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Economists are puzzled over the wage growth conundrum. Wages were supposed to rise significantly. They didn’t. Why?

Let’s start with a look at the conundrum expressed in a Tweet.

This is a confusing jobs report. US employers added the most workers since mid-2016, but hourly wages didn’t increase as much as analysts had expected. Bond traders are generally taking this to be positive for growth, with yields ticking up, but the inflation conundrum remains.

8:33 AM – Mar 9, 2018

Confused? Most economists were, especially at Econoday. I wasn’t.

There’s still no wage inflation underway but the flashpoint may be sooner than later based on unusual strength in the February employment report. Nonfarm payrolls rose an outsized 313,000 which is more than 80,000 above Econoday’s high estimate. Revisions add to the strength, at a net 54,000 for January which is now 239,000 and December which is 175,000.

Despite all this strength average hourly earnings actually came in below expectations, at only plus 0.1 percent with the year-on-year 3 tenths under the consensus at 2.6 percent. But given how strong demand is for labor, policy makers at the Federal Reserve may not want to risk runaway wage gains as employers try increasingly to attract candidates.

The workweek further points to strength, up 1 tenth to an average 34.5 hours for all employees with the prior month revised 1 tenth higher to 34.4 hours (the private sector workweek rose 2 tenths to 38.8 hours with manufacturing also up 2 tenths to 41.0 hours in a gain that points to strength for next week’s industrial production report).

The unemployment rate held at a very low 4.1 percent as discouraged workers flocked into the jobs market. The labor participation rate is another major headline, up 3 tenths to 63.0 percent and again well beyond high-end expectations.

The sheer strength of the hiring in this report would appear certain to raise expectations for four rate hikes this year as Fed policy makers may begin to grow impatient with their efforts to cool demand.

…click on the above link to read the rest of the article…

The Status Quo Will Reign

March 1, 2018

The Status Quo Will Reign

This month’s stock market correction is still fresh in everyone’s mind. Many have even begun to wonder if the era of dark money was truly over.

How will the recent correction affect the Fed’s dark money policies?

The consensus explanation for the correction was that inflation was rising and that would precipitate faster rate increases. The Feb. 2 unemployment report gave the impression that higher worker wages could lead to a higher inflationary trend.

I don’t buy this at all. I believe these fears of inflation are overblown.

As my colleague Jim Rickards has explained, the Feb. 2 report revealed that total weekly wages were actually declining and that labor force participation was unchanged. And the year-over-year gain in wages only seemed impressive compared with the extremely weak wage growth of recent years.

After accounting for existing inflation, Jim argued, the real gain was only 0.9%. That’s weak relative to the 3% or even 4% real wage gains typically associated with economic expansions since the end of World War II.

In short, Jim concludes, “the story about the “hot” economy with inflation right around the corner does not hold water.”

I agree.

Meanwhile, the latest report on U.S Gross Domestic Product (GDP) for the fourth quarter of 2017 was nothing to write home about. At 2.6% annual growth, it was 0.3% lower than expectations. That’s not the sign of an overheating economy. But those in the financial media considered it positive because it showed 2.80% growth in real personal consumption.

But if you look beneath the surface, what you’d see is that consumers aren’t actually doing well across three core areas that “govern the ability of individuals to spend.”

…click on the above link to read the rest of the article…

Mnuchin’s Wrong: Here’s Why Investors Should Be Very Worried About Inflation

February 27, 2018

Mnuchin’s Wrong: Here’s Why Investors Should Be Very Worried About Inflation

Despite Treasury Secretary Steven Mnuchin’s bizarre insistence that there’s no connection between consumer-price inflation and rising energy prices and wages, these factors – plus a spate of others – are forcing some food companies to consider raising prices on goods from chicken to cereal, according to Reuters.

One of these factors, as Reuters explores in a wide-ranging feature published on Monday, involves US trucking and railroad operators foisting higher shipping rates on customers like General Mills Inc. and Hormel Foods Corp.

According to Reuters, transportation costs are climbing at double the rate of inflation.

These increases are catching food companies off guard. Struggling railroads and trucking companies haven’t expanded their capacity, choosing instead to focus on cost cuts – much to Wall Street’s delight.

Interviews with executives at 10 companies across the food, consumer goods and commodities sectors reveal that many are grappling with how to defend their profit margins as transportation costs climb at nearly double the inflation rate.

Two executives told Reuters their companies do plan to raise prices, though they would not divulge by how much. A third said it was discussing prospective price increases with retailers.

The prospect of higher prices on chicken, cereal and snacks costs comes as inflation emerged as a more distinct threat in recent weeks. The U.S. Labor Department reported earlier this month that underlying consumer prices in January posted their biggest gain in more than a year.

As US economic growth has revved up, railroads and truck fleets have not expanded capacity to keep pace – a decision applauded by Wall Street. Shares of CSX Corp, Norfolk Southern, and Union Pacific Corp have risen an average 22 percent over the past year as they cut headcount, locomotives and rail cars, and lengthened trains to lower expenses and raise margins.

…click on the above link to read the rest of the article…

How the Fed’s Inflation Policies Crucify Workers in Pictures

February 19, 2018

How the Fed’s Inflation Policies Crucify Workers in Pictures

Every month, pundits comment on average wages. But median wages best explain how the Fed’s policies crucify workers.

The meme of the day is wage growth is accelerating.

I disputed that notion on February 7, in Acceleration in Wage Growth is a Statistical Mirage.

On February 16, I reported Congratulations Workers! You Make One Penny More Than a Year Ago.

That penny more a year is by hour, in “real” inflation-adjusted terms. The calculation is from the BLS.

Nonetheless, the Fed is not happy with wage destruction.Various Fed presidents seek still higher inflation.

Inflation Targeting

Instead of using an inflation target of 2%, San Francisco Fed President John Williams proposes the Fed use a price-level target, that would allow inflation to run higher during expansions to make up for prior shortfalls.

We need that discussion, but in the opposite sense because the Fed’s insistence inflation in a disinflationary world has seriously harmed median and average wage earners.

Occupational Employment Statistics (OES) from the BLS supports this view.

The following charts are from OES data downloads at the state and national level coupled with additional CPI data from the BLS.

Data for these charts are from May 2005 through May 2016. Those are not arbitrary dates.

The latest OES data is from May of 2016 and prior to May of 2005, the OES used varying months. Having all yearly data from May allows easy comparison of wages vs. year-over-year CPI measurements.

National Hourly Wages

Wage Differentials Mean vs. Median Hourly Wages by State

Every month, analysts track the monthly jobs report for “average” wage increases. Such analysis is misleading because most of the benefits go to the top tier groups.

This behavior is not unexpected, but it makes it very difficult for the bottom half of wage earners who do not own a house, to buy a house.

…click on the above link to read the rest of the article…

Nine Reasons Why Globalization Can’t Be Permanent

February 1, 2018

Nine Reasons Why Globalization Can’t Be Permanent

Since the late 1990s, globalization has seemed to be the great hope for the future. Now this great hope seems to be dimming. Globalization sets up conflict in the area of jobs. Countries around the world compete for development and jobs. If there is not enough cheap-to-produce energy to go around, huge wage disparity is likely to result.

We know from physics and history that economies need to grow, or they collapse. The wage disparity that high-wage countries have been experiencing in recent years is evidence that the world economy is already reaching energy limits. There are no longer enough jobs that pay well to go around. Any drop in energy supply is likely to worsen the job situation.

Most observers miss this problem, because they expect high oil prices to signal energy limits. This time, the signal is low wages for a significant group of workers, rather than high oil prices. This situation is possible in a networked economy, but it is not what most people look for.

Unhappy citizens can be expected to react to the wage disparity problem by electing leaders who favor limits to globalization. This can only play out in terms of reduced globalization.

History and physics suggest that economies without adequate energy supply can be expected to collapse. We have several recent examples of partial collapses, including the Great Depression of the 1930s and the collapse of the Soviet Union. Such collapses, or even more extensive collapses, might occur again if we cannot find energy alternatives that can be quickly scaled up to replace oil and coal in the very near term. These replacements need to be cheap-to-produce, non-polluting, and available in huge quantities.

The story that the economy doesn’t really need a growing supply of very cheap-to-produce energy is simply a myth. Let’s look at some of the pieces of this story.

…click on the above link to read the rest of the article…

The Rowboat (Wages) and the Yacht (Assets)

February 1, 2018

The Rowboat (Wages) and the Yacht (Assets)

As I keep saying: the status quo has divested the working and middle classes.

The reason why the status quo has failed and is fragmenting is displayed in these three charts of wages, employment and assets: wage earners (labor) are in a rowboat trying to catch the yacht of those who own assets (capital).

Here is a chart of weekly wages of those employed fulltime: up a gargantuan $4/week in the 18 years since 2000. Let’s see, $4 times 52 week a year–by golly, that’s a whole $208 a year. Brand new Ford F-150, here we come!

If we go back 38 years to 1980–an entire lifetime of work–we find real (adjusted for official inflation, which seriously understates big-ticket expenses such as rent, healthcare and college tuition/fees) wages have notched higher by $10/week–a gain of $500 annually.

If we adjusted wages by real-world income, we’d find wages have declined since 1980 and 2000.

Here’s employment by age group since the year 2000. THose who can’t afford to retire are still dragging their tired old bones to work while employment for the under-55 cohort hasn’t even returned to the levels of 2000.

Meanwhile, asset valuations have soared. Those who own capital (assets) have done very, very well, those who trade their labor for dollars–they’ve gone nowhere.

Households with two regular jobs could afford to buy a house in Seattle, Brooklyn, or the San Francisco Bay Area in 1995. By 2005, they were priced out. Can a household with median income ($59,000 annually) afford a crumbling shack in any of the white-hot housing markets? You’re joking, right?

The cold reality is wage-earners are tugging on the oars of a water-logged rowboat, trying to catch up with the sleek yacht of asset owners. The system has been rigged to reward those who own assets (capital) or who can borrow immense sums of nearly-free money (credit) to buy assets.

…click on the above link to read the rest of the article…

Mystery: Australian electricity costs rise six times faster than wages – up another 12%

January 31, 2018

Mystery: Australian electricity costs rise six times faster than wages – up another 12%

More bad luck for the renewables industry. Despite providing free energy from the sun and wind, electricity prices keep rising relentlessly, shockingly fast. Even doubling in wholesale costs in South Australia and Victoria.

It was supposed to be cheap to collect low-level-energy across hundreds of thousands of square kilometers. Who knew that subsidized, unreliable energy would induce volatile pricing, allow the players to game the system, create obscene spikes, drive out the cheapest providers, require expensive battery storage, more frequency control, more maintenance, just as much back up supply, $400 million dollars worth of extra diesel generators (and the rest) and extra long transmission lines? Who knew? — Probably thousands of engineers.

Spot the pattern? Every other nation with lots of renewables has expensive electricity and our forward market says there’s more price rises coming.

Australian electricity prices rising six times faster than wages are growing

Sydney Morning Herald

Electricity prices have jumped by six times the rate of the average pay rise, new figures reveal, as family wallets are increasingly squeezed by essential services such as education, utilities and fuel.

The most significant price rises were electricity, up 12.4 per cent, fuel up 10.4 per cent, domestic holiday travel up 6.3 per cent and fruit up 9.3 per cent.

Australian Electricity prices, CPI, Graph.

Consumer Price Index

If you think our economy is flaming out now, wait til we reach the 23% RET target, and pay for the $1 billion interconnectors and the $4 billion extra hydro storage that we didn’t need when we had enough coal power. Then, after we reach the bottom, we’ll have to pay more to build new USC coal baseload, just to keep up with Indonesia, because we were too frightened to upgrade the old cheap plants; and it’s too frightening for any investors to do it for us.

…click on the above link to read the rest of the article…

The Pie Is Shrinking So Much The 99% Are Beginning To Starve

January 27, 2018

Melissa E Dockstader/Shutterstock

The Pie Is Shrinking So Much The 99% Are Beginning To Starve

How much longer until the pitchforks come out?

Social movements arise to solve problems of inequality, injustice, exploitation and oppression. In other words, they are solutions to society-wide problems plaguing the many but not the few (i.e. the elites at the top of the wealth-power pyramid).

The basic assumption of social movements is that Utopia is within reach, if only the sources of the problems can be identified and remedied. Since inequality, injustice, exploitation and oppression arise from the asymmetry of power between the few (the financial and political elites) and the many, the solution is a reduction of the asymmetry; that is a tectonic realignment of the social structure that shifts some power—economic and/or political—from the few to the many.

In some instances, the power asymmetry is between ethnic or gender classes, or economic classes (for example, labor and the owners of capital).

Social movements are characterized by profound conflict because the beneficiaries of the power asymmetry resist the demands for a fairer share of the power and privileges, while those who’ve held the short end of the stick have tired of the asymmetry and refuse to back down.

Two dynamics assist a social, political and economic resolution that transfers power from those with too much power to those with too little power: 1) the engines of the economy have shifted productive capacity definitively in favor of those demanding their fair share of power, and 2) the elites recognize that their resistance to power-sharing invites a less predictable and thus far more dangerous open conflict with forces that have much less to lose and much more to gain.

In other words, ceding 40% of their wealth-power still conserves 60%, while stubborn resistance might trigger a revolution that takes 100% of their wealth-power.

…click on the above link to read the rest of the article…

Will the World Economy Continue to “Roll Along” in 2018?

January 10, 2018

Will the World Economy Continue to “Roll Along” in 2018?

Once upon a time, we worried about oil and other energy. Now, a song from 1930 seems to be appropriate:

Today, we have a surplus of oil, which we are trying to use up. That never happened before, or did it? Well, actually, it did, back around 1930. As most of us remember, that was not a pleasant time. It was during the Great Depression.

Figure 1. US ending stocks of crude oil, excluding the Strategic Petroleum Reserve. Amounts will include crude oil in pipelines and in “tank farms,” awaiting processing. Businesses normally do not hold more crude oil than they need in the immediate future, because holding this excess inventory has a cost involved. Figure produced by EIA. Amounts through early 2016.

A surplus of a major energy commodity is a sign of economic illness; the economy is not balancing itself correctly. Energy supplies are available for use, but the economy is not adequately utilizing them. It is a sign that something is seriously wrong in the economy–perhaps too much wage disparity.

Figure 3. U. S. Income Shares of Top 10% and Top 1%, Wikipedia exhibit by Piketty and Saez.

If wages are relatively equal, it is possible for even the poorest citizens of the economy to be able to buy necessary goods and services. Things like food, homes, and transportation become affordable by all. It is easy for “Demand” and “Supply” to balance out, because a very large share of the population has wages that are adequate to buy the goods and services created by the economy.

…click on the above link to read the rest of the article…

Gail Tverberg: The Coming Energy Depression

January 8, 2018

Gail Tverberg: The Coming Energy Depression

The math is straightforward, but cruel

As most PeakProsperity.com readers know, we fully agree with the statement: Energy is THE master resource.

Without it, nothing can get done.

Energy analyst and professional actuary Gail Tverberg returns to the podcast this week to revisit the global energy outlook. And fair warning, Gail warns it’s quite grim.

To her, it’s a simple math problem. We have too many people placing too much demand on the world’s depleting energy resources. The cost of energy is rising, which we are compensating for in the short term by using financial gimmicks to make “affordable” — when all we’re really doing is creating future promises that cannot possibly be repaid.

The increasing cost of energy is manifesting in higher prices (for everything, not just fuels) and lower real wages, a divergence she sees only worsening from here. This path leads to another Great Depression-style crisis from which she does not see a clear path out of:

What we really live on is what we pull out of the ground each year, in terms of oil or coal or natural gas or whatever. So what we have is just what we pull out.

Now, you accurately point out that we’re making too many claims on the future using debt. We’re actually doing this via a couple of different ways, which are pretty much equivalent. One of them is by issuing equity. This has the equivalent effect as using debt because what you’re saying is I’ll pay you dividends, and you’re going to get a higher price in the future. This is simply different kind of claim on the future. Another way to borrow from the future is through government promises.

…click on the above link to read the rest of the article…

Economists Think Inflation Will Rise Sharply in 2018: They’re Wrong

January 4, 2018

Economists Think Inflation Will Rise Sharply in 2018: They’re Wrong

Let’s investigate six reasons economists think inflation is about to pick in 2018, and why I think they are dreaming.

Reason Number One – Wage Hikes

Minimum wages rise in 18 states starting in 2018.

Former Fed Vice-Chairman Stanley Fischer told Bloomberg TV on October 4, “I still believe we will have higher inflation. The basic mechanism here is unemployment is declining all the time, wages will start going up at some stage.”

Wage Hike Rebuttal

The National Bureau of Economic Research paper: Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle, 2017 concludes there was a negative benefit to low wage workers as a result of wage hike.

The NBER Two-Page Synopsis finds:

A 9% reduction in hours worked at wages below $19/hour.
A reduction of over $100 million per year in total payroll for low-wage jobs, measured as total sum of increased wages received less wages lost due to employment reductions. Total payroll losses average about $125 per job per month.
The findings that total payroll for low-wage jobs declined rather than rose as a consequence of the 2016 minimum wage increase is at odds with most prior studies of minimum wage laws. These differences likely reflect methodological improvements made possible by Washington State’s exceptional individual-level data. When we replicate methods used in previous studies, we produce the same results as previously found.

This is an issue that’s debated over and over again, mostly with poor methodologies to come to the desired conclusion.

In contrast, the NBER had “exceptional individual-level data”.

Adding support the NBER’s conclusion, the Bank of Canada estimates Minimum Wage Hikes Could Cost Canada’s Economy 60,000 jobs by 2019.

By the way, and as discussed in Staggering Rent Increases in 2017, the median U.S. rental now requires 29% of median monthly income, according to Zillow. Between 1985 and 2000, renters spent about 25.8% of their income on housing.

Next, factor in student debt.

…click on the above link to read the rest of the article…

The Great Retirement Con

November 17, 2017

Shutterstock

The Great Retirement Con

Frankly put: retirement is now a myth for the majority

The Origins Of The Retirement Plan

Back during the Revolutionary War, the Continental Congress promised a monthly lifetime income to soldiers who fought and survived the conflict. This guaranteed income stream, called a “pension”, was again offered to soldiers in the Civil War and every American war since.

Since then, similar pension promises funded from public coffers expanded to cover retirees from other branches of government. States and cities followed suit — extending pensions to all sorts of municipal workers ranging from policemen to politicians, teachers to trash collectors.

A pension is what’s referred to as a defined benefit plan. The payout promised a worker upon retirement is guaranteed up front according to a formula, typically dependent on salary size and years of employment.

Understandably, workers appreciated the security and dependability offered by pensions. So, as a means to attract skilled talent, the private sector started offering them, too.

The first corporate pension was offered by the American Express Company in 1875. By the 1960s, half of all employees in the private sector were covered by a pension.

Off-loading Of Retirement Risk By Corporations

Once pensions had become commonplace, they were much less effective as an incentive to lure top talent. They started to feel like burdensome cost centers to companies.

As America’s corporations grew and their veteran employees started hitting retirement age, the amount of funding required to meet current and future pension funding obligations became huge. And it kept growing. Remember, the Baby Boomer generation, the largest ever by far in US history, was just entering the workforce by the 1960s.

…click on the above link to read the rest of the article…

4 In 10 Canadians Can Not Cover Basic Expenses Without Going Deeper In Debt

October 24, 2017

4 In 10 Canadians Can Not Cover Basic Expenses Without Going Deeper In Debt

Back on July 13, when the BOC hiked rates by 25bps to 0.75% – its first rate hike in 7 years – followed by another unexpected rate hike in September, we documented some troubling trends among Canadian households, including the record household debt-to-income ratio…

… the sliding average hourly wages…

… as well as the unprecedented Canadian housing bubble which puts US home prices to shame…

… followed by a just as troubling observation that Canadian reliance on housing has never been greater in the form of loans secured by property reaching an all time high…

… we warned that the combination of rising interest rates and Canada’s record reliance on debt, would be a dangerous combination.

Our fears were confirmed three months later, when BNN reported that a survey released yesterday found that almost half of Canadian households don’t feel financially prepared for further interest rate increases.

According to the Ipsos poll, conducted on behalf of MNP, 40% of respondents said they fear ending up in financial trouble if rates go up much higher, with one-in-three already feeling the impact of higher rates.

“It’s clear that people are nowhere near prepared for a higher rate environment,” MNP President Grant Bazian said in a release. “The good news is that there seems to be at least the acknowledgement now that rates are going to climb which might make people reassess their spending habits – especially using credit.”

It gets worse: 42% of respondents said they don’t think they can cover basic expenses over the next year without going deeper into more debt. The same number said they’re within $200 of not being able to cover monthly expenses.

…click on the above link to read the rest of the article…

Is Population Decline Catastrophic?

October 7, 2017

Is Population Decline Catastrophic?

In the 1970’s we heard the earth was going to get so crowded we’d be falling off. Now the panickers have flipped to population decline. They were wrong in the 70’s, so are they wrong again? Is a declining population catastrophic?

Countries from Germany to Japan are investing in mass immigration or pro-birth policies on the assumption that they must import enough warm bodies to stave off economic collapse. I think this is mistaken. Falling population on a country level is certainly no catastrophe and, indeed, may be positive. I’ll outline some reasons here.

Historically, the first question is why population declined. If it’s the Mongols invading again then, yes, the economy will suffer. Not because of the death alone, but because wholesale slaughter tends to destroy productive capital as well.

On the other hand, if the population is declining from non-war, we have a well-studied natural experiment in the Black Plague. Which is generally credited with the “take-off” of the West. Because if the population declines by a third while capital including arable land stays the same, you get a surplus. Same resources divided by fewer people.

Think of zombie movies where dude’s running around with unlimited resources at his disposal — free cars, riverfront penthouses. That, in diluted form, is what a declining population gives us — more land, more highways or buildings, more resources per person.

Now, if the population’s declining not because of a terrible disaster like the Plague, rather because people simply want fewer children, then you don’t even get the massive hit from losing productive people. A worker dying at 40 takes a lot of productivity with him, while a child unborn isn’t actually destroying anything but hopes and dreams.

So if the Plague was a per capita economic bonanza to Europe, having fewer children should be an even larger per capita bonanza.

…click on the above link to read the rest of the article…

The Insanity of Pushing Inflation Higher When Wages Can’t Rise

September 6, 2017

The Insanity of Pushing Inflation Higher When Wages Can’t Rise

In an economy in which wages for 95% of households are stagnant for structural reasons, pushing inflation higher is destabilizing.

The official policy goal of the Federal Reserve and other central banks is to generate 3% inflation annually. Put another way: the central banks want to lower the purchasing power of their currencies by 33% every decade.

In other words, those with fixed incomes that don’t keep pace with inflation will have lost a third of their income after a decade of central bank-engineered inflation.

There is a core structural problem with engineering 3% annual inflation. Those whose income doesn’t keep pace are gradually impoverished, while those who can notch gains above 3% gradually garner the lion’s share of the national income and wealth.

As I showed in Why We’re Doomed: Stagnant Wages, wages for the bottom 95% have not kept pace with official inflation (never mind real-world inflation rates for those exposed to real price increases in big-ticket items such as college tuition and healthcare insurance).

Most households are losing ground as their inflation-adjusted (i.e. real) incomes stagnate or decline.

As I’ve discussed in numerous posts, the stagnation of wages is structural, the result of multiple mutually reinforcing dynamics. These include (but are not limited to) globalized wage arbitrage (everyone in tradable sectors is competing with workers around the world); an abundance/ oversupply of labor globally; the digital industrial revolution’s tendency to concentrate rewards in the top tier of workers; the soaring costs of labor overhead (healthcare insurance, etc.) that diverts cash that could have gone to wage increases to cartels, and the dominance of credit-capital over labor.

In an economy in which wages for 95% of households are stagnant for structural reasons, pushing inflation higher is destabilizing. The only possible output of pushing inflation higher while wages for the vast majority are stagnating is increasing wealth-income inequality–precisely what’s happened over the past decade of Federal Reserve policy.

…click on the above link to read the rest of the article…

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