Since some of my 'work' observations on currencies have been doing the rounds in the press over the last few days, I thought I'd lay out some broad thoughts on recent weakness in emerging market (and other) currencies. There's a danger in broad generalisation in a quick sweep through thirty years of the after-effects of very low US interest rates, but this is a blog not a research paper so here goes....
In 1993, when the Federal Reserve maintained interest rates at what was then perceived to be an astonishingly low level of 3% as the US economy recovered from the aftermath of the S&L crisis and the recession two years earlier, the seeds were sown for the 1990s Asian crisis.
When the central bank of the world's biggest economy decides that its domestic interests are best served by extraordinary monetary policy settings, policy-makers all over the world have to decide how to react. In 1993, by and large, Asian policy-makers' response was to continue to gradually liberalise the flow of money into and out of their economies, to maintain formal or informal pegs between their currencies and the US dollar and to let the good times roll. In countries like Thailand, the decision not to allow currencies to appreciate pretty much automatically resulted in US interest rates being imported into economies which were growing far too fast for 3% rates. What followed was a surge in both domestic credit growth and in foreign currency borrowing - if your central bank sets rates at 6%, the Fed is at 3% and you have a fixed exchange rate between your currency and the US dollar, why not just borrow cheap dollars?
The result through the early part of the 1990s was that a lot of Asian countries maintained competitive exchange rates and saw very rapid growth in credit. That was fine for a while but as US interest rates rose, it became problematic. It became clear to everyone that what looked like a credit 'boom' was a bubble and that too many golf courses, casinos and beach resorts had been built without regard for whether there was income enough to service the debts to pay for them - debts whose services costs were going up.
As growth slowed, bad debts ballooned and capital left their countries, Asian central banks found that they did not have enough currency reserves to stop the pressure on their (pegged) exchange rates, and were forced to choose between letting them fall (making the foreign currency debt problem worse), raising interest rates (causing an even greater economic downturn) or imposing capital controls. Different countries chose different paths but the Asian crisis followed and the next few years were spent trying to learn the lessons from the disaster.
The lessons which were learnt served Asia well in 2001-2012. As the Federal Reserve once again embarked on a policy of exceptionally easy monetary policy after 2000, Asian central banks were much more alert to the danger of poor lending practises and to the danger of foreign currency borrowing. They set about building vast war-chests of currency reserves to help defend themselves against future runs on their currencies. And they started to allow their currencies to float somewhat more freely, which mostly meant that they allowed them to appreciate against a US dollar anchored by low interest rates.
Because they avoided the worst excesses of credit growth in this period, Asian economies weathered the 2008 crisis much better than Europe and the US. But what came out of that period was even lower interest rates (3% Fed Funds in the 1990s become 1% Fed Funds in the 2000s and then zero Fed Funds in the 2010s) with the added twist of Quantitative Easing.
The challenge remained the same and was no longer in any way an 'Asian' problem or even one just for 'emerging' economies. The central bank of the world's biggest economy set interest rates at zero when the emerging market economies as a whole were enjoying real GDP growth of 7 1/2% in 2010. They faced the choice of allowing their currencies to appreciate sharply, of allowing domestic asset prices to rise and credit to grow because rates were too low, or of imposing capital controls. No wonder many complained they were in a currency war.
Different countries faced different domestic issues and reacted to the global environment in different ways. But if there is a common thread it is that most allowed their currencies, in nominal and even more in real terms, to appreciate more than they had in the early 1990s. In 1993, a young backpacker wandering the world would generally have found that 'emerging economies' were cheap places to visit. By 2011, that was no longer the case. Again, it was not just an 'emerging market' story. In 1995, British people could go and enjoy cheap prices for winter sun in Australia, while young Australians came to London to earn better pay than they could get at home and see the world at the same time. Now, Australia's youth stays at home to serve beer to locals who enjoy watching their cricket team thrash England's.
When the notion of the Federal Reserve 'tapering' its bond purchases was first mooted last May, there was a temptation to ask whether that was important. Buying bonds more slowly is only a marginal shift and interest rates are still at zero, after all. However, a turn in the monetary policy cycle was signalled and was enough to trigger a violent response in asset markets. US bond yields rose and the currencies which had been allowed to appreciate in reponse to super-easy US monetary policy, started to fall back, chaotically in many cases.
The most positive way to look at the events of the last 9 months is that most of the central banks whose currencies are falling, probably welcome at least part of the adjustment. They didn't choose to have overvalued exchange rates, after all. What they chose was to allow the currency to take the strain of offsetting US monetary policy, which in turn allowed them to maintain some degree of control over domestic credit conditions. If I compare the modest sell-off we have seen in emerging market bonds, for example, with the larger moves we have seen in currencies, the conclusion is that the currency is doing its job of acting as a shock-absorber and this is a currency adjustment (so far) and not a crisis. In Australia, whose currency is now 20% cheaper than it was at its peak, there is no sense of crisis at all. In Argentina whose currency has fallen almost 20% in January, it's definitely a crisis.
Whether it is right to conclude that there is 'no crisis' is a matter of judgement. But I would draw three very broad conclusions:
Firstly, the willingness to allow currencies to act as a shock-absorber helps prevent the extremes of domestic credit imbalances which plagued Asia in the 1990s. That is a very good thing indeed in those countries which did allow their currencies to float more freely and did manage their domestic financial system more closely.
Secondly, given that we are still in the very early stages of the US policy nomalisation and since there are still an awful lot of countries whose currencies are far more expensive in real terms today than they were 10 years ago, it would be rash to assume that the adjustment is mostly complete.
And thirdly, since Fed policy was even more accommodative in this cycle than in the early 2000s or the 1990s, it isn't surprising that the scale of the capital flight from G3 economies into the rest of the world was much bigger this time and the accompanying asset inflation was also much greater. And so, the turmoil that can be caused by those flows being reversed, can also be greater than it was in the second half of the 1990s. Which is to say that even while I don't think this IS a crisis at this point, the risk of it becoming one is clear. Particularly in those countries where control of domestic asset inflation and credit creation was weakest.
Saturday, 1 February 2014
Saturday, 11 January 2014
A short Saturday morning US jobs post
A quick run down of the US employment data and where it leaves this particular fool...
There are three charts to consider. The first shows falling unemployment rate, which is a function of the on-going decline in the labour force. That's been written about to death. At some point people will stop just leaving the labour force, but it hasn't happened yet. When they do, the pace of decline in the unemployment rate will slow, but the best estimate I have seen of the long-term trend growth rate of the US labour force is around 80,000 per month, which suggests that even yesterday's 74k increase in jobs is enough to keep the unemployment rate steady.
I've plotted it against the hourly earnings series, which has slowed to 1.8% y/y, and to 2% on a 3-month smoothed basis. Unemployment has fallen sharply but there's nothing pointing to any significant pick-up in wage growth yet. That will be yet another factor keeping consumer price inflation at bay.
The second chart shows the two measures of employment, the non-farm payroll series, plotted against the growth rate in employment from the household survey (the one that is used to measure the unemployment rate). Employment growth in the NFP series has slowed to 1.62% from 1.73%, and you'll excuse me I hope if I fail to get over-excited. The December payroll data were bad, albeit possibly excused by the weather, but the underlying trend in employment growth is close to long-term averages and still very consistent with a 'new-normal' economic recovery. Little has changed as a result of yesterday's soft headline and won't unless it is repeated for a couple more months. But the household survey shows employment growth of 0.8%, which is much worse. Even if I smooth it out, the gap is bigger than it has been since the late 1990s. Just looking at the two lines you can see that the (smaller) household survey is more volatile, but even so, the divergence is big enough that I for one will be watching it in the months ahead.
The last chart shows the NFP data, plotted against a 36-month standard deviation, i.e. a measure of the volatility of the series. Relative to recent norms, yesterday's number was a genuine outlier. If you glance across a the last period of low NFP volatility in the late 1990s, you can see that there were spikes, but they were followed by corrections. The lack of volatility in the US employment data is a source of optimism about this year's growth, because weather aside there isn't much which 'ought;' to cause a negative shock. In the 1995-1998 period, low employment volatility was accompanied by equity price gains, a strong dollar, and strengthening growth until the Fed 'blew it' by cutting rates and keeping them too low for too long after LTCM went bust - re-fuelling the housing and dotcom booms. I take heart from both solid employment gains and the lack of volatility in the series, so a pick-up in vol would alarm me...
The jobs report poses questions about whether this was a one-month weather-induced outlier or something more meaningful. Most people will guess that it's the former, at least for a couple more months,. But the slowdown in wage growth either puts NAIRU even lower or says the wage/unemployment relationship is broken. Either way, the only inflation we should worry about is asset price inflation and the Fed seems happy to ignore that. The household survey meanwhile, needs to show employment growing faster or I'll start to really worry about that, too. And as a final aside, since no-one knows what to make of the jobs data, the big news was the fall in the US trade deficit as energy independence raises the attractive prospect of an economic recovery that is NOT accompanied by a widening deficit. In short, a recovery with much better balance between output and demand growth than we've been used to in the US. Oh, that we in the UK could dream of such balance in our recovery....
There are three charts to consider. The first shows falling unemployment rate, which is a function of the on-going decline in the labour force. That's been written about to death. At some point people will stop just leaving the labour force, but it hasn't happened yet. When they do, the pace of decline in the unemployment rate will slow, but the best estimate I have seen of the long-term trend growth rate of the US labour force is around 80,000 per month, which suggests that even yesterday's 74k increase in jobs is enough to keep the unemployment rate steady.
I've plotted it against the hourly earnings series, which has slowed to 1.8% y/y, and to 2% on a 3-month smoothed basis. Unemployment has fallen sharply but there's nothing pointing to any significant pick-up in wage growth yet. That will be yet another factor keeping consumer price inflation at bay.
The second chart shows the two measures of employment, the non-farm payroll series, plotted against the growth rate in employment from the household survey (the one that is used to measure the unemployment rate). Employment growth in the NFP series has slowed to 1.62% from 1.73%, and you'll excuse me I hope if I fail to get over-excited. The December payroll data were bad, albeit possibly excused by the weather, but the underlying trend in employment growth is close to long-term averages and still very consistent with a 'new-normal' economic recovery. Little has changed as a result of yesterday's soft headline and won't unless it is repeated for a couple more months. But the household survey shows employment growth of 0.8%, which is much worse. Even if I smooth it out, the gap is bigger than it has been since the late 1990s. Just looking at the two lines you can see that the (smaller) household survey is more volatile, but even so, the divergence is big enough that I for one will be watching it in the months ahead.
The last chart shows the NFP data, plotted against a 36-month standard deviation, i.e. a measure of the volatility of the series. Relative to recent norms, yesterday's number was a genuine outlier. If you glance across a the last period of low NFP volatility in the late 1990s, you can see that there were spikes, but they were followed by corrections. The lack of volatility in the US employment data is a source of optimism about this year's growth, because weather aside there isn't much which 'ought;' to cause a negative shock. In the 1995-1998 period, low employment volatility was accompanied by equity price gains, a strong dollar, and strengthening growth until the Fed 'blew it' by cutting rates and keeping them too low for too long after LTCM went bust - re-fuelling the housing and dotcom booms. I take heart from both solid employment gains and the lack of volatility in the series, so a pick-up in vol would alarm me...
The jobs report poses questions about whether this was a one-month weather-induced outlier or something more meaningful. Most people will guess that it's the former, at least for a couple more months,. But the slowdown in wage growth either puts NAIRU even lower or says the wage/unemployment relationship is broken. Either way, the only inflation we should worry about is asset price inflation and the Fed seems happy to ignore that. The household survey meanwhile, needs to show employment growing faster or I'll start to really worry about that, too. And as a final aside, since no-one knows what to make of the jobs data, the big news was the fall in the US trade deficit as energy independence raises the attractive prospect of an economic recovery that is NOT accompanied by a widening deficit. In short, a recovery with much better balance between output and demand growth than we've been used to in the US. Oh, that we in the UK could dream of such balance in our recovery....
Sunday, 5 January 2014
UK and US monetary policy - designed in Monaco
The Sunday Times shadow MPC is voting for a rate hike in the UK. It won't make a blind bit of difference, what we will get instead is a bit of tinkering with the forward guidance the MPC use, to lower the rate unemployment needs to fall below before they will contemplate rate hikes.
The UK rate debate is echoed in the US, though it seems more vociferous here, and centres around the question of whether it is interest rate changes that matter, or the level of interest rates. If you ever play with monetary policy rules, like the Taylor Rule, they will suggest appropriate rate levels, rather than moves and will definitely suggest that rates should be raised even when inflation is low. Their starting point is that there is a 'neutral interest rate' from which actual rates should differ as a function of how much slack there is in the economy and how far inflation is from target.
A standard Taylor rule estimate would put UK interest rates around 2% at the moment, on the basis of a 6 1/2% NAIRU and a 2% inflation rate target. Core CPI inflation is just below target and unemployment is not that far above target, so a real interest rate a little above zero would seem to make sense. You need to get NAIRU under 4% to justify current policy rates. That's even lower than the US (NAIRU at 4.3%) and of course far lower than the level of NAIRU which justifies current rates in Europe (around10%).
The Taylor rule isn't the holy grail of policy making, and it's certainly being ignored by central banks at the moment; but should rates to be kept at current (extraordinarily low) levels just because there is slack in the economy? On that basis, rates would be far below 'neutral' until there was no slack in the economy, or until growth was consistently above trend, and then they would have to rise very fast. It's the equivalent of keeping your foot hard down on the accelerator of a car until it's time to brake equally hard - more like how you might drive an F1 car round Monaco than a Ford Fiesta round Islington.
Setting rates too far from 'neutral', however that's measured, causes mis-allocation of capital. By keeping rates too low for too long a decade ago, the Fed provided the fertiliser that allowed the credit bubble to blossom so disastrously. There are times when extraordinary monetary policy makes sense, but I'd like to see a return to rate levels that are higher, but still very low relative measures of 'neutral', as soon as it is safe to do so. So the question now, is whether it's 'safe' to take baby steps in the direction of nomalising policy, not whether it's time for policy to be 'tightened'?
For now, the debate (in the UK and the US) is about whether rates should be raised or not, rather than whether they are at appropriate levels for economies with falling unemployment and above-trend growth rates. That's a mindset which is friendly for asset prices and even if there is little risk that we see any significant upward pressure on either wage growth or inflation, it will continue to cause capital to be misallocated.
The UK rate debate is echoed in the US, though it seems more vociferous here, and centres around the question of whether it is interest rate changes that matter, or the level of interest rates. If you ever play with monetary policy rules, like the Taylor Rule, they will suggest appropriate rate levels, rather than moves and will definitely suggest that rates should be raised even when inflation is low. Their starting point is that there is a 'neutral interest rate' from which actual rates should differ as a function of how much slack there is in the economy and how far inflation is from target.
A standard Taylor rule estimate would put UK interest rates around 2% at the moment, on the basis of a 6 1/2% NAIRU and a 2% inflation rate target. Core CPI inflation is just below target and unemployment is not that far above target, so a real interest rate a little above zero would seem to make sense. You need to get NAIRU under 4% to justify current policy rates. That's even lower than the US (NAIRU at 4.3%) and of course far lower than the level of NAIRU which justifies current rates in Europe (around10%).
The Taylor rule isn't the holy grail of policy making, and it's certainly being ignored by central banks at the moment; but should rates to be kept at current (extraordinarily low) levels just because there is slack in the economy? On that basis, rates would be far below 'neutral' until there was no slack in the economy, or until growth was consistently above trend, and then they would have to rise very fast. It's the equivalent of keeping your foot hard down on the accelerator of a car until it's time to brake equally hard - more like how you might drive an F1 car round Monaco than a Ford Fiesta round Islington.
Setting rates too far from 'neutral', however that's measured, causes mis-allocation of capital. By keeping rates too low for too long a decade ago, the Fed provided the fertiliser that allowed the credit bubble to blossom so disastrously. There are times when extraordinary monetary policy makes sense, but I'd like to see a return to rate levels that are higher, but still very low relative measures of 'neutral', as soon as it is safe to do so. So the question now, is whether it's 'safe' to take baby steps in the direction of nomalising policy, not whether it's time for policy to be 'tightened'?
For now, the debate (in the UK and the US) is about whether rates should be raised or not, rather than whether they are at appropriate levels for economies with falling unemployment and above-trend growth rates. That's a mindset which is friendly for asset prices and even if there is little risk that we see any significant upward pressure on either wage growth or inflation, it will continue to cause capital to be misallocated.
Sunday, 29 December 2013
Short-term thinking
I was wandering over a rather damp golf course yesterday, thinking about the rapidly-growing consensus that QE isn't inflationary because inflation is lower now in the US than when QE started. The golf course where I torture animals by sending balls into the undergrowth at regularly intervals responded to talk of global warming and a couple of dry summers almost twenty years ago, by digging a great big lake to increase irrigation. It now seems that global warming makes for wet summers.
I'm not an expert on global warming. But it does strike me as odd that a sample of one, and a period of just a few years, can be seen seen as proof of anything - either the effect of global warming on the weather, or the effect of QE on inflation.
We don't really know what the long-term effects of massive expansion of central bank balance sheets will be. Personally, I reckon the effect of QE is mostly on the price of the assets that the central banks buy and everything else follows from that. The amount of money in the economy is determined by demand for loans, and banks' willingness to expand their balance sheets, more than by central banks' own balance sheets, but the effect on asset prices is simpler. A central bank buys bonds, drives prices up and forces other bondholders to buy something else. That is bad for the currency if there are a lot of foreign holders of the bonds and good for equities supposing they compete with bonds for investors' cash. And as long as there is a global excess of goods and labour and the currency effect is small, why should it send up CPI inflation?
But if the QE doesn't send up consumer price inflation, that doesn't mean it has no effect or that it isn't dangerous. Rising bond prices may be 'good' for borrowers but go shopping for an annuity and you could feel differently. Sit and decide what to put your pension savings into and the high level of the equity market won't be so attractive, either. But hey, pensions are not in the CPI index, any more than house prices are, so there's nothing to worry about, right?
Away from QE though, I still think the disparity between the cost of money and the growth rate of the US and global economies is simply causing mis-allocation of capital. The gap between Fed Funds and US GDP growth is heading back towards 4%. It's a recipe for asset price inflation, and a recipe for excessive valuation of assets, somewhere. I've plotted the GDP/Fed Funds relationship below, in both nominal and real terms. There are four cases of rates being far too low relative to GDP growth and they have all had a different impact. Ignoring the present, in 2004/6 easy money caused a credit bubble. In 92/95 easy Fed policy caused a credit and asset bubble in Asia, and only the easy policy in 75/78 showed up in higher CPI inflation.
My point is a simple one - if rates are too low, we should expect there to be an impact, but should not assume automatically that the impact will be felt in CPI inflation. And the same is true of QE. We should expect over-easy money to cause distortions that will come home to roost in the real economy - just not necessarily on the 1-2-year time horizon that suits most observers.
p.s.... if rates are too low for too long, of course someone becomes addicted to cheap money. The same would be true of what cheap beer prices do to alcohol addiction. The turkeys come home to root when rates have to go up, and we find out who the addicts are. In 2008, it was the banks. In 2006 it was the Asian banks and property developers. So, who is over-leveraged this time?
I'm not an expert on global warming. But it does strike me as odd that a sample of one, and a period of just a few years, can be seen seen as proof of anything - either the effect of global warming on the weather, or the effect of QE on inflation.
We don't really know what the long-term effects of massive expansion of central bank balance sheets will be. Personally, I reckon the effect of QE is mostly on the price of the assets that the central banks buy and everything else follows from that. The amount of money in the economy is determined by demand for loans, and banks' willingness to expand their balance sheets, more than by central banks' own balance sheets, but the effect on asset prices is simpler. A central bank buys bonds, drives prices up and forces other bondholders to buy something else. That is bad for the currency if there are a lot of foreign holders of the bonds and good for equities supposing they compete with bonds for investors' cash. And as long as there is a global excess of goods and labour and the currency effect is small, why should it send up CPI inflation?
But if the QE doesn't send up consumer price inflation, that doesn't mean it has no effect or that it isn't dangerous. Rising bond prices may be 'good' for borrowers but go shopping for an annuity and you could feel differently. Sit and decide what to put your pension savings into and the high level of the equity market won't be so attractive, either. But hey, pensions are not in the CPI index, any more than house prices are, so there's nothing to worry about, right?
Away from QE though, I still think the disparity between the cost of money and the growth rate of the US and global economies is simply causing mis-allocation of capital. The gap between Fed Funds and US GDP growth is heading back towards 4%. It's a recipe for asset price inflation, and a recipe for excessive valuation of assets, somewhere. I've plotted the GDP/Fed Funds relationship below, in both nominal and real terms. There are four cases of rates being far too low relative to GDP growth and they have all had a different impact. Ignoring the present, in 2004/6 easy money caused a credit bubble. In 92/95 easy Fed policy caused a credit and asset bubble in Asia, and only the easy policy in 75/78 showed up in higher CPI inflation.
My point is a simple one - if rates are too low, we should expect there to be an impact, but should not assume automatically that the impact will be felt in CPI inflation. And the same is true of QE. We should expect over-easy money to cause distortions that will come home to roost in the real economy - just not necessarily on the 1-2-year time horizon that suits most observers.
p.s.... if rates are too low for too long, of course someone becomes addicted to cheap money. The same would be true of what cheap beer prices do to alcohol addiction. The turkeys come home to root when rates have to go up, and we find out who the addicts are. In 2008, it was the banks. In 2006 it was the Asian banks and property developers. So, who is over-leveraged this time?
Friday, 6 December 2013
The good, the bad and the ugly of the US labour market report.
I'm not sure whether the economics profession has ever spent quite so much time arguing about whether the monthly US labour market data are good or bad, as they do now. We used to debate whether the figures meant very much, given that they are subject to big revisions, but we did at least agree whether they were good, boring, or awful.
So, two charts below to provide a very short interpretation of the issues with the data. The top chart shows the unemployment rate (in yellow, inverted, since 1980), and the employment rate. Unemployment is the percentage of people in the labour force that have not got a job. The employment ratio is the number of people with jobs, divided by the total population. From 1983 until 2004, the two moved together, falling unemployment seeing the employment rate rise, since then, things have got tougher. And since 2010, they tell very different stories. The unemployment rate has fallen steadily. Employment is growing at a rate of 1.7% per annum and payroll growth has been averaging about 170,000 per month for 5 years. The labour force has been growing much more slowly, so the unemployment rate has fallen. And you can draw a straight line through the data and conclude that a 3% fall in 4 years will get the unemployment rate under 6% in 2015. But while growth in the labour force is very weak, the population IS still growing and the employment rate is going nowhere. This is why so many people will tell you today that the fall in unemployment is the 'wrong sort of fall.
The second chart shows the two employment surveys, the household survey which asks people if they have a job and the establishment survey which asks companies how many people they employ. The headline non-farm payroll figure comes form the establishment survey, which is a larger sample. The unemployment rate comes from the household survey. The October data for the household survey were distorted by the Federal shutdown, and that caused the unemployment rate to rise, while employment fell. That is the white line. The Two lines mostly move together, though you can see they have crossed over since 2008. You can also see, I hope, that the household measure of employment has bounced in November, but has not recovered all the ground lost in October. So, if you take the household survey and look at the September-November outcome, jobs were not added. And in both surveys, you can see that employment is merely approaching the levels it was at in late 2007.
Overall, 1.7% employment growth is in line with the average of the last 50 years. That would be fine if we were not trying to recover from the worst recession of the last 50 years. The US economy is growing, but is not catching up lost ground. The unemployment rate is one measure which suggests that some, even much of the output lost in the recession has been lost for ever, and the future will simply see a normal growth path from a low level. Some US economists, including Larry Summers very publicly but also Janet Yellen, simply don't accept this. There is a belief that if the central bank maintains accommodative policy settings for long enough, they can recover some of this 'lost' output. Put it another way - if they ignore the falling unemployment rate maybe some of the people who have become disillusioned and left the labour market will go back to work. If they are wrong, US wage growth and then US inflation will go up if the economic recovery continues.
Personally, I admire the willingness of US policy-makers to throw away textbooks, re-write theories and refuse to accept that a 'new normal' economy is simply not as vibrant as the old one. The contrast with the lack of policy reaction to 0.1% GDP growth and 12% unemployment, is incredible. Refusing to accept the status quo is a bit like Oliver Twist asking for more gruel... it shakes things up.
So, two charts below to provide a very short interpretation of the issues with the data. The top chart shows the unemployment rate (in yellow, inverted, since 1980), and the employment rate. Unemployment is the percentage of people in the labour force that have not got a job. The employment ratio is the number of people with jobs, divided by the total population. From 1983 until 2004, the two moved together, falling unemployment seeing the employment rate rise, since then, things have got tougher. And since 2010, they tell very different stories. The unemployment rate has fallen steadily. Employment is growing at a rate of 1.7% per annum and payroll growth has been averaging about 170,000 per month for 5 years. The labour force has been growing much more slowly, so the unemployment rate has fallen. And you can draw a straight line through the data and conclude that a 3% fall in 4 years will get the unemployment rate under 6% in 2015. But while growth in the labour force is very weak, the population IS still growing and the employment rate is going nowhere. This is why so many people will tell you today that the fall in unemployment is the 'wrong sort of fall.
The second chart shows the two employment surveys, the household survey which asks people if they have a job and the establishment survey which asks companies how many people they employ. The headline non-farm payroll figure comes form the establishment survey, which is a larger sample. The unemployment rate comes from the household survey. The October data for the household survey were distorted by the Federal shutdown, and that caused the unemployment rate to rise, while employment fell. That is the white line. The Two lines mostly move together, though you can see they have crossed over since 2008. You can also see, I hope, that the household measure of employment has bounced in November, but has not recovered all the ground lost in October. So, if you take the household survey and look at the September-November outcome, jobs were not added. And in both surveys, you can see that employment is merely approaching the levels it was at in late 2007.
Overall, 1.7% employment growth is in line with the average of the last 50 years. That would be fine if we were not trying to recover from the worst recession of the last 50 years. The US economy is growing, but is not catching up lost ground. The unemployment rate is one measure which suggests that some, even much of the output lost in the recession has been lost for ever, and the future will simply see a normal growth path from a low level. Some US economists, including Larry Summers very publicly but also Janet Yellen, simply don't accept this. There is a belief that if the central bank maintains accommodative policy settings for long enough, they can recover some of this 'lost' output. Put it another way - if they ignore the falling unemployment rate maybe some of the people who have become disillusioned and left the labour market will go back to work. If they are wrong, US wage growth and then US inflation will go up if the economic recovery continues.
Personally, I admire the willingness of US policy-makers to throw away textbooks, re-write theories and refuse to accept that a 'new normal' economy is simply not as vibrant as the old one. The contrast with the lack of policy reaction to 0.1% GDP growth and 12% unemployment, is incredible. Refusing to accept the status quo is a bit like Oliver Twist asking for more gruel... it shakes things up.
Saturday, 16 November 2013
We don't work too much but we spend too much time at work
I've just posted a short piece about UK GDP, GDP per capita and what constitutes an economic recovery. A lot of people think that if GDP is going up but average real wages are falling and the overall financial position of many people is worse today than it was a year ago, then there is no economic recovery. It's hard to argue with that position.
But that's only part of the issue. 'GDP' is a measure of the total output of a country in monetary terms, but increasing total quantifiable output definitely isn't the only thing we should be trying to do.
Harry Eyres wrote a column for today's FT called Why work so hard? He quotes John Maynard Keynes' prediction that by 2030 we would all be much better off and would work far fewer hours. Keynes was right on the first, wrong on the second and Mr Eyres wants to understand why.
When I read the article I wondered whether Mr Eyres considers that writing articles for the FT is 'work' and would rather spend less time doing that and more time doing 'leisure' which is by definition more fun. Because if that's the case, he's doing a good job of kidding us, as his writing style suggests that travelling, reading, thinking and writing about the world as he sees it, is how he would spend his leisure time even if he did less 'work'. Journalists, especially ones who write columns like the 'The Slow Lane' aren't typical, but the line between 'work' and 'leisure' is being blurred and many of those who say they would rather spend less time 'working' often really mean 'less time at work, in this job'.
There are, I think, three issues. The first is money, the second is how we choose to spend our time and the third is our jobs.
When Keynes said he thought we would work fewer hours, 'work' meant leaving home to earn money in a farm, factory, mine, docks or army (for the vast majority of people, at any rate). The difference between work and leisure was very clear and that is why we have measures such as GDP which count the output from 'work' and ignore everything else (most obviously housework). This also gave rise to a fixation with productivity, a measure of how much we can produce per hour. Give me a better machine and better training and I can produce more, faster. More, faster, means more money and that's good. And so Keynes believed that we would reach a point where we could earn enough money to have fun while working fewer hours.
We still go to 'work' for money, but quite a lot of people would do the same thing in their leisure time as they do at work. One of the tragedies of our society is that so many old people suffer from loneliness and that's one reason why people work. You go to work to get paid, but it becomes a centre of your social life. I've seen too many men retire and then age 5 years in a few months and slowly vegetate because they have no idea what to do with their time, to believe that a life of enforced 'leisure' is so appealing that it should be the dominant goal of my working life.
I choose economics as a way to spend time, for work or in leisure. It would have been nice to have played golf this morning but frost having intervened, I've spent a couple of enjoyable hours reading. Was that work or leisure? The answer is that today, it's leisure because I'm not being paid. And that's a good thing because otherwise, I'd have to count all the hours I spend thinking about financial markets as 'work' and that would immediately make me less productive.
But here the difference between 'work' and 'job' becomes more important. How many teachers, doctors, nurses, or policemen for that matter went into the profession for love, but became disillusioned because of how they spend their time. If I could work from home whenever it was convenient; and surf the web, chat with friends and socialise when I was at 'work' that would not make less productive, it would just make me happier. Firms create insane levels of bureaucracy, of measurement and of time-wasting, partly in order to justify 'work'.
I'll give an example from financial market research. Almost every fund manager or other investor I have ever asked, has told me that what he or she wants from investment bank research teams are short, timely, thought-provoking ideas. They haven't got time to read long pieces, unless every single word is necessary to help them make money (and even then they want a one-page precis). They don't much like multi-authored 'house view' pieces because these tend to group-think consensus. They prefer high-conviction, spur of the moment pieces, or research that was the product of incredibly detailed analysis but summed up in a few words or even better, a single chart. And I know more and more who think 140 characters is about right for a research note.
So how do the world's investment banks react to this plea for brevity and strong opinion? By doing the exact opposite, of course. 'Less is more' is a great philosophy but persuading an employer that it would be a better idea to write less and go and spend four hours thinking on the golf course on a Monday morning, isn't easy.
So, Mr Eyres, I don't want to work fewer hours, but I don't want to waste time doing the wrong kind of work in the wrong place, either. I just need to persuade my employer to pay for my work, irrespective of where I do it.
Which takes me to another FT story, written by Izabella Kaminska on the Alphaville Blog. It considers The rise of the non-monetised economy but is worth a read on many levels. Ms Kaminska is paid to write pieces about foraging for mushrooms and wondering what to give her godchildren as presents, but as I pointed out earlier, maybe journalists aren't typical when we consider what is work and what is leisure.
But that's only part of the issue. 'GDP' is a measure of the total output of a country in monetary terms, but increasing total quantifiable output definitely isn't the only thing we should be trying to do.
Harry Eyres wrote a column for today's FT called Why work so hard? He quotes John Maynard Keynes' prediction that by 2030 we would all be much better off and would work far fewer hours. Keynes was right on the first, wrong on the second and Mr Eyres wants to understand why.
When I read the article I wondered whether Mr Eyres considers that writing articles for the FT is 'work' and would rather spend less time doing that and more time doing 'leisure' which is by definition more fun. Because if that's the case, he's doing a good job of kidding us, as his writing style suggests that travelling, reading, thinking and writing about the world as he sees it, is how he would spend his leisure time even if he did less 'work'. Journalists, especially ones who write columns like the 'The Slow Lane' aren't typical, but the line between 'work' and 'leisure' is being blurred and many of those who say they would rather spend less time 'working' often really mean 'less time at work, in this job'.
There are, I think, three issues. The first is money, the second is how we choose to spend our time and the third is our jobs.
When Keynes said he thought we would work fewer hours, 'work' meant leaving home to earn money in a farm, factory, mine, docks or army (for the vast majority of people, at any rate). The difference between work and leisure was very clear and that is why we have measures such as GDP which count the output from 'work' and ignore everything else (most obviously housework). This also gave rise to a fixation with productivity, a measure of how much we can produce per hour. Give me a better machine and better training and I can produce more, faster. More, faster, means more money and that's good. And so Keynes believed that we would reach a point where we could earn enough money to have fun while working fewer hours.
We still go to 'work' for money, but quite a lot of people would do the same thing in their leisure time as they do at work. One of the tragedies of our society is that so many old people suffer from loneliness and that's one reason why people work. You go to work to get paid, but it becomes a centre of your social life. I've seen too many men retire and then age 5 years in a few months and slowly vegetate because they have no idea what to do with their time, to believe that a life of enforced 'leisure' is so appealing that it should be the dominant goal of my working life.
I choose economics as a way to spend time, for work or in leisure. It would have been nice to have played golf this morning but frost having intervened, I've spent a couple of enjoyable hours reading. Was that work or leisure? The answer is that today, it's leisure because I'm not being paid. And that's a good thing because otherwise, I'd have to count all the hours I spend thinking about financial markets as 'work' and that would immediately make me less productive.
But here the difference between 'work' and 'job' becomes more important. How many teachers, doctors, nurses, or policemen for that matter went into the profession for love, but became disillusioned because of how they spend their time. If I could work from home whenever it was convenient; and surf the web, chat with friends and socialise when I was at 'work' that would not make less productive, it would just make me happier. Firms create insane levels of bureaucracy, of measurement and of time-wasting, partly in order to justify 'work'.
I'll give an example from financial market research. Almost every fund manager or other investor I have ever asked, has told me that what he or she wants from investment bank research teams are short, timely, thought-provoking ideas. They haven't got time to read long pieces, unless every single word is necessary to help them make money (and even then they want a one-page precis). They don't much like multi-authored 'house view' pieces because these tend to group-think consensus. They prefer high-conviction, spur of the moment pieces, or research that was the product of incredibly detailed analysis but summed up in a few words or even better, a single chart. And I know more and more who think 140 characters is about right for a research note.
So how do the world's investment banks react to this plea for brevity and strong opinion? By doing the exact opposite, of course. 'Less is more' is a great philosophy but persuading an employer that it would be a better idea to write less and go and spend four hours thinking on the golf course on a Monday morning, isn't easy.
So, Mr Eyres, I don't want to work fewer hours, but I don't want to waste time doing the wrong kind of work in the wrong place, either. I just need to persuade my employer to pay for my work, irrespective of where I do it.
Which takes me to another FT story, written by Izabella Kaminska on the Alphaville Blog. It considers The rise of the non-monetised economy but is worth a read on many levels. Ms Kaminska is paid to write pieces about foraging for mushrooms and wondering what to give her godchildren as presents, but as I pointed out earlier, maybe journalists aren't typical when we consider what is work and what is leisure.
When rising GDP isn't a 'recovery'. Part 1
There's a debate on LBC radio this morning about the prospects for and the nature of, the economic recovery currently underway in the UK. Here are a few facts, as I see them. Firstly, the UK's current recovery is the most pathetically weak of any in the last hundred years, including the period after the Great Depression. Secondly, real GDP is now growing and most forward-looking indicators suggest that it will continue to do so. And thirdly, so far real GDP per capita has not recovered noticeably, with the GDP recovery itself mostly due to an increase in the population.
I wrote about the economic implications of population growth a couple of weeks ago. An influx of people looking for work in the UK is keeping wages down, boosting demand and will in due course help boost output. But it is also placing huge demands on antiquated infrastructure (transport, utilities, education and the health system) which is a factor behind the UK's inflation rate being higher than it is in a lot of other countries. This is not the only reason the UK has higher inflation but it plays a large part. And so, wage growth is depressed,as new workers compete for jobs and real wages fall. Overall demand is boosted as new arrivals find somewhere to live and spend money; Housing costs go up in the South East as supply fails to keep up with demand. And that leads to a debate about whether there really is a recovery at all. I think there's a completely separate debate to be had about GDP as a measure of economic success. I'll get more coffee as I swap a frosted golf course for sun shining through the living room window, and then get into that but first I'll finish up on the UK 'recovery'.
Stronger growth and above-target inflation are beginning to put pressure on the Bank of England Governor and his MPC colleagues to increase interest rates. They are resisting this pressure, preferring to delay any policy tightening until the unemployment rate has fallen a good bit further. The pressure won't go away and with ex-MPC members debating the economic outlook and policy implications, I suspect that the MPC will struggle to maintain a united front through 2014. Low rates will go on supporting house prices in the capital and South East (which is increasingly not seen as a good thing by the majority of people). Meanwhile, the pound is recovering some of the fall which followed the 2008 crisis. This is a good thing. The weak pound pushed up import prices and hurt consumer demand, more than it boosted exports (largely because the UK's main export markets in Europe were and remain very weak). A de facto policy of using sterling weakness to help re-balance the economy towards manufacturing was in my opinion both a mistake and a failure.
I suspect the difference between a recovery in 'GDP' and a recovery in real per capital disposable incomes will be a major source of political debate in the next couple of years. As, inevitably, will the social consequences of immigration. I am optimistic that the economy will benefit over time from being the go-to place for anyone in Europe who wants a job, but I do wish that this would trigger a response in terms of investment in the education, transport and regional development that would allow recovery to be shared across the UK and across economic sectors. Apart from anything else, if the UK doesn't do that, we'll have a truly terrifying trade deficit in about 5 years' time.
I wrote about the economic implications of population growth a couple of weeks ago. An influx of people looking for work in the UK is keeping wages down, boosting demand and will in due course help boost output. But it is also placing huge demands on antiquated infrastructure (transport, utilities, education and the health system) which is a factor behind the UK's inflation rate being higher than it is in a lot of other countries. This is not the only reason the UK has higher inflation but it plays a large part. And so, wage growth is depressed,as new workers compete for jobs and real wages fall. Overall demand is boosted as new arrivals find somewhere to live and spend money; Housing costs go up in the South East as supply fails to keep up with demand. And that leads to a debate about whether there really is a recovery at all. I think there's a completely separate debate to be had about GDP as a measure of economic success. I'll get more coffee as I swap a frosted golf course for sun shining through the living room window, and then get into that but first I'll finish up on the UK 'recovery'.
Stronger growth and above-target inflation are beginning to put pressure on the Bank of England Governor and his MPC colleagues to increase interest rates. They are resisting this pressure, preferring to delay any policy tightening until the unemployment rate has fallen a good bit further. The pressure won't go away and with ex-MPC members debating the economic outlook and policy implications, I suspect that the MPC will struggle to maintain a united front through 2014. Low rates will go on supporting house prices in the capital and South East (which is increasingly not seen as a good thing by the majority of people). Meanwhile, the pound is recovering some of the fall which followed the 2008 crisis. This is a good thing. The weak pound pushed up import prices and hurt consumer demand, more than it boosted exports (largely because the UK's main export markets in Europe were and remain very weak). A de facto policy of using sterling weakness to help re-balance the economy towards manufacturing was in my opinion both a mistake and a failure.
I suspect the difference between a recovery in 'GDP' and a recovery in real per capital disposable incomes will be a major source of political debate in the next couple of years. As, inevitably, will the social consequences of immigration. I am optimistic that the economy will benefit over time from being the go-to place for anyone in Europe who wants a job, but I do wish that this would trigger a response in terms of investment in the education, transport and regional development that would allow recovery to be shared across the UK and across economic sectors. Apart from anything else, if the UK doesn't do that, we'll have a truly terrifying trade deficit in about 5 years' time.
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