Home > Economy, Housing, Politics > Make Hay While the Sun Doesn’t Shine

Make Hay While the Sun Doesn’t Shine

Today new Fed Chairman Janet Yellen jumped on the bandwagon in blaming the recent growth slowdown on the weather.

Here’s what I have to say about the news and the weather.

First, although it’s becoming quite passé to point this out, the weather should account for a slowdown in economic activity – but, since economists were aware of the weather (presumably), it is less clear that it should account for a surprise in the amount of slowdown we are seeing. The chart below (source: Bloomberg) shows the Citibank economic surprise index, which measures how much recent data have exceeded (positive) or fallen short (negative) of expectations. It is not a measure of growth, per se, but merely of the direction in which economists are missing. I have plotted both the US index and the Eurozone index.


Obviously, economists were far too pessimistic about the numbers in December and January (reflecting data from October to December, and data kept exceeding their estimates. But now they are over-exuberant. So it isn’t that the numbers are falling short; it’s that they’re falling short of where economists (who can presumably recognize snow) thought they would be incorporating the known weather drags. That could simply mean the weather had a worse impact on real people than the bow-tied set thought it would. Or it could mean data is weaker than it ought to be.

Second point: just because the weather was bad should not be taken as carte blanche for the economy to collapse. If the economy was really as strong as equity investors seem to think, should weather be able to derail it so easily? Yes, weather makes it harder to detect the natural rhythm of what is going on, but it wasn’t as if that was easy to begin with. The danger is, as I suggested a week and a half ago, when all news can only be neutral or good. That’s a bad sign for once the weather normalizes again and it gets impossible to shrug off bad news as easily.

Third point: was the weather as bad in Europe? Because, as you can see from the chart above, economists have also been missing on the optimistic side for European figures. To be sure, they’ve been missing by less, and the numbers surprised less on the positive side over the last couple of months, but I don’t know that the Polar Vortex ought to be affecting Italy as seriously as it is affecting Chicago.

All of which is simply to say that the weather isn’t going to be bad forever, so … make hay while the sun doesn’t shine, I guess. Stocks are flat on the year, the hard way (but commodities are +6.5%, measured by the DJ-UBS index; according to our valuation estimates, that should be the normal case over the next few years rather than the rarity it has been over the last few).

It is interesting, too, that as bad as the weather effect has been on the construction industry and sales it hasn’t really impacted the price dynamics at all. The chart below (source: Bloomberg) shows Existing Home Sales in white, and the year/year change in median sales prices of existing single-family homes. Sales are 14% off their highs (seasonally-adjusted, which you should take with a grain of salt due to the unseasonal weather, but notice that the decline started in August when the snow was appreciably lighter), yet prices are still rising at nearly 11% year/year.

ehsl and prices

Now, a housing bull will say that these are the opposite faces of the same coin. They would say, “because there is so little inventory available – according to the NAR, only 1.9mm homes are for sale, which is higher than last winter but otherwise the lowest since 2002 – prices are rising and fewer are being sold because of the shortage of supply.” This is certainly possible, although I wonder at where all of the ‘shadow supply’ and bank REO property got off to so quickly, especially since the pace of existing home sales (and new home sales) remain at such low fractions of the pace prior to 2007 (existing home sales is currently 64% of the peak rate in 2005; new home sales are at 34% of the 2005 peak). How do you get rid of inventory without selling it?

The housing market continues to be a conundrum, but without a doubt prices are rising. And, also without a doubt, rising home prices are beginning to push rents higher. More economists are raising their forecasts for core inflation looking forward over the next year. Of course, readers of this column know that this is old news here. Speaking of which, Enduring Investments’ Quarterly Inflation Outlook for Q1 has been published. Institutional investors and others interested in our services can register for this private report on our website by filling out the contact form and requesting access to the blog.

Finally, I want to make one observation about the complete impotence of the Republicans to respond to the Democrats’ push for a higher minimum wage. It is terribly distressing to see such bad economics from one party (in this case, the Democrats) and such utter lack of common sense responses to bad economics from the other party (in this case, the Republicans). Here is the only question that needs to be answered: if raising the minimum wage has only salutatory effects on the economy and on the working class, then why not raise it to $1000/hour? Why not $10,000 per hour? Surely, if raising the minimum wage is good, then raising it more can’t be bad. Republicans should be amending the bill to make the minimum wage $10,000/hour.

The obvious answer is that if the minimum wage was $10,000/hour, no one would hire anybody – and we all know that, and even Democrats know that, and we all know why: because there is almost no one in the country who can produce enough goods or services to be worth $10,000/hour. If you are hiring people, you have to decide whether you will get enough out of them to afford their labor and still stay in business. The answer is obvious at $10,000. But it’s the same question at $10: can this group of workers produce enough so that I can afford to pay them all $10? If not, they will not be earning $10/hour but $0/hour (or at least some of them will be). We know exactly what would happen with a $10,000/hour minimum wage, and it’s easy to demonstrate it. But the Republicans are absolutely inarticulate on this point, and on most points, and that is why they keep losing arguments where they have the stronger position.

Housekeeping Note: earlier this week I published an article on the Mt. Gox/bitcoin fiasco. If you didn’t see the note (it didn’t get out on all of the syndication channels), you can find it here.

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  1. BMB
    February 27, 2014 at 6:18 pm

    Reblogged this on A Bit More Bull.

  2. eric
    February 27, 2014 at 7:24 pm

    Ok, so the answer is obvious at $!0,000/hr. What’s the answer at $10/hr? Do we know what percentage of earners who make less than $10/hr can produce more than 10$ worth of goods? Second question: what percentage of earner who _currently_ produce less than $10 worth of goods only do so because the prices of what they produce are kept low by their low wages. In other words, Walmart can charge me $2 for a pair of socks because they pay their employees a low wage. Force them to raise their wages and they will raise their prices for a pair of socks, but so will all their competitors have to.

    Do we have data on this? Or is it all just partisanship?

    • February 27, 2014 at 7:53 pm

      The percentages are not what people are arguing. The Democrats have a nice note from several Nobel economists who claim it won’t affect employment at all. And then there are another dozen who didn’t sign it because it’s absurd.

      If the argument was “the people who get raised to $10 and keep their jobs will benefit more than the people who lose their jobs will get hurt, so we have a net gain to society,” then there would be something to discuss. But that’s not the claim at all.

      I do think there’s an unstated claim that the capitalists are screwing the little guy, paying him $7 when his labor is actually worth $10 (but our clients benefit – this was your scenario). But of course if everybody makes 50% more but prices increase 50%, then no one is better off, except of course for the Democrats who get more votes from people who don’t understand that.

      It also seems relatively certain that if you force American workers to charge $10 for their labor, that even more labor will be shifted overseas by mean capitalists who would rather offer good products at low prices than the same products at higher prices (and their customers, as it turns out, agree). And that’s also part of the political calculus. The Democrats figure they can’t lose: if no one loses any jobs because of higher minimum wage, then they’re a champion for the little guy (and the labor unions, whose contracts are struck in reference to the minimum wage in many cases, applaud them). And if lots of jobs are lost, they get to play the 1%er card by blaming greedy capitalists for shipping jobs overseas. So maybe I was too hard on the Democrats. They probably understand this all perfectly, but are just lying to the little guy to increase their own power.

      And the answer to all of this is yes, there is a TON of data, and hundreds of studies that have been done, and no one who has spent any time with the data can rationally argue that higher wage rates don’t lead to less employment. It’s sort of microeconomics 101. As I said up top in this response, that doesn’t mean there isn’t something worthwhile to argue on the normative side – do we lift more people out of poverty by raising their wages than we condemn to poverty (making them wards of the state, incidentally) by causing them to lose their jobs. Maybe the answer there is yes, although I suspect the answer is no (the answer to THAT clearly varies with $10 compared to $12 compared to $1000). But the Democrats’ argument simply impedes the real discussion by making it a class argument. The right thing to do is to actually gather lots of data and figure it out, then have a public discussion about whether it’s better to have more people employed at lower wages (but working rather than collecting government cheese) or fewer people employed at higher wages. Because that’s the REAL tradeoff.

    • February 27, 2014 at 7:57 pm

      By the way, another question…suppose a worker is being paid $7 but can make $100 worth of goods. Why doesn’t someone else then pay him $8, or $10, or $50? It isn’t like there is no competition for productive employees. I think there’s this myth that somehow Wal-Mart sets the wage for its employees. It does, but no one is forced to work for them for that wage. If there are a lot of people out there capable of turning out much more than they are getting paid, then there are a lot of stupid capitalists leaving money on the table. I don’t really believe that.

      There is a reason that not very many people work for the minimum wage in certain areas of the country. It’s because business owners found they had to pay more – and could afford to pay more, because of the productivity of the workers – in order to get those employees. It wasn’t because it was legislated that they do so!

  3. eric
    February 28, 2014 at 9:18 am

    Yes, I certainly agree that there is a normative question, and my point is that the normative dimension gets obscured when you move the line to $10,000, because then there ceases to be a normative dimension. (As you say: the issues varies from 10 to 12 and becomes obvious at 10,000.)

    I think there is another issue. A wage earner who brings in $7.25/hour and supports a family of four is likely ALSO a ward of the state in many respects: food stamps, medicaid, lots of other such things. So, in effect, if you work for walmart at minimum wage, and my taxes pay for your food stamps, then I am effectively subsidizing walmart, since (assuming that walmart cant move these jobs overseas–they are local service jobs–I’m guessing walmart has moved every single job it can overseas) these subsidies are the ONLY think that makes it possible for you to work at walmart at that wage.

    I’m also curious if we have data on what percentage of MW jobs CAN be moved overseas: remembering that restaurant workers, retail workers, construction day laborers, etc. all need to be local.

    As for the question in your second comment: I thought I answered that: If someone else pays him $10, then I will hire someone else at $7 and underprice the other guy and put him out of business. But if we all have to pay everyone $10, then we can get more money for our goods without worrying about being undercut. (Again, assuming we are talking about labor which CANT be shipped overseas, because, again, I think most of the low skill labor that CAN be shipped overseas HAS been.

    • February 28, 2014 at 9:56 am

      That’s the reason I moved the line to 10k. Because at $10, we can be tricked into thinking that the normative side and the positive side are the same thing. It IS economics 101 – raise the floor price of a good, in this case labor, and less of it is consumed (and there is a glut, which in labor we call unemployment, as more is supplied at that price than is consumed). This assumes only that the floor is above the market clearing price – and if it wasn’t, then no one would be getting paid minimum wage right now so we know the floor is above the market clearing price. We also know that unemployment among the less-skilled is much, much higher than it is among the skilled, so we know we have a larger glut among those who would be affected by a floor price. At 10,000, there’s no debate about the positive economics so we can all be clear that this is a normative question. The Democrats are wrong (I won’t say they’re lying – they may simply be bad economists) – raising the minimum wage most definitely will cost jobs. Let’s all agree on that point and then we can have a grown-up discussion about whether that’s okay, rather than saying that Republicans hate the little guy. No, the Republicans just think it helps the little guy more to LOWER the minimum wage, which lowers the prices of lots of the stuff he consumes AND makes employment more available.

      I think that right now, the cost of overseas labor has risen quite a bit relative to US labor so that, is we just left well enough alone, more manufacturing would be eventually coming back to the US. But if we raise the cost of US labor relative to foreign labor, again there’s no question what will happen – labor will be shipped overseas (or there will be substitutions made for labor). Sure, we can’t ship the Wal-Mart greeter overseas, but play along: if the cost of a Wal-Mart greeter went to $10k/hour, what do you think would happen? Would Wal-Mart jack up the price of socks to $400/pair? I suspect rather that they would make do with fewer greeters, fewer checkers, fewer warehouse laborers, etc. And many manufacturing firms that still exist here would move overseas.

      You say that “if someone else pays him $10, then I will hire someone else at $7 and underprice the other guy.” Why would someone work for you for $7 if someone else is paying $10? Well, only if he is less productive and can’t get that $10 wage. So you end up with less-productive people earning $7 and he gets more-productive people earning $10. And it’s probably a pretty close race between you. That’s what happens when wages are flexible. And again, this isn’t theory – there are plenty of places in the US where the minimum wage isn’t binding because everyone is getting paid more than the minimum.

  4. eric
    February 28, 2014 at 9:21 am

    Oh, and of course, we aren’t ALL earning 50% more and paying 50% more for our products. That, I agree, would be silly. The poorest among us and getting 50% more, and only the products produced by the poorest of us go up in price by 50%. I am always suspicious when someone says an issue is “Econ 101.” That usually means the issue is one of distribution of wealth, which is ALWAYS a normative question.

    • February 28, 2014 at 9:44 am

      Okay, but who do you think buys more Wal Mart socks? The poorest or the richest? The richest aren’t as impacted by inflation – the poorest always pay more of that cost. Inflation is a strongly regressive tax.

      • eric
        February 28, 2014 at 10:00 am

        I think this question is where the action is. And I think I picked a bad example with the socks. The price of socks is not much affected by the minimum wage. The things whose price is most affected by minimum wage are unskilled services: restaurant eating, housecleaning, gardening, nannies, etc. The price of those go up by almost exactly the amount the MW goes up. But socks only go up a very small amount.

      • February 28, 2014 at 10:54 am

        Socks are only not affected much by the MW because they’re not made here, because of prior minimum wages. 🙂 Housecleaning, gardening, and nannies prices won’t move at all, because probably 80% of these are cash transactions at below the MW. That’ll go to 100%. Restaurant eating will go up by less than MW but service will suffer, because your waiter will now also be busing the tables as the busboy is cut loose (waitstaff of course are exempt from MW because they get tips!). Fast food will go up the most, relatively, because it’s almost all MW employees and hardest to automate. And of course, that’s where the MW class is most likely to be eating.

  5. HPBunker
    February 28, 2014 at 10:52 am

    Mike, I get the economics 101 side of this argument. However, the labor market is already distorted in many ways and, as Eric posts above, current minimum wage workers are already effectively wards of the state subsisting on Medicaid, food stamps, and the EITC. With a higher minimum wage, more of their needs would be met through wages rather than the government safety net, placing the burden of providing for them more on the backs of those who consume restaurant meals, walk-mart products, and so on, and less on taxpayers in general. That would seem to be a more economically efficient arrangement.

    In other words, why should I, someone who literally never eats at McDonald’s, be paying (through my income taxes) the Medicaid, food stamp, and EITC funds upon which most minimum wage workers now depend? Would it not make more sense for McDonald’s patrons and shareholders/franchise owners to be covering more of these costs directly (through higher meal prices, lower dividends, and smaller profits, respectively)?

    • February 28, 2014 at 10:58 am

      Well, I think you’re accepting the argument that these workers will all get paid more, so get less in benefits. If that’s the case, then it’s great (but losing those benefits means they face a VERY high effective marginal tax rate and you might actually find more people dropping out of the labor force!). However, you’re also neglecting the fact that many people will lose their jobs as the result of an increase in MW – we don’t know how many, but it isn’t zero – and those job losses will INCREASE demands on the government safety net. So it isn’t at all clear to me that this decreases dependency on government…indeed, the cynic in me says that if it did, the Democrats wouldn’t support it.

  6. February 28, 2014 at 10:59 am

    Great discussion, folks…pardon me if I become less chatty from here though since it’s month-end and we have some portfolio rebalancing to do!

  1. February 28, 2014 at 7:43 am

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