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Summary of My Post-CPI Tweets

December 17, 2014 2 comments

Below is a summary of my post-CPI tweets. You can follow me @inflation_guy :

  • 1y inflation swaps and gasoline futures imply a 1-year core inflation rate of 0.83%. Wonder how much of that we will get today.
  • Very weak CPI on first blush: headline -0.3%, near expectations, but core 0.07%, pushing y/y core down to 1.71% from 1.81%.
  • Ignore the “BIGGEST DROP SINCE DECEMBER 2008” headlines. That’s only headline CPI, which doesn’t matter. Core still +1.7% and median ~2.3%
  • Amazing how core simply refuses to converge with median. Whopping fall in used cars and trucks and apparel – which is dollar related.
  • Core services +2.5%, unch; core goods -0.5%, lowest since 2008. But this time, we’re in a recovery.
  • Medical Care Commodities, which had been what was dragging down core, back up to 3.1% y/y. So we’re taking turns keeping core below median.
  • Core ex-housing declines to +0.800%, a new low.
  • That’s a new post-2004 low on core ex-shelter.
  • Accel major groups: Food, Med Care (22.5%) Decel: Housing, Apparel, Transp, Recreation, Educ/Comm, Other (77.5%). BUT…
  • But in housing, Primary Rents 3.482% from 3.343%, big jump. Owners’ Equiv to 2.707% from 2.723%, but will follow primaries.
  • Less-persistent stuff in housing responsible for decline: Lodging away from home, Household insurance, household energy, furnishings.
  • Real story today is probably Apparel, which is clearly a dollar story. Y/y goes to -0.4% from +0.6%. Small weight, but outlier.
  • Similarly used cars and trucks, -3.1% from -1.7% y/y (new vehicles was unch at 0.6% y/y).
  • On the other hand, every part of Medical Care increased. That drag on core is over.
  • Curious is that airfares dropped: -3.9% from -2.8%. SHOULD happen due to energy price declines, but in my own shopping I haven’t seen it.
  • I don’t see persistence in the drags on core CPI. There’s a rotation in tail-event drags, which is why median is still well above 2%.
  • We continue to focus on median as a better and more stable measure of inflation.
  • Back of the envelope calc for median CPI is +0.23% m/m, increasing y/y to 2.34%. Let’s see how close I get. Number around noon. [Ed. note: figure actually came in around 0.15%, 2.25% y/y. Not sure where I am going wrong methodologically but the general point remains: Median continues to run hotter than core, and around 2.3%.]

Quite a few tweets this morning! The number was clearly roughly in-line on a headline basis: gasoline prices have dropped sharply, in line with crude oil prices. How much? Motor Fuel dropped from -5.0% y/y to -10.5% y/y. The monthly decline was over 6%, and so a decline in headline inflation on a month/month basis was all but certain. Had core inflation been as low now as it was in 2010, we would have seen a year-on-year headline price decline (as it is, headline CPI is +1.3% y/y).

However, core inflation is not as low as it was in 2010. It continues to surprise us by failing to converge upwards to median CPI. Last year, the reason core CPI was inordinately low compared to the better measure of central tendency (median) was that Medical Care inflation was weak thanks to the effects of the sequester. But that effect is now gone. Medical Care inflation is back to 2.5% on a year-on-year basis; this month’s print was the highest in over a year. The chart below (Source: Bloomberg) shows the y/y change in Medical Care Commodities (e.g. pharmaceuticals) – back to normal.

medcarecommod

The 2013 dip is very clear there, and the return to form is what we expected, and the reason we expected core inflation to return to median CPI. But it hasn’t yet; indeed, core is below median by around 0.6%, the biggest spread since 2009. Now, it may be that core is simply going to stay below median for an extended period of time as one category after another takes turns dragging core lower. From 1994-2009, core was almost always lower than median. That was a period of disinflationary tendencies, and the fact that different categories kept trading off to drag core CPI lower was one sign of these tendencies.

I do not think we are in the same circumstances today. Although private debt levels remain very high (weren’t we supposed to have had deleveraging over the past six years? Hasn’t happened!), public debt levels have risen dramatically and the latter tends to be associated with inflation, not deflation. Money supply, especially here in the US, has also been growing at a pace that is unsustainable in the long run and it seems unlikely that the Fed can really restrain it until they drain all of the excess reserves from the system. These are inflationary tendencies. The risk, though, is that the feeble money growth in Europe could suck much of this liquidity away and move global inflation lower. This is an especially acute risk if Japan’s monetary authorities lose their nerve or if other central banks rein in money growth. In such a case, global inflation would decline so that, while US inflation rises relatively, it falls absolutely. I don’t consider this a major risk, but it is a risk which is growing in significance.

Of course, all of that and more is priced into inflation-linked bond and derivative markets, as well as in commodities. Only a massive and inexplicable plunge in core inflation could render the market-based forecasts correct – and there is no sign of that. Housing inflation continues to rise, and the soonest we can see that peaking is late next year. Getting core inflation to decline appreciably while housing inflation is 2.6% and rising is very unlikely! Accordingly, we see inflation-linked assets as extremely cheap currently.

A Busy Quarter – But Why?

December 11, 2014 2 comments

Serendipity often plays a role when I am considering a blog post. In this case, I wasn’t even planning a post but was updating old spreadsheets for current data to see how things have developed. In the past, I have documented how NYSE Composite volume has been falling fairly steadily since at least 2006. It is difficult to tell whether this is important or not, since some of this is due to the fact that more trading occurs off of the NYSE these days. Still, there was a significant drop-off in 2010 and 2011 and 2012 which seemed more than coincidental (2012 total volume was about half of the volume traded in 2008, in terms of shares, and probably lower than that in terms of volume).

In 2013, volume fell a small amount further. But I was interested to see that in 2014, NYSE volumes look to be just about exactly the same as they were in 2013 – for the first time in a long while, volumes have not declined.

But what was even more interesting to me was the pattern of volume over the course of the year. I put together the following chart to compare the rolling-20-trading-day volume for last year and this year.

2014volYou can easily see the increase in volume in the “taper tantrum” of May/June 2013, and the summer lull in both years. You can also see how volumes recovered in September and then fade into year end. But what stands out is how the summer was significantly quieter than in 2013, but since the end of September volumes have been quite high.

For fun, I decided to look at the data for 2006-2013 in its entirety (that’s all the data that I have). For each day, I computed the share of the year’s total volume and then averaged that across all eight years. By taking percentage of the total, I removed any tendency to overweight 2006’s much higher volume compared to 2013…it was the pattern I was looking for. Then, I computed a rolling-20-day sum. The line in blue below is the percentage of the year’s volume represented by any 20-day window ending on the day in question (since there are roughly 12.5 such windows in a year, we would expect 8% = 1/12.5 in a steady line if there was no seasonality). I then did the same thing for 2014 (but adjusting for the fact that we don’t know the year’s total volume yet).

seasonalvolSeveral things jump out as interesting. First is that there seems to be a general pattern that volumes generally decline after June. The summer volume swoon is mainly in August, there is a flurry of trading in September and early October, and then volume ebbs from there. Second, and more interesting at the moment, is that volumes in 2014 haven’t picked up just compared to 2013, but are quite a bit higher than the norm, and even quite a bit higher than for most of the rest of this year! By contrast, in 2013 the pattern was fairly normal except for the spike around the taper tantrum.

What causes me to scratch my head is the implication. There is no clear cause I can think of that would trigger a rise in equity trading volumes since mid-September. The end of the Fed’s taper was becoming clear, but I don’t know why that would trigger higher equity volumes. There haven’t been any unusual geopolitical events (at least, no more unusual than in any other year).

I am reluctant to declare this as yet another sign of a frothy and overbought equity market, with swelling participation at the highs. But I am open to the possibility.

Categories: Stock Market Tags: ,

Growth-Sapping Effect of the Minimum Wage

December 10, 2014 1 comment

I just saw this interesting article in Econbrowser called “New estimates of the effects of the minimum wage.” It is both good news, and bad news.

It is good news because it clarifies a debate about the effect of the minimum wage which has been raging for a long time, but without much actual data. This article summarizes a clever approach by a couple of academic economists to examine the actual effects of increasing the minimum wage. The research produces solid numbers and confirms some theories about the effects of the minimum wage.

The bad news is that the effect of the minimum wage is just what theory says it should be, but liberal politicians have insisted isn’t true in practice. And that’s a net negative effect on overall welfare, albeit divided between winners and losers. However, even that ought to be good news, because this analysis also means that we can reverse the policy and reap immediate gains in consumer welfare.

First, the theory: microeconomics tells us that an increase in the minimum wage, if it is above the equilibrium wage for some types of labor, should decrease employment while increasing the wages of those who actually retain their jobs. (The usual argument for increasing the minimum wage is that the people who earn minimum wage aren’t making enough to live on, and supporters tend to forget that if people lose their jobs because the minimum wage is raised, then those people are making even less.) We often say things are “Econ 101,” but this really is Econ 101 in the sense that it is taught in every introductory economics class. There is no excuse not to know this:

sdoflaborIn the chart above, the supply of labor is S and the demand for labor is D. In the absence of a floor (minimum wage), the clearing wage and quantity of jobs is at the intersection; at a minimum wage of a, however, there is a shortage of jobs equal to c-b. If the minimum wage is raised to a’, then the shortage of jobs increases to c’-b’. The question for society is whether the increase in joblessness is an acceptable cost to accept, in order to increase the minimum wage from a to a’. (Of course, the political calculation might also include the fact that people who become unemployed will be supported by the welfare state, and potentially vote to preserve and expand those public institutions that constitute it).

The problem for those who argue against the minimum wage, or for it being increased, is that they can point out this economic truism until they are blue in the face, while the other side simply says “nuh-uh” and denies it is true with the same fervor that they insist that Obamacare has actually lowered premiums and deductibles. The façade only cracks, maybe, when actual data is presented that shows the argument to be bankrupt.

This academic study does that cleverly, by examining changes in employment and wages in states where the federal minimum wage was binding (because the state minimum wage was lower, or non-existent) and states where it was not binding (because the state minimum wage was higher, so the federal minimum wage didn’t matter). Their conclusion:

“Over the late 2000s, the average effective minimum wage rose by 30 percent across the United States. We estimate that these minimum wage increases reduced the national employment-to-population ratio by 0.7 percentage point.”

That’s the sterile conclusion. Now let’s count the cost. Between July 2007 and December 2009, the national employment-to-population ratio (which is similar to, but not the same as, the labor force participation rate) declined from 62.7% to 58.3%; it has since risen to 59.2%. As the chart below (source: Bloomberg) shows, the labor force participation rate (in yellow) shows a more gradual decline but no recovery – as has been well-documented.

labor

Now, some numbers. In November, the Civilian noninstitutional population (the denominator for the employment-to-population rate) was reported by the Bureau of Labor Statistics (BLS) to be 248,844,000. That means that if the authors are correct, the minimum wage has boosted the wages of unemployed workers at the bottom of the scale at the cost of about 1.74 million jobs (0.007 * 248,844,000).

Imagine what having another 1.74 million workers would do for GDP? Do you think it could make a difference for one of the worst recoveries on record?

It probably isn’t fair to assume that all of those 1.74 million workers is currently “unemployed” by the BLS definition. Many of them are likely not looking for work, in which case they would not be counted as unemployed. It is interesting to note, although surely spurious, that the series “Not in Labor Force, Want a Job Now” is about 1.7 million higher than would be expected given the unemployment rate (see chart, source BLS).

wannajobAlternatively, we could consider what it would mean to the Unemployment Rate if those 1.74 million workers were employed. This means they would also be in the Civilian Labor Force, so the participation rate (see above) would be 63.5% rather than 62.8%. If instead of coming from the “Not in Labor Force, Want a Job Now” group they came from the “Unemployed” group, the Unemployment Rate would be 4.7% instead of 5.8%. (Personally, I think that most of them are probably in the former category, as the Unemployment Rate has declined at approximately the rate we would expect from past recoveries, despite tepid GDP growth.) That is not inconsistent, of course, if GDP growth is lower because the labor force is simply smaller than it should be – and that is exactly the implication of this bit of research.

Again, the good news is that we can help the country and the downtrodden “structurally” unemployed with the same simple policy: reverse all increases in the Minimum Wage that have happened since 2007.

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