referred to them by the Virginia Department of Rehabilitative Services. Some of their workers are capable of using chainsaws, others are good at mowing. If you might be able to use their skills, please contact RAOC! – I provided their website link above.

Mike Smitka

Midyear (Un)Employment: Stumbling

click on graphs to enlarge

Headlines are trumpeting the latest month's job gains, based on the Current Employment Survey. Let's not get overly excited. I track employment, not unemployment, and subtract the number on involuntary short hours. I also use as my base the expected number of employed, corrected for population structure (e.g., the aging of the large baby boom cohort). Furthermore, I use the Current Population Survey. Details follow. But first, the automotive sector, which continues to add jobs at a faster rate than the economy as a whole.

The auto industry is doing better than the economy as a whole, both in manufacturing and on the retail side. In other words, the share of the auto industry in total jobs is rising. While the economy as a whole added 160,000 jobs in June, the auto sector added 13,500 jobs; under these metrics, the share of auto sector jobs has gradually climbed from 1.6% to 1.8%. However, that remains well below the 2.3% share of 1999.

The monthly Current Employment Survey is the data source. Unfortunately, it provides no breakdown between vehicle assembly and parts manufacturing, but we do have data on automotive manufacturing (parts & assembly), dealerships, and total retail including auto parts. All three show steady gains. In the process better matching supply and demand in NAFTA, Japanese, German and Korean firms are all adding capacity. To give a purely domestic side, Ford is expanding F-150 production, adding a shift in Kansas City while preparing to launch the Transit van on KC's second assembly line. (I was in the KC plant as well as the Rouge in Dearborn – Ford's two F-150 plants – this spring.) Some of this will be replacing imports. Even when that capacity will go into Mexico, it those won't detract from assembly jobs and will add to parts employment in the US. In other words, the outlook is for continued gains.

The picture for the economy as a whole is less reassuring. While the US added 160,000 jobs in June, the number of people working short hours rose by 322,000. So this past month we actually saw the number of full-time jobs fall by 158,000. Furthermore, the economy needs to add 67,000 jobs a month just to keep up with population growth. (This number is adjusted for population aging – the "boomers" are gradually retiring. For details, see this web site. ) While we've added a lot of jobs since the recession ended, and in most months have added more than the requisite 67K break-even level, the moving average of net job creation is now approaching zero.

Things look slightly better this past month if we look only at employment, and don't factor in people on short hours. Nevertheless, the basic picture remains unchanged; for many months the number of short hours fell sharply. So on balance the bottom line doesn't differ by much, particularly when compared against the total number of unemployed.

Two graphs on that. First, I have the "total pain" measure (formally, BLS's U-6 measure);

it remains shockingly high, still well above the pre-Great-Recession peak [though data only go back to 1994]. Second, there's long-term unemployment: the number out of work 27 weeks or more remains the level of the Volcker-Reagan recession of the early 1980s.

The data also show no evidence of any long-term structural shift towards a higher base. Of course for those in the auto industry, well, it's hard to keep up car payments if you've been out of work for over 6 months.

The government sector isn't helping. The sequester is turning out to be flexible, as seasonal cash balances have been depleted and as Congress has provided agencies with permission to reallocate funds unspent at the line-item level to programs running out of funds. (Of course these funds were unspent because in many cases Congress, in its predilection to micro-manage, gave agencies line items they said they didn't need. In other cases the underlying issue was annual budgets towards "lumpy" expenditures – large-scale maintenance projects – that may only be spent every 3rd year). Of course such accounting games can only go so far; once cash and reallocated funds are used up, the sequester will bite harder. In any case, despite population growth that would normally call for more police, fire departments, and teachers, local government cut 165,000 since January 2011, while state governments cut 119,000 and the Federal government 121,000. In any single month the numbers may not appear large, but given the weak level of job creation in the economy as a whole, this certainly represents a very real drag on growth.

Finally, what of the prognosis? Note that so far data suggest that the impact of the Great Recession has fallen almost entirely on the shoulders of younger and prime-age workers. The following chart illustrates that by looking at employment to population ratios of young, prime-age and older workers. This doesn't mean that lots of older people haven't traded a good full-time job for one at Walmart. However, it's very clear that lots of new college graduates have yet to find what society considers a "proper" job, and the empirical microeconomic evidence suggests that on average, after a couple years in such jobs they never fully recover career-wise: as conditions improve, employers turn first to new school-leavers who've not gone through an extended bout of underemployment. We really need an uptick there.

In any case, when we plot employment growth against the long-term implicit demand of the population for jobs, the news is not good. Yes, we're better off than in early 2009. However, under current trends we won't return to normal for another 5-6 years, even given the retirement of the "boomers" over the next several years. (Notice the black line of "target" employment gradually flattens, and lies far below the blue line that represents a naïve projection on the basis of historic labor force growth in the pre-2007 period.) The Fed may have its pedal to the metal, but while better than the alternative, that's not accomplishing much. However, that's the only policy tool available, since the House can't even pass a budget.