Tuesday, July 17, 2018

Is Inflation Back?

Is inflation coming back? Are hoola hoops returning? I don't really know since I still don't know how to predict the future. But people want to know answers to these kinds of questions so we devise ways to think about the future. One way is to hire a psychic or you could buy a Ouija Board.

In economics we resort to two well criticized methods -- we base forecasts on imperfect theories or take a walk through the data. While inflation theories can be quite complicated, many of us today throw them around like salmon at the Seattle Fish Market. The simpler the better. The economy is stronger than it used to be. Excess capacity is diminishing. Presto, firms can get higher prices for goods and services and inflation is higher. Job done. Way to go dudes.

Sometimes people or what we sometimes refer to as the "street" take these sophisticated theory-based forecasts seriously. Those very important people who comprise the Federal Reserve Open Market Committee (FOMC) take this information seriously and have announced that they have diverted their war against unemployment to a war against inflation. Or in more common layman's language they decided to raise interest rates four times this year.

When the Fed announces a plan to raise interest rates four times in a year that is big stuff. Some emerging markets suffered already as rich folks moved their money back to the USA in anticipation of jucier returns here. Some folks have decided to postpone their purchases of SUVs and garden condos because of higher interest rates. People who worry about inflation are now even more worried about inflation because the Fed would never lie. If the Fed is worried about future inflation then so should they.

While other parts of inflation theory would argue against a sustained rise in inflation, we ignore those irritating little details and sweep them under the rug. I have covered those points in recent posts and don't want to go over that today. Let's just say that most people seem to be clinging to a theory that predicts that strong US growth is going to raise inflation.

Today I want to play games with numbers. I chose to look at recent inflation rates. There are at least as many inflation rate indicators as there are SUVs. So one has to make a choice or write a 700 page dissertation. I chose the measure supposedly used by the FOMC -- the rate of change of the personal consumption expenditures (PCE) deflator. The PCE deflator is very much like its more well-know cousin, the Consumer Price Index (CPI), but it is a lot prettier and dresses better.

There is a version of the PCE deflator that ignores changes in food and energy prices. Food and energy prices are more erratic than a Trump behind a Twitter board. By ignoring F&E in an inflation measure, we focus on things that are less erratic and more sustained. Policy is supposed to ignore all those random fluctuations and focus on more sustained or persistent changes in prices.

I decided that since inflation of the PCE deflator less F&E has been rising for about 7 months -- I would focus on the 7 month annualized change in that index. Those numbers are found in the table below. I am comparing these 7 months changes over 7 month time periods since near the end of the last recession. Thus the table looks at inflation information from 2009 to 2017.

We begin the story by looking at the bottom numbers in the bottom of the table, 2.08 and .04. The 2.08 is the moving average of the inflation rate over the seven months from October of 2017 to May of 2018. Looking up that column you see its the highest number. Thus we see that inflation is higher now. The 0.4 says it was almost half of a percentage point higher than in the previous 7 month period. So that data shows inflation (PCE less F&E averaged over 7 months) is clearly higher.

Does the rest of the table tell us anything else about inflation that could be useful when thinking about the future? Notice that some of the rows of numbers are in red. In those rows the inflation rate in that 7 month period was lower than in the previous 7 month period. Inflation has not gone up linearly since 2009. It goes up and then it goes down. I chose 7 month moving averages because that time coincides with the latest increases in inflation -- and because it is a long enough period to be measuring sustained changes.

The point is that inflation has not sustained itself at higher levels since 2009. It bumps up and then it bumps down. Notice in 2016 there were back-to-back seven month periods when the inflation rose by .29 and then .44 points. Surely inflation was on a tear. But then those two periods were followed by  a seven month decline by .83 points. Hmm -- not so much a tear.

I'm not going to bore you with a discussion of all these numbers. But I do think that the two recent bouts of inflation from early 2017 to early 2018 do not prove that inflation is roaring back. Those two periods are not unlike what happened the year before and from what often happens in history after the inflation rate rises for a while.

There is no reason from either data or theory to be sure that inflation will come roaring back like a World Cup player after encountering what appeared to be a life-ending fall on the turf. I am happy the Fed seems to have ended its vendetta against unemployment but that doesn't mean they have to turn their guns on inflation. Just slowly return monetary policy to normalcy. That's all they need to do. Quit scaring the rest of us with your anti-inflation rhetoric. Extreme changes in policy from the frying pan into the fire can cause recessions. Here's a great idea -- let's have a monetary policy that goes from extreme to normal!

Personal Consumption Expenditures Deflator
Less Food and Energy 
Annualized Percent Change, 
Seven Month Moving Average


7 Mo
Avg Change
2009 Aug 1.46
2010 Mar 1.57 0.11
2010 Nov 0.89 -0.68
2011 May 1.8 0.91
2011 Dec 1.7 -0.1
2012 Jul 1.93 0.23
2013 Feb 1.59 -0.34
2013 Sep 1.25 -0.34
2014 Apr 1.78 0.53
2014 Nov 1.43 -0.35
2015 Jun 1.3 -0.13
2016 Jan 1.59 0.29
2016 Aug 2.03 0.44
2017 Mar 1.2 -0.83
2017 Oct 1.68 0.48
2018 May 2.08 0.4

Tuesday, July 10, 2018

The Age of Communication

My last two posts were more philosophy and less economics. How about a third one? Let’s call this one the irony of the age of communication.

Can one doubt that we are living in a new era based on communication? It sounds modern, doesn’t it? Think about it. We have Alexa in our living rooms. We spend a lot of time talking to her so that she will play music for us. She also turns on and off some lights while we are on vacation. I hear she listens in on our conversations but that is for another post. What matters is that I can communicate with a robot sitting on a table.

I also can communicate with people. Remember when making an international call was costly and difficult? Remember when making a long-distance domestic call was advanced? No more. And now you can even see the people at the other end if you use Skype or your iPhone. We can talk and talk and talk. Grandpa, did you gain a few pounds? Ha hah. Hey, Grandma is that a little mustache on your lip?

When I say "Hey Google" to my phone, I can communicate an information need. It’s more fun than typing into my Google search bar. Then Google tells me stuff that I forgot. Hey Google, when was Dolly Parton born? Hey Google, what year did Elvis die? When was Party Doll banned in Boston? I can even look up the seven signs of a coming heart attack. How cool is that? And I can do all this in my easy chair, in my car, and while walking on a crowded sidewalk.

This really is the age of communication and possibly the age of information and communication (I&C). Remember when we were kids and we had a huge bookcase in the living room that held our family encyclopedia? We had the kind you get when you accumulated enough Green Stamps. More financially successful families had the version by Britannica. But both did the same thing – they connected us to all sorts of facts. Now we don’t need a bookshelf or thousands of pages of paper and print. We now have computers, tablets, and phones. All that information and more is easily found in those tiny little boxes. It is more accessible and much cheaper.

All the above sounds pretty good. But here is what worries me after my fourth JD. Is there any connection between knowledge and the age of I&C? A na├»ve person would think there was not only a connection but a damn good positive one. That is, with more information and communication at our fingertips, surely we must know more and surely we must have more positive control over our environment. Surely more I&C makes us better off. 

Imagine taking a physics class where you learn all sorts of important things about the world. Things that make your life better. For example, Professor Bortell taught us about gravity and made us repeat several times that what goes up must come down. I can still remember that and so far I have not once hit myself on the head after throwing heavy objects into the air. Today’s physics students have to learn the same theories but I am guessing that job is made all the easier because of the ease of finding information about things that we could only find in our heavy, thick textbooks and encyclopedias.

But then I started thinking and wondering if there is a trade-off between knowledge and I&C. Is it possible that it allows people to squander their time rather than enhance it? We all know that learning a language, for example, takes a lot of time and repetition. It does not matter how much easy information you have accessible about Spanish pronouns or German sausage. Ha Ha. I meant German verbs. All that information availability is fine, but it cannot replace the 10,000 hours you need repeating Donde esta la biblioteka.

Think of all the things you learned in your life that needed time in the saddle. How did you learn multiplication of numbers up to 15? How did you learn the location of each state? All the classes of animals and plants? How did you learn algebra? Biology? How did you learn how to say how did you learn? Sorry about that one. But my point is that learning takes time and effort and then even more time and more effort. Maybe you were one of those people who found learning easy. Lucky you.

When I go anywhere these days I marvel at all the people who are connected – talking on the phone, writing texts, watching videos, listening to music, and so on. And then I worry that all these people are getting addicted. Can you go for more than 17 seconds without checking your email? Facebook? I go to a gym. Most people are there for less than an hour and some of them are on their phones the whole time. What kind of workout is that? You can't leave your phone in your locker for 60 minutes? 

This new drug of I&C gives us more and easier excuses. It’s not fun to do the hard work of learning, of acquiring knowledge. Many of us crave excuses to avoid this hard learning. If so, how are you finding the time to memorize your multiplication tables? That’s what I wonder about. Excuses have always been around. To avoid studying, my roomie and I used to walk across the bridge over Interstate 75/85 to have a chili dog and watch Laugh-In on TV at the Varsity Restaurant in Atlanta. On a nice day, one can always stare at the beauty of the surroundings. Excuses from work have always been there. But it seems to me that the Age of I&C has taken this one step further. Phones demand our constant attention. How do we find time to learn valuable things? Alexa, did the cashier give me the right change? Please!!!!!

We often hear people lament the fact that US students are falling behind those of other countries. How are we going to generate enough scientists and engineers if we are all sitting around staring at our phones? How are we going to create enough voters who are able to make good political decisions when it’s a lot easier and more fun to join a radical Facebook group? Knowledge is indispensable to a prosperous and happy society. I am not so sure that I&C is going to get us there. 

Tuesday, July 3, 2018

Uncivil Behavior

I hear more and more discussions about uncivilized behavior. It seems very uncivil for people to be uncivil. It’s not very civil. The synonyms polite and courteous come to mind when we think about civil behavior. The uproar over our President’s uncivil behavior is both warranted and, I think, a bit overbearing.

Warranted? Of course. We want our presidents to act presidential. A president should be calm and wise and strong and a model of behavior for nine-year old boys and girls. He or she should wear lovely appropriate clothing with nice ties and grey business suits. When President Trump tweets and sometimes when he speaks at pep rallies, he seems more like a football linebacker’s coach than a president. His critics call him crazy but many of them have never been around some of my relatives. If you want to see crazy, that’s crazy.

So the hullabaloo over President Trump’s behavior is warranted. Only Roseanne Barr can create more of a stir. But is it all a bit overbearing? Are the critics a bit disingenuous?

My first point is that while we live in a very educated and civilized society, most of us do not always act civilly. My son is very civil. But when he feels that a driver needs a little education, he is quite colorful in how he provides the necessary education. Admit it, even your favorite philosophy professor has flipped off a driver who cut her off. Civilized? When you careen down a narrow hallway reading the latest exciting tweet from your mother on your iPhone and make everyone else jump out of the way, that’s not exactly civilized. And what about that stream of four-letter words that escape your once pristine mouth cavity when your cable goes out in the middle of penalty kicks? 

My first point is simple. We are very civil people who act civilly most of the time but when we think it is warranted, we act more like the Sharks at a Jets reunion party. So now the question is not if President Trump acts uncivilly, but under what conditions it might be okay for any president to on occasion act like a maniac. It might be to educate someone who proves hard to educate. We sometimes say it takes a two-by-four to get someone’s attention. Or it might be that it is simply hard to convince someone that he must change an old practice. You can’t teach an old dog a new trick. Maybe you can – but you must speak louder or carry a bigger dog biscuit.

That gets me to President Trump. While many of you romanticize the civility and beauty of our foreign friends, the truth is that managing relationships with foreign leaders is not much easier than planning a wedding. A country is defined as foreign because the people in that country have chosen not to have English as their national language and they insist on singing their own national anthems at sporting contests. They also seem to prefer employment for their own citizens, and if you ever decided to bottle your latest batch of brandy under the name of Armagnac, you would find your French friends are no longer so friendly. America first? Hmm. How about France first? How about Germany first? Is it not clear that China is first?

Point? Even with our closest foreign friends, the relationships are contentious. Just like you and your best friend Howie when you got into that fight over who is best, the Beatles or the Stones. Being best friends brings out both the best and the worst in us. Inasmuch, having a tough stance and using rough words with Canada does not mean we like Russia better than Canada. It just means there might be a lot at stake between close neighbors who each care very much about their own citizens.

Back to the two-by-four. The world in 2018 is not the world of 1946. Europe has more than overcome post-World War II rebuilding. Many Asian countries including China are not the poorest backward nations of the world. The economic relationships between the US and these countries are also not the same as they were 50 or more years ago. But it is very possible that there are remainders or vestiges of economic policies that do not treat the US equally in 2018. The world has changed, and the policies must mirror those changes. 

Changing those policies is not easy. Many Americans are frustrated that a patient, civil approach doesn’t change things fast enough. Somehow we have to get the attention of our friends so they fully understand that the most current relationships do not reflect the shrinking economic gap between the rich US and its trading partners. I don’t mind a little uncivil language and tough bargaining if it means that we move economic relationships to more appropriately parallel true economic disparities. The risk of tough talk and actions is more of the same. That's not what we want. We do not want a trade war or any kind of war. But knowing that our partners have their own domestic situations to protect, it won't be easy to get their attention. Continuing the same civil approaches we used in the past might not be enough.

Tuesday, June 26, 2018

Can't Get No Satisfaction

No data this week. No macroeconomics this week. On to “Other Stuff.”

In their 1965 song Can’t Get No Satisfaction*, The Rolling Stones sang something like “When I’m drivin in my car, and a man comes on the radio. He’s tellin me more and more about some useless information. Supposed to fire my imagination…”

How prophetic! While this topic has bothered me for quite a while, it really came home to roost this last week with respect to the Kim/Trump Summit. I have never heard the same crapola repeated so often in the media within a week.

But let’s back up. I love the fact that we have freedom of the press. They should be free to decide what to report and how many times to report it. That’s their business decision, and they are free to do that. But that does not mean that their decisions are always good, and in the case of the last week I think their decisions were horrible.

What happened to the good old days of news with Walter Cronkite? We had Ralph Renick in Miami, but it was the same thing. They told us what was going on in the USA and to some extent in the world, too. When it was time to render an opinion, the lights flashed and horns blared (exaggeration), and we all understood this was not news. It was Ralph’s opinion about something. Lights would stop and then back to the news.

But even more important than the distinction between news and opinion was that Ralph was not a professor of a music or of a foreign language. In music and foreign languages, one learns and becomes accomplished through practice. And then more practice. It is normal in music and language learning that you would do the same thing over and over and over. You expected that. Donde esta la biblioteka? I must have said that 10,000 times in 10th grade Spanish class. I am currently learning to play the guitar. I learned how to do a G chord. Four years later, I am still struggling with mastering the G chord. And no Tuna – I don’t mean G string!

You think I am on my fourth JD but I am not. My point is that the press – whether on the left or right – have decided that it isn’t enough to give us their opinion. They have to hammer it in. And then cement it in. Apparently all the other stuff that is going on in the world isn’t worth their time and effort. They would rather spend their endless hours of news time hammering in simple opinion themes.

In the last couple of weeks, how many times have you heard that Trump was giving a world stage to dictator Kim? How many times did we hear that we will retain sanctions until Kim has totally dismantled all his nuclear weapons including his Lionel train set? How many times does it take?

Keep in mind that in all the lead-up to the meeting between Kim and Trump, there was actually very little news. Yes, there is a meeting. Yes, it is in Singapore. Yes, Trump said he will insist on a total end to Kim’s nuclear war capability. Yes, Kim wears a striped suit and has a cool haircut. But that was about it. After the meeting, there was a very short meeting summary that said almost nothing. How many times can a reporter tell you that a summary was short and said nothing? Apparently 10,000 times would be okay. Most of us can repeat the main left and right talking points about Kim/Trump in our sleep.

Is there nothing going on in the world that we are subjected to repeats of the exact same information and themes multiple times each day in multiple media? Why do we hear over and over the minutia of Hillary’s emails, Trump’s Russia conspiracy, Comey’s latest burp, and so on. Does the press really think that most of us could not get through a day without having them enflame us with these ongoing but sloth-like sagas? Why can’t we have a moratorium on all this and ask the appropriate bodies to decide if Trump should do an extra 10 push-ups while Hillary goes to Charm School? Shut out all the daily noise. Wait for a decision. Then report it. In the meantime, shut up. Please. 

Then maybe we could receive some in depth and thoughtful insights into why we can’t win a war on poverty or crime or can’t seem to balance the nation’s budget. Or maybe we could learn more about why some Italians might want to follow Britain in exiting the European Union. Give us the news and give us your opinion. But please, stop being the good language professor. It's getting really boring. La bioblioteka es enfrente de la iglesia.

*Otis Redding made a wonderful rendition of this song too. Not sure which one I like more. 




Tuesday, June 19, 2018

The Fed and the Next Recession

I had so much fun last week graphing wage changes that it spilled over to another graph this week. This time, the graph plots interest rates.

Why interest rates? Because interest rates are interest-ing? Ha ha. Of course they are interesting. But a better reason to focus on interest rates today is because the worry-warts are screaming that the Fed is going to send us straight to recession hell. While many of you hate the Fed and wish we were back in the good old days of the gold standard when there was no Fed or when the Fed was reduced to less importance than a milk delivery driver, the rest of us are less extreme. But we do worry that the Fed is prone to over-reacting, thereby becoming the winner of the contest for the most severe unintended consequences. We worry in 2018 that inflation will begin rising, the Fed will raise interest rates, and the economy will come crashing down around our ears.

So, we are all riveted on interest rates. And if we looked at interest rates in the summer of 2018 and compared those rates to those in mid-2016 or even mid-2017, we might get a wee bit scared. But the point of today is to create a longer historical perspective.

First, let’s define the interest rates plotted below. Both are market rates* on government securities. The top line is the rate on 30-year Treasury Constant Maturity Bonds. The bottom line is the rate on the 10-year Treasury Constant Maturity Bond. Neither of these is a policy variable directly controlled by the Fed. But both are very popular and are generally taken to be barometers of market interest rates. Many market rates are influenced or tied to the 10-year rate. The 30-year rate is a good proxy for longer-term bonds in general.

If the Fed implements a policy to raise interest rates, it usually conducts an open market operation whose intent is to change something called the Federal Funds Rate (FFR). A change in the FFR then raises the cost of funds and ought to impact many market interest rates. A successful Fed policy, therefore, will result in a wide swath of interest rates changing even though the Fed only directly controls the FFR. It is possible, however, that many of these market rates do not behave as the Fed desires.

The graph shows that market rates have risen in predictable fashion in 2017 and 2018 as the Fed raised the FFR. The FFR was set at virtually zero from around 2009 through most of 2015. Notice, however, the roller-coaster rides of both rates in the chart. The trend of both rates was clearly downward but there were very clear episodes of rising/falling cycles within that downward trend. With the FFR constant, there must be other things that affected interest rates. Notice the increases in rates around 2011 and then again in 2012 to 2014. Both of those periods saw rates rise and then fall by about as much as they rose. All this happened with a near zero FFR. 

If these other things could be important from 2009 to 2015, then presumably they might be important in 2018 and beyond. That is, if the Fed decides to raise the FFR rate in 2018, perhaps market rates will not follow. Perhaps other factors will keep rates from rising or even contribute to a fall. And this means knee-jerk forecasts that a Fed tightening cycle will lead to a recession could also be wrong.

What are these other factors that might prevent market interest rates from rising as the FED increases the FFR? First, consider real GDP growth in the US. Rapid growth often puts pressure on financial markets as the demand for loans exceeds the supply. But who is seriously forecasting strong economic growth in the US? While some forecasters imagine faster growth emanating from the recent tax cuts, few of them think growth will remain strong for very long. A barrage of studies worry that low productivity and labor supply growth imply weak US growth for the foreseeable future. Look at the diagram. The 30-year rate is barely rising compared to the 10-year bond.

Second, interest rates often reflect expectations of future inflation. Higher expected inflation means a lender gets paid back in dollars that are worth less. So they demand a higher interest rate today to compensate for the loss of buying power tomorrow. It is true that some forecasters believe that inflation is going to increase in the USA, but few see reasons for sustained higher inflation in the future.

Third, the value of the dollar is important for interest rates. If the dollar declines in value relative to other key currencies, this leads to more inflation in the USA. If one believes the dollar will fall in the future, this means investors will want to move out of US assets. The selling of these US assets raises interest rates. The dollar has not been depreciating lately. It has been rising in value. This reduces inflation and interest rates. Believing the dollar will continue to rise also lowers interest rates*.

Fourth is the risk scenario in other countries. As investors worry about economic problems in Europe (Italy, Britain ) and Asia (Korea, Japan), they increasingly want to invest in the USA. Even with warts in the USA, what matters is who has the bigger warts. The more negative news you read about Europe and Asia, the more the global appetite for US assets increases. This drives the price of US bonds upward and reduces interest rates. 

In summary: Modest US economic growth, stable inflationary expectations, a higher value of the dollar, and economic riskiness in Europe and Asia should all combine to put downward pressure on interest rates.

I cannot predict the future any better than you can. Some folks want you to believe that Fed policy will raise market interest rates and take the air out of the US economy. While Fed policy sometimes works that way, 2018 and 2019 are not typical years. It is altogether possible that the Fed will continue raising the FFR, and the result will be a continued slow growth economy with relatively stable inflation and interest rates. 

*Students often have trouble with idea that higher bond prices mean lower market interest rates. This is because we forget the these bonds have a fixed coupon yield or return. One bond might promise 5% to the holder. Thus a $100 bond gives whoever buys the bond $5 each year. If you buy such a bond in the open market on a bad day when the price is only $50 then you get $5 interest on your $50 investment. That's a 10% return! The lower market price for the bond means a higher market interest rate. If you buy the bond on a big day for the bond market, you might pay $200. You still get interest of $5 and therefore your market return is only 2.5%. So we get the general rule -- the higher the market price of the bond the lower the market return. The lower the market price of the bond the higher the market return. 


Tuesday, June 12, 2018

Wage Growth in a Tight Labor Market

Much has already been written about the employment report for May 2018 that was published on Friday, June 1. The unemployment rate, like your friendly mole, once again dug deeper and went to an 18-year low of 3.8%. This means that the labor market is growing tighter, which means that firms are finding it harder to find the right employees. There are many articles being written now about this business challenge as firms use innovative ways to try to attract new employees or to hold on to existing ones. Of course, a common approach to attracting and keeping workers is raising wages and benefits. 

Wages, therefore, become a critical economic variable these days. This week I decided to look at wage behavior in the USA to see if there are signs of firms using wages to ameliorate labor market tightness. The graph at the bottom looks at monthly percentage changes in average earnings for all employees. 

Reading graphs is definitely an art form. I ain't Picasso but let's give it a shot. Each dot on this graph records how much earnings grew in that month. If you go to the very last dot on the graph, it says that in May of 2018 earnings grew by 0.298 compared to the value in April of 2018. The one-month percentage change was 0.298%. For sake of our eyeballs, let's round up and call that a one-month increase of about 0.3% in May. If that one-month increase lasted for a full year, then wages would increase by about 3.6%. 

That's a big if and is only suggested so that we can put the one-month gain into an annual perspective. If Lebron scored 12 points in the first quarter of a game, he scored 12 points! But we could say something like -- dude, that's like scoring 48 points in a whole game. Wow. Groovy. He may or may not score 48 in that game but the 48 gives us another way of understanding the 12 he did score in Q1. 

Whew. I am thirsty. So if you read the above, you know that the 0.298 increase in May of 2018 is about a 3.5% annualized increase. That sounds pretty good. If the cost of living went up by 2% in May, then you might be happy that your wages grew faster than your expenses. 

The reason I placed the whole graph below is that we can evaluate the most current increase better by looking at past changes. This graph has monthly ups and downs from April of 2006 to May of 2018, so we can compare over a 13-year period. My task today is to evaluate the 0.298 of May 2018. 

Is it the highest point on the graph? 
     Absolutely not. Just in the last couple of years there were many months that had stronger growth in earnings. 

Is it the lowest point on the graph? 
     Absolutely not. There are even more months in which earnings grew much slower than 0.298. 

Is there any pattern to the monthly changes? 
     It looks like whack-a-mole to me. Most ups are followed swiftly by downs and vice versa.

Do you observe an upward or downward trend in the dots? 
     From about April 2006 through June 2010, there seems to be a downward trend. That is, on average, wage growth seemed to decline. Wages were growing but at a slower pace.  
     But from June 2010 to about October 2011, the wage growth picked up. From my eyeball, it appears that the average monthly percentage change during that time was about 0.2 or an annual rate of about 2.4%. 
     Then from 2012 to now, there appears to be no discernible trend change in earnings. For six years, we got ups and downs around a mean that suggests wage change at about 2.4% per year. If you removed the crazy negative data point in October of 2017, you might see some increase in trend starting around October of 2016. Of course, you might also see pink elephants.

Why go through all this madness? Because there is nothing like the data. You will see a lot of interesting and intelligent articles about wage change in the USA. Smart people will discuss the May data point and tell you that the 3.5% growth in May is higher than the 2.4% rate that prevailed over the last eight years. These folks may want to convince you that wages are spiraling higher -- and maybe they are. But looking at this graph from beginning to end does not make me very confident that we are on a new upward trend. I remain skeptical that the 3.5% means much of anything. I wonder what we will learn in July about June. 




Tuesday, June 5, 2018

Inflation: Viva la Difference?

Venezuela has been in the news a lot lately. While the news has covered a lot of different issues from food shortages to returned prisoners, I was very impressed with their inflation rate. According to the International Monetary Fund, the inflation rate of Venezuela in 2017 was 2,818.4 percent*. That got me wondering about the state of inflation around the globe. The US has experienced remarkably low inflation in the past decade; it came in at 2.1 percent in 2017. Are most countries like the US or more like Venezuela?

While my goal today is less about policy and more about simple comparisons, it won’t hurt starting out with a little background about inflation, its causes, and its consequences. Inflation is a straightforward concept. It is a macro concept that measures how much prices are changing in a nation. It is calculated by averaging together the prices of a bunch of things we usually buy. The Consumer Price Index is one of many measures of inflation. It looks at changes in the prices of the goods and services we most often purchase. Thus, we often speak of it as a measure of the nation’s cost of living.

When the cost of living is rising faster than our incomes, the buying power of our income falls. This raises caution because it means people find it harder to continue buying the same quantity/quality of goods and services. Some people think a little bit of inflation is good but when it reduces our ability to buy we get concerned. You could think of this in terms of inflation stages. Low inflation is okay and might be beneficial as most of us look forward to our wages rising, and firms often find life easier when their prices are increasing. When inflation gets higher, we begin to worry about purchasing power. When inflation accelerates even faster, we get even more concerned. At even higher rates, it creates additional concerns if it causes trading partners to shun our high-priced goods. It would cause alarm if it was a signal of deeper economic problems and foreigners decide to stop investing in our country.

With that brief background we wonder what was going on with respect to inflation in the world in 2017. The table below contains inflation information I took from the IMF. The information is divided by the six regions of the world. These regions account for 150 countries and sub-regions.

The first column contains the name of each region. Look below the table for the full region titles. In the ( ) is the number of countries and sub-regions reported in each region. The Advanced Countries include 40 countries/sub-regions.

The third column in the table labeled AVG gives the average inflation rate for all the countries in that region. The table is ordered by these inflation rates. In 2017, the Advanced Nations' inflation rate averaged 1.7%. The region with the highest inflation rate in 2017 was the Middle East. Those 23 countries averaged 7.2% inflation in 2017. 

Clearly, from the table, emerging markets experienced significantly higher inflation than that of the Advanced Nations.

The second (Low or L) and fourth columns (high or H) show you the range experienced by countries in each of the regions. One Advanced Nation experienced deflation in 2017 of 0.5%. The highest inflation rate experienced by any Advanced Nation in 2017 was 3.8%. Notice the range of inflation rates for Emerging Asia – from 2.2% deflation to 7.5% inflation.

The number that sticks out the most in the table is the 2,818.4% inflation rate experienced by Venezuela in Latin America. The 30% rate for the Middle East came from two countries: Egypt and Libya.  

The fifth column in the table is a measure of the inflation dispersion within each region. It tells you how many of the countries in that region had inflation rates of 3% or less. Of the 40 advanced countries, 93% had inflation rates of 3% or less in 2017. In contrast, only 15% of the CIS countries experienced 3% inflation or less. Despite the 12% inflation rate of Turkey, 92% of the countries in Emerging Europe had inflation of 3% or less.

These numbers raise more questions than we can possibly answer today. They communicate the idea that inflation in 2017 was experienced in highly varying degrees around the world. In some countries, prices fell while they were rising by almost 3,000% in others. Despite world trade and despite globalization, there is no such thing as a common inflation experience. While a casual viva la difference might sound like fun, the underlying point is that inflation has consequences, and both the causes and consequences of inflation are alive and well. We breathe easier in the USA with such low inflation. But the world in 2017 shows that when the right mistakes are made, damaging inflation could be closer than you think. 

           Inflation Rates, 2017
Regions             L      Avg     H          3%
Advan (40)     -0.5     1.7      3.8        93%
Em Asia (30)  -2.2     2.8     7.5         56%
LA & C (32)   -0.2    4.1** 2,818.4   53%
CIS (13)           2.5     4.7     13.7       15%
Em Eur (12)    0.7     6.8     11.9       92%
Mid East (23) -1.0     7.2     30.0       48%

*The data I used for this post came from the IMF’s World Economic Outlook for April 2018. More precisely, they come from Appendix Tables A6 and A7. The inflation measure quoted here is the annual percentage change in the Consumer Price Index. The complete names for the regions are:

Advanced Nations

Emerging and Developing Asia  - China, India Vietnam and others

Latin America and the Caribbean – Argentina, Brazil, and others

Commonwealth of Independent States  -- Russia and others

Emerging and Developing Europe – Turkey, Croatia, Hungary, and others

Middle East, North Africa, Afghanistan, Pakistan – Egypt, Saudi Arabia, and others

**The 4.1% average for Latin America excludes the very high inflation rates for Venezuela and Argentina

Tuesday, May 29, 2018

Are Wage Gains Ready to Skyrocket?

Most people take for granted that wages have shown lackluster growth over the last 20 years or so. So I put my data cap on and starting looking at numbers. My first takeaway is that there are way too many numbers. We might want to know how wages have kept up with productivity. That seems reasonable. But then one needs to find companion series for wages and productivity, so we can compare apples with apples. That can be done but do we want to compare these series for all workers? For all manufacturing workers? For medium-income workers? Over how many decades?

Another comparison of wages could focus instead on how wages changed compared to prices – that is, did wages keep up with inflation? Again, there are many indicators from which to choose – various measures of wages and even more measures of inflation. To makes matters even more challenging – some of the series go back to 1929 while others just got started in 2006.

What I am saying here if it isn’t obvious is that it is time for a nice cold JD. It is also time to make some decisions. No matter which choice I make some of you will want to scold me. But I made a decision anyway. I decided to focus on the years from 1968 to 2017. Going back to 1968 means we have a rich enough data set so that we can put today’s low inflation numbers in perspective with past times when US inflation was higher. I also decided to use the CPI as my inflation variable. Earnings of Production and Nonsupervisory Workers in the Business Sector is my measure of wages.

What I examined is how earnings kept up with inflation during the past half-century. To do this I calculated three times series –  % change in earnings (Edot), % change in prices (Pdot), and % change in the buying power of the earnings (calculated as the first series minus the second one (Edot minus Pdot)). For example, in 1970 the % change of earnings was 6.1%. Prices rose by 5.6%. Therefore the buying power of the earnings rose by 0.5% (6.1-5.6) in 1970. 1970 is an example of a year when earnings did quite well. The wage increase of these production and nonsupervisory workers was larger than the increase in the cost of living.

As I look down my table (below) I notice there are lots of years when the buying power of earnings was positive while there were also years when workers did not keep up with inflation (buying power of earnings was negative). When the buying power of earnings was negative – it meant that workers were getting behind – and that they might at some point want to catch up. 

The earnings buying power went down considerably from 1973 to 1975 and then again from 1978 to 1981. In those years inflation was hitting double digits and despite some good years of earnings growth – these earnings just couldn’t keep up with inflation. In 1980 earnings rose by almost 9% but since inflation was 12.5% workers fell behind. And strangely enough, it was not until 1995, after the inflation rate had fallen considerably that earnings began rising faster than inflation. The years 1995 to 2002 were catch-up years. During those years earnings rose a total of about 10 points more than inflation.   

Between 2003 and 2012 there was no real pattern. But then between 2013 and 2017 there was a very clear pattern – and brace yourself for this – wherein inflation  generally stayed below 2% per year – wages of production and non-supervisory workers were rising by about 2.4% per year. Thus, earnings were catching up as the buying power of earnings increased. 

There are lots of ways to go from this point. But let’s not forget one thing. While workers always want higher wages – the thrust for higher wages is often driven by how far wages stretch to buy goods and services. This data suggests that while there have been times when the buying power of the wages declined (in the 1970s and then from the mid-80s to the mid-90s) – the last 15 years cannot be classified as a time when inflation robbed workers of their buying power. Especially the last 15 years show just the opposite. Workers might not love the size of their wage increases – but these increases have been well above the inflation rate. And therefore, there is no clear pent-up explosion of wage increases looming around the corner.

As I said above, there are lots of ways to go from here. I am not saying that all workers are just fine. I am not saying there are no labor market issues to deal with. What I am saying is that the rate of growth of earnings compared to the cost of living is important for understanding future wage and price growth. The earnings of production and nonsupervisory workers in the USA might not be growing rapidly but they have, of late, been growing faster than the cost of living. That needs to be factored into our forecasts for the future. 

Table
Earnings
CPI
Edot -
Year
Dec
Dec
Edot
Pdot
Pdot
1968
3.11
35.5

1969
3.30
37.7
6.1
6.2
-0.1

1970
3.50
39.8
6.1
5.6
0.5

1971
3.73
41.1
6.6
3.3
3.3

1972
4.01
42.5
7.5
3.4
4.1

1973
4.25
46.2
6.0
8.7
-2.7

1974
4.61
51.9
8.5
12.3
-3.9

1975
4.87
55.5
5.6
6.9
-1.3

1976
5.23
58.2
7.4
4.9
2.5

1977
5.61
62.1
7.3
6.7
0.6

1978
6.10
67.7
8.7
9.0
-0.3

1979
6.57
76.7
7.7
13.3
-5.6

1980
7.13
86.3
8.5
12.5
-4.0

1981
7.64
94.0
7.2
8.9
-1.8

1982
8.02
97.6
5.0
3.8
1.1

1983
8.33
101.3
3.9
3.8
0.1

1984
8.61
105.3
3.4
3.9
-0.6

1985
8.87
109.3
3.0
3.8
-0.8

1986
9.01
110.5
1.6
1.1
0.5

1987
9.28
115.4
3.0
4.4
-1.4

1988
9.60
120.5
3.4
4.4
-1.0

1989
9.98
126.1
4.0
4.6
-0.7

1990
10.35
133.8
3.7
6.1
-2.4

1991
10.64
137.9
2.8
3.1
-0.3

1992
10.90
141.9
2.4
2.9
-0.5

1993
11.18
145.8
2.6
2.7
-0.2

1994
11.47
149.7
2.6
2.7
-0.1

1995
11.81
153.5
3.0
2.5
0.4

1996
12.25
158.6
3.7
3.3
0.4

1997
12.76
161.3
4.2
1.7
2.5

1998
13.22
163.9
3.6
1.6
2.0

1999
13.70
168.3
3.6
2.7
0.9

2000
14.29
174.0
4.3
3.4
0.9

2001
14.75
176.7
3.2
1.6
1.7

2002
15.21
180.9
3.1
2.4
0.7

2003
15.47
184.3
1.7
1.9
-0.2

2004
15.86
190.3
2.5
3.3
-0.7

2005
16.36
196.8
3.2
3.4
-0.3

2006
17.05
201.8
4.2
2.5
1.7

2007
17.69
210.0
3.8
4.1
-0.3

2008
18.38
210.2
3.9
0.1
3.8

2009
18.84
215.9
2.5
2.7
-0.2

2010
19.22
219.2
2.0
1.5
0.5

2011
19.56
225.7
1.8
3.0
-1.2

2012
19.89
229.6
1.7
1.7
-0.1

2013
20.34
233.0
2.3
1.5
0.8

2014
20.73
234.8
1.9
0.8
1.2

2015
21.25
236.5
2.5
0.7
1.8

2016
21.78
241.4
2.5
2.1
0.4

2017
22.31
246.5
2.4
2.1
0.3