Job Transition Programs To Facilitate Progress

Economic progress means disruption and that creates pain. We could reduce that pain which would not only be a huge kindness but help to facilitate more progress. Some countries spend 2% of GDP on job transition programs. We spend 0.1%

Many European countries invest much more in their job transition programs than the United States. For the 2 percent of GDP Denmark spends on active labor market policies (training, job finding assistance, etc.), it gets high job-to-job mobility (going straight from one job to another) as well as lots of transitions in and out of employment. The rate of involuntary displacement is similar to that in other OECD countries, but the rate at which displaced workers find a job is much more rapid: three in four displaced workers find a new job within one year. Importantly, the Danish model survived the 2008 crisis and recession, with no large increase in involuntary unemployment at that time. Germany spends 1.45 percent of its GDP on active labor market policies, and this went up to 2.45 percent during the crisis, when unemployment was much higher than usual. In France, on the other hand, notwithstanding claims about how it wants to do more for the unemployed, expenditure on active labor market policies has been stuck at 1 percent of GDP for more than a decade. The corresponding measure for the United States is just 0.11 percent.

 

Banerjee, Abhijit V and Duflo, Esther. Good Economics for Hard Times (p. 314). PublicAffairs. Kindle Edition.

How Apps, Entrepreneurship and a Steady Boom Have Brought Unemployment Claims to an All-Time Low

The Facts

The 4-week moving average of initial unemployment claims is at an all-time low.

In raw numbers, it was actually lower in 1969 but at that point the labor force was exactly half (well, okay, 50.7%) what it is now. So as a percentage, it has never been lower in recorded history.

This statistic is a measure of how many people walk into an unemployment office to say, "I've lost my job and don't have another one to go to."

In April of 2009, 658,000 people filed for unemployment each week. That was the worst of the Great Recession. October of 1982 was even worse, with 671,750 walking into unemployment offices around the country during a single week.

But the American economy is always shedding and creating jobs, at a rate of about 2 million per month. It's remarkable that such a small number of folks laid off or quitting one job don't end up in an unemployment office before they get their next job.

The week of 24 February, only 220,500 people filed initial unemployment claims. The last time it was lower was 27 December 1969 - nearly 50 years ago - when it hit 219,750. As a percentage of the labor force, though, that 1969 number equated to about 1.1% of the labor force showing up in an unemployment office during the month whereas this latest number suggests only 0.5% of the labor force filed for unemployment in the month. It's a stunning number.

The Theories

The most obvious explanation is an uninterrupted rise in jobs created that has now gone on for 88 months (and counting). Every month that results in more jobs created than destroyed means that many fewer people unemployed or unable to find a job. I think there is more to even than that, though.

Simply put, the economy has never been more efficient at creating new jobs and then matching unemployed people to those new jobs. I don't know why but I have a theory that it is because of apps and entrepreneurship.

Uber, Lyft, Mechanical Turk, PostMates, and other apps quickly match people to tasks they can do. Even the websites like Monster, and Indeed have accelerated the time it takes for employers to find qualified employees to hire. Some apps quickly find someone to perform a task; other sites accelerate the time it takes to find a new employee.

Once upon a time, in small communities, you knew that Todd could help carry heavy loads and Melissa could repair fragile things. You could easily find help and they could find work. As the world got bigger and more advanced, it became harder to know who could program in Java vs. C, or who could design period-furniture and who could repair modern furniture. It took a long time for the unemployed to find jobs and for employers to find help. It would take months to find the right person for a job and for tasks that might take only minutes or days, you might never find a match. There was a lot of friction in job markets even a decade ago.

Now software lets a person who wants to drive you to the airport find the person who wants a ride to the airport within about 15 minutes. It's easier than ever to find a match and this makes for nearly friction-less labor markets. This means that more people are downloading an app to make money (I know, to qualify as an Uber driver is not as easy as downloading an app) rather than waiting for a person to hire them. One result is a lower number of folks who file for unemployment.

Another element is increased levels of entrepreneurship. It is easier than ever to start or expand a business. Once upon a time you had to get loans to buy a store or build a factory to start a business; now you can fund a software startup with six laptops. More than half of American employees now work at least part of the week at home. This suggests that the overhead for office space per person is dropping, one less barrier to starting or expanding a business. (I know. It's not THAT cheap or simple. Still, even renting a cubicle is cheaper than setting up a factory.) A great number of employees are hired as contractors; some because that is now how corporations are engaging employees and some because that is an increasingly common way to put someone through the equivalent of a probationary period. There is less commitment and expense in "hiring" an employee and thus less hesitancy to do so. Employees still face a great deal of uncertainty about particular contracts or income levels but less likely to go long stretches without some kind of income.

In this way it's a bit like the move from a bank account that offers 3% annual rate vs. a stock that could rise or fall 30% in a year. Income will fluctuate more but employment will not. People are less likely to turn to unemployment insurance than to another job or task that could mean a temporary rise or fall in pay. If not already, I suspect that fewer people will look back at the last ten years of employment as a steady rise of 4% in annual pay and will instead see rise and falls more akin to the performance of a 401(k).

What It Means

One thing that no one would suggest, though, is that the Uber drivers are fine with just their cars and Uber app. Among other things, they need roads to drive on. Why mention this obvious thing? As the economy and information systems become more adept at matching supply and demand, it's important to support the infrastructure that makes it work. In this case, it's not just roads. People who are more likely to be getting their income from contract jobs and apps need things like universal healthcare to replace the standard benefits once provided by corporate employers and job training programs to make them steadily more productive. The good news is that these more efficient markets will mean less reliance on government unemployment insurance; the bad news is that more tenuous income streams suggests a greater need for things like government health insurance and education.

Another implication of more efficient labor markets is the very real possibility that the natural rate of unemployment has dropped. The ideal rate of unemployment would not be zero for the simple fact that finding a great fit between employee and job is not an instantaneous process. Given it takes a little while to find a great match, it makes sense that somewhere between 2 to 5% of the labor force would be unemployed at any given time. If it is true that it's easier for people to find work, it makes sense that this rate has gone down. What that means is that if string of uninterrupted job creation continues another 6 to 24 months, the unemployment rate could approach 3%. [I've already forecast about a 33% chance of a recession but if that doesn't hit this year, unemployment could steadily trend downwards.]

In all, more efficient labor markets is yet another great sign of progress. It doesn't mean that business cycles are over but it does mean that in any given month fewer people face the prospect of unemployment. That's pretty cool.

Ron's Economic Forecast for 2018 - Highest Probability of a Recession in 8 Years

A Chinese recession? A bumbling Fed Chair? A downturn in stocks? Your blogger predicts a 33% chance of bad news for the American economy in 2018.

THE LAST SEVEN YEARS

As we were coming out of the Great Recession, people continued to fixate on threats. When you've been beaten you flinch even when someone raises a hand to wave at you, so this makes sense. The Great Recession was awful and it left people anxious about what might happen next. I've reported it before but it bears repeating: in the decades before and after, the economy created an average of 2 million new jobs each year: in the oughts, from 2000 to 2009, the economy did not create jobs but rather destroyed an average of 100,000 jobs per year. Rather than create 22 million jobs, that decade destroyed a million jobs. Just consider what a shortfall of 23 million jobs in a decade means for a moment.

In light of that, it only makes sense that early in this decade people were so aware of what all could go wrong that they lost track of what all could go right. I was cautiously but unrelentingly optimistic about the economy throughout the recovery and it has gone well; now the unemployment rate could soon fall below 4% and the S and P 500 is up nearly 4X (well, 3.6X) what it was when the market bottomed out in early 2009. Even last year, after the election of Trump, I put aside my disbelief and repugnance in his presidency to predict that he would likely preside over another great year for the economy. 

Now, for the first time since the end of the Great Recession, I'm pessimistic about the economy. It seems as though that 8 years of good have distracted people from the fact that bad things, too, can hit. Just as 7 years ago most people seemed skeptical that things can go well, most people now seem skeptical that things can blow up.

PERCEPTION AND POLICY

One thing that I've learned is that people mostly don't distinguish between the state of conditions (e.g., we have high or low unemployment), the rate of change in conditions (e.g., the unemployment rate is dropping) or the rate of change in the rate of change (e.g., the economy is still creating jobs but at a slower rate). Obama took office as the Great Recession was at its worst and to this day many people associate him with that state of terrible unemployment. Trump took office when the economy was mostly recovered and many people now associate him with that state of wonderful employment. I do believe that policy makes a difference but the most obvious complicating factors are simply this: it takes time to get policy passed, it takes even more time for that policy to impact the economy, and easily the clearest instance of when policy makes a difference is during a recession. Simply put, there are a variety of theories about how policy changes long-term economic conditions but the causation lag is long and filled with uncertainty. (For instance, most people would agree that early childhood education and wellness programs are positive but assuming those are targeted at kids under 7, it'll be half a century before those children reach their peak earning years and any number of complicating factors - from wars to the popularization of computers or robots - could exacerbate or mitigate the impact of this early childhood intervention. In any case, it's safe to assume that the president and members of congress who instigated such policy would be dead by then and most people will have forgotten them and their policies.)

And a further complication is that about two-thirds of Republicans and a third of Democrats can't see the good when the other party has the White House. 

WHAT IS POSITIVE

Debt levels in the US are relatively low; as a percentage of GDP, federal debt is up about ten percentage points, corporate debt is up about six percentage points and household debt is actually down about five percentage points in the last 5 years, making for a net change of about 11 percentage points. With less reason to pay down debt in 2018, households, corporations and even the government have reason to continue with - and potentially even increase - current levels of spending. This should have a positive impact on future spending.

Unemployment is 4.1% and has now been below 5% for two years. The impact of sustained low levels of unemployment not only include the fore-mentioned debt pay down but great increases in net worth. One of the most extraordinary statistics from the recovery? The net worth of households is up $42 trillion since the depth of the Great Recession and up $30 trillion from its pre-recession peak in 2Q 2007. When people are collecting regular paychecks they're able to save and invest in homes and stocks. This, too, is promising for 2018.

Further, as unemployment stays low companies have to offer higher wages to attract workers. Wages are growing. As an anecdote, at Thanksgiving we were with three young women all in their early thirties; within the prior four months all three had accepted new positions (two at new employers) for raises ranging from about 15% to 100%. This is the kind of thing that happens when unemployment threatens to drop below 4%.

Further, the Republican tax plan looks to be front-loaded in its impact. Some indications are that it will stimulate the economy the most in 2018 and then slightly less in each of the next few years. It has the potential to add another one percentage point to GDP growth in 2018; that impact is huge.

Finally, the popularization of entrepreneurship - the essence of my book The Fourth Economy - is continuing. Economic policy at the regional level is increasingly focused on entrepreneurship programs within universities and emulating Silicon Valley's success. (None of that will be easy but even mediocre efforts at things that matter a great deal pay off more than extraordinary effort on things that matter little.)

This is all great news and the most likely thing is that it will translate into another great year.

There is about a 67%  chance that the stock market will again rise by double-digits, unemployment will drop below - and stay below - 4%, and wages will rise faster than they have all century. 2018 could be one of the best years since the late 1990s and will likely start out that way. Among other things, this would mean a rise in household income at every level, including median and lower-income and not just those in the top 1 to 20%.

WHAT IS WORRISOME

There is about a 33% chance that the economy turns down in 2018. That turn would probably start some time between May and October.

There are a few reasons that it may turn down: China, a new Federal Reserve Chairman and monetary policy, Trump, and the nature of business cycles.

BUSINESS CYCLES

There are two common measures for these cycles: unemployment rates and the stock market. Sometimes an economy is creating jobs and wealth and sometimes it is destroying them. Since 1900, the US has had 23 recessions, including the Great Depression that began in 1929 and the Great Recession that began in 2008. The length of those downturns has varied from 6 months (the shortest period of downturn that can qualify as a recession) to 43 months (the Great Depression in the early 1930s).

If you were plunked down into a random month between January 1900 and December of 2017, the odds that you'd land in a month in which the economy is suffering from a recession is roughly 24%. Of course Keynesian economics made great advances in the aftermath of the Great Depression and since then the odds of any given month being in recession are 14%. (In the 33 years leading up to the end of the Great Depression, the odds of you landing in a recession plagued month were 48%.)

Curiously, the odds that you would have a month since 1948 in which the unemployment rate is as low - or lower - than it is now is 15%, nearly identical to the odds that you'd be in a recession. The odds that the unemployment rate is 4.1% or lower is the same as the odds that it is 7.4% or higher. (Which is to say that most - about 70% - of the time the unemployment rate bounces around between it's current rate of 4.1% and 7.4%.)

Why does the economy rise and fall? It's because good optimism eventually becomes bad optimism. The economy is bad and someone is optimistic enough to start a business that depends on rising sales. Their optimistic bet pays off, they get rich, and that optimism fuels more optimism. More businesses are started, more stocks bought, more employees hired ... and the economy expands. There comes a day, though, when the optimism is unfounded. New businesses fail at a little faster rate, old businesses expand more slowly or even contract, and the economy begins to destroy jobs and wealth. Now, pessimism is the wise bet and companies layoff and investors hold onto their money. In a bust the pessimists become the leaders. Until the cycle starts anew, as it has a dozen times since the end of the Great Depression in 1933. The booms help to create new things and the busts help to destroy the old; between them job and product markets transform over time, and what we buy and what we do for a living radically changes over a lifetime.

Why mention this? Well, if we're just betting on probabilities - putting aside reasons for optimism mentioned above - there is an 85% chance that unemployment goes up from 4.1% and only a 15% chance that it goes down from there. This claim is less scientific than simply based on data since 1948. Again, the unemployment rate of 4.1% or lower occurs only about 15% of the time. The next month we draw out of the hat is more likely to be higher than lower. Let me be clear: many of the fundamentals suggest that the economy will continue to do well in 2018; that said, economies do not expand without interruption and the odds that it will falter, that unemployment will tick up, are never zero.

Similar for stock prices. Since 2000, stock prices have fallen in five years, or 29% of the time.

ANOTHER REASON TO WORRY? TRUMP

Worst case, his stupid ideas become bad policy. It's not clear that anyone in the Republican Party will resist him and he has at least another year to run with a Republican led House and Senate. If he signs legislation that leads to the deportation of millions of illegal aliens, we'll have a recession. If he manages to jettison NAFTA, we'll have a recession. If he cuts funding for research, per capita GDP growth will slow and the steady increase in life expectancy that we've enjoyed for more than a century could stall. 

And of course the Mueller investigation could result in a number of Trump's administration - even Trump himself - facing charges that could force his resignation or even imprisonment. While the final resolution - him in jail or remaining in the White House with Mueller's investigation finally concluded - could stabilize or even rally markets, it's hard to imagine that in the space between when Mueller makes his big reveal and when there is a resolution won't be a time that rocks markets.

In the 10 months before Nixon resigned in the aftermath of the Watergate scandal, the S and P 500 fell 43%.

NEW FEDERAL RESERVE CHAIRMAN JEROME POWELL

Janet Yellen's replacement as head of the Fed (he'll take over in February) is Jerome Powell. I have two big concerns with him: he has no degree in economics and he will be responsible for tightening monetary policy, a delicate operation that can frighten markets.

Work experience - Powell has served in the Fed for years - helps a great deal when it is business as usual. Theory, though, is essential when things change and unlike Yellen and Bernanke who had studied, researched and published on the topics of recessions and recoveries, Powell has never published anything that would suggest he has thought deeply about these topics. The last Fed Chairman to lack an economics degree served in the 1970s but this disregard for expertise is, of course, characteristic of Trump.

The Fed has announced that it will raise interest rates. If it does this too quickly, it slows down the recovery. If it does this too slowly it fuels an asset bubble and / or inflation. Simply put, money pumped into the system helps encourage "real" economic activity (actual investment, consumer borrowing, and hiring) but also drives up prices. People have argued that since the emergence of the World Trade Organization, it is harder for that money to drive up the price of goods that can be imported but instead drives up the prices of assets like stocks and homes. They argue that loose monetary policy is less likely to drive up the price of apples than it is to drive up the price of Apple stock. 

Before the Great Recession, excess reserves in American banks ranged from about $1.5 to $3 billion. As the Fed pumped more money into the economy to counter the credit crash, excess reserves rose to $2.9 trillion, roughly 1,000X more. Yellen has quietly lowered that to $2.3 trillion but there is still a lot of money to pull out of the system. Related, the Fed is finally moving interest rates back up, something that will have a ripple effect on lending and all the hiring, expansion, and spending that accompanies low interest rates.

Unwinding loose monetary policy is somewhat like the game of operation, an attempt to remove something without setting off buzzers that suddenly send markets down or - worst case - cause a contraction in credit and a stutter in hiring or consumer spending. I simply trust a lawyer less than I do academics who have studied these matters extensively. I'd be much more comfortable with Yellen serving another term (as the men have for decades back) than I am with Powell learning this new position during a sensitive time in the transition of monetary policy. He's a risk.

AND FINALLY, CHINA

Ruchir Sharma has been worried about a global recession emanating from China for a year or two. He has a couple of plausible concerns, chief among them the amount of debt China has  recently created. 

Sharma cites thirty instances in which private debt over a 5-year period grew faster than GDP by at least 40 points. (Imagine in year 0 that a country's private debt is equal to 100% of of GDP and in year 5 it is equal to 140%.) In each of these cases, GDP growth fell by more than half over the next five years, occasionally slipping into recession. [See page 300-1 of Sharma's The Rise and Fall of Nations] Sharma is worried about China because over the last five years private sector debt as a percentage of GDP has gone up 56.5 points. It could be that China will escape a downturn as it pays down debt but, again, 30 of 30 countries have been caught in the consequences of rapidly growing debt.

His other concern has to do with a belief in the way business cycles purge the old and create the new. As mentioned, since the US has become the major economy in roughly 1900, it has had 23 recessions. By contrast, in the quarter century since China has begun its great ascent it has had 0 recessions. None. This is a long time to go without market correction.

My own concern with China has to do with my belief in the progress that communities make through four economies: agricultural, industrial, information and entrepreneurial. China - in my opinion - has successfully made the transition from agricultural to industrial economy. Its per capita GDP is now about $10,000, which is one mark for the transition to a new economy. Curiously, President Xi has recently assumed more power than any leader since Mao and is making sounds of a crackdown on dissent. It seems plausible to create an industrial economy coincident with tight government controls; it does not seem plausible to do that with the emergence of an information economy. Simply put, I'm dubious about the compatibility of government control and the emergence of an information economy reliant on knowledge workers who have easy access to information technology and - obviously - information.  I don't know how you create an information economy while limiting access to information. 

China has not only emerged as the second biggest economy in the globe but it has accounted for a huge portion of global GDP growth over the last quarter of a century. If it falters, it will have a ripple effect.

Finally, things happen that haven't been predicted. The price of mortgage backed securities suddenly falls. Terrorists fly planes into the World Trade Center. I've listed a variety of triggers for a recession but it could easily be something completely unforeseen that is the trigger.

THE FORECAST

For now I'm keeping my money in stocks until the end of the first quarter of 2018. I think the market will rise another 3% to 8% by May and the unemployment rate will go as low as 3.8%. Home construction will rise, as will business investment.

I'm worried, though, that the the market will turn down about mid-year, as will job creation. The market could finish the year down about 5% to 10% and while unemployment will still be decent (4%? 4.5%?) job creation will turn negative for the first time in 8 years. The total number of jobs created in 2018 will be about 1 million, give or take, about half what it has averaged during the recovery.

For the year:
S and P 500: down 5 to 10%

Jobs: up 1 million

Unemployment: Roughly unchanged or up slightly to somewhere between 4.0 to 4.5%

Finally, where we are as of when this was published:
S and P 500 is at 2,692.71
Unemployment is at 4.1%

Your Blogger's Forecast Record for the Last 2 Years - 2016 and 2017

Some years I make forecasts for the coming year. This is a blog so there is nothing standard about what metrics I forecast but here is a recap for the last two years.

2016

I forecast that median household income would finally enjoy a strong rise and forecast it would hit $55, maybe $57k. It hit $57.7k.

I thought residential construction would rise between 10 to 15%; the monthly year over year rise varied from 8 to 13%.

I forecast a rise in personal consumption of 5%. It hit 5%.

I was bullish on job creation, predicting another 12 straight months of uninterrupted job gains that would total between 2 to 3 million. We got 12 moths of uninterrupted job gains and 2.2 million new jobs.

I forecast a rise in the rate at which wages would go up; they did rise more rapidly in 2016 than they did in 2015. 

Finally, I forecast an S&P 500 rise of 10% to 20%. The market rose 9.8%.

2017

Last year, I forecast a smaller number of statistics but predicted a very strong economy. (Prediction is here, A Stimulus, a Boom and White Men Dancing: an economic forecast to the end of the decade )

The forecast starts with:
"First of all, the economy is primed for take-off."

And then,

"The next four years will be great and it's perfectly plausible that unemployment will drop below 4% within two to three years. We might even see the uninterrupted run of positive job creation run out another four years, as absurd as that sounds."

Then, it adjusts for the just elected Trump.

"Short term, Trump changes this for the positive ... bump GDP growth .... driving stock prices up."

I tweeted out just two statistics:

Job creation of 2 million and unemployment just over 4%.

The actual numbers? With a month left we're 84,000 jobs short of 2 million and the unemployment rate is 4.1%. Also, the stock market is up 18.8% for the year with weeks to go.

Next post will be my forecast for 2018.

Unemployment Rate: What is Next After the Longest Drop in History?

We have data on monthly unemployment rates in the US from January 1948 - shortly after World War 2 - through September of 2017. During that time it has never been lower than 2.5% (which it was in May and June of 1953 at the peak of the post war recovery) and never been higher than 10.8% (which it was in November and December of 1982 in the depth of the Volcker-induced recession during Reagan's first term).

Half the time it is below 5.7% and half the time it is above 5.7%.

Unemployment rates of 3.8% or lower put you in the top 10%; rates of 7.9% or higher put you in the bottom 10%. 80% of the time, unemployment rates have bounced between 3.9% to 7.8%; that range defines normal. Outside of that range things are great or awful.

At the depth of the Great Recession - in October of 2009 - unemployment hit 10%. That's among the worst 1% of all months. (Well, in the worst 1.2%.) Since then it has steadily come down during the longest uninterrupted streak of job creation on record. Last month - the end of the streak - unemployment hit 4.2%, a value in the best 17%. We're in the top 20% but not yet top 10%, really good but still not great.

One simple answer as to whether unemployment will drop further is to say that it's only been lower than its current rate of 4.2% 15% of the time. Again, unemployment rates bounce between 4% to 8% most of the time; it doesn't seem to last long outside of that range. That alone suggests that the unemployment rate will soon stabilize or even rise.

Another interesting thing to note is that this is an exceptionally long recovery. Unemployment peaked 8 years ago this month - in October of 2009. A steady drop in unemployment has never lasted longer. The next longest improvement, the drop from the 10.8% high in December of 1982 to its low of 5% in March of 1989, took just over 6 years before beginning to rise again. Unemployment rates steadily drop for a time and then steadily rise, and steady improvements usually last just a few years, not 8 yerars.

At the start of a recovery people are well aware of all the reasons things can go badly. After all, they are just coming out of a period in which things did, indeed, go badly. Remember how early in the recovery people were anxious about Greece, China's stock market, deficit spending, the mortgage market, Greece, etc. People were looking for reasons that things could go wrong. Now? Now they're looking for reasons that the recovery could continue and less aware of reasons it might not; this makes economies more vulnerable.

There are reasons the unemployment rate could drop further and reasons it won't. 

Among the reasons it could drop further is that our labor force is growing more slowly than it did a decade ago. From 1955 to 2005, US labor force (folks aged about 25 to 65) grew 1.7 percent a year. Since then it has grown about 0.5%. As companies seek to hire, they'll have fewer options; all else being equal, this would translate into lower unemployment.

Another reason it could drop further is because of a drop in immigration. Again, this lowers the number of available workers and could mean that employers will draw from the unemployed rather than the newly available. If immigration rates drop enough, the labor force might even stop growing.

Curiously, the reasons that the unemployment rate could start to rise again include a drop in immigration. Immigrants don't just find work here. They buy houses, clothes, meals and all the things that drive demand for goods and services that, in turn, drives demand for employees here. If Trump's policies are successful at slowing down the flow of immigrants, he'll actually succeed at destroying jobs.

Trade, of course, could still provide jobs for American workers. Assuming, of course that Trump does not ignite trade wars. Simply put, he wants trade wars with our biggest trading partners - threatening to blow up Nafta and trade deals with China - and if he gets his way we'll see a drop in trade with our three biggest trading partners. That will destroy American jobs.

The third reason that the unemployment rate could rise is because Trump is planning to cut spending and taxes. Tax cuts will disproportionately go to the rich. If you give a poor guy a $1,000 in tax cuts, he's likely to spend $900 of it. When you're making only $30,000 a year, you could use that extra $1,000. If, by contrast, you give a rich guy $1,000 in tax cuts, he's likely to save $900 of it. When you're already making $500,000 a year, an extra $1,000 isn't going to change your vacation plans. Government spending ripples throughout the economy in ways simple (the employees of the State Department buy coffee at that little coffee shop across the street) and complex (the Medicare recipient pays a medical bill which enables the hospital to make a down payment on a new imaging technology and the young doctor to make a down payment on a new car). If you cut $1,000 in government spending and then give a $1,000 tax cut to someone rich, you'll reduce spending, reducing demand for the goods and services that drives demand for employees.

What is the punchline? It depends on whether Trump ends trade deals. In either case, unemployment rates are likely to start rising again within 3 to 9 months. If he ends trade deals, they'll begin to rise sharply.

If Trump fails to end trade deals:
Unemployment will fall to no lower than 3.8% within the next six months, after which time it'll start to rise again. Given drops in the growth of the labor force, job creation could turn negative at least one or two more months within the next year even as the unemployment rate remains relatively stable.

If Trump succeeds in ending trade deals like Nafta:
Unemployment will - at best - hit 4% near term but may have already bottomed out at the current 4.2%. We'll have a recession and the unemployment rate will rise to 6% to 8% within a year or two.

Trump's Bold Solutions to Imaginary Problems: Address to Joint Session of Congress on the last day of February 2017

I did not see Trump's speech but read it. My initial reaction is that it was filled with about equal number of promises that are too general to ever be broken and promises to fix problems that don't exist. He made general promises more akin to "I'll be a great husband," rather than specific, measurable promises like, "I'll massage your back, do the laundry but not cook dinner." He is going to be a great president but we don't really know what he means by that. And he repeatedly framed improving situations as awful, promising to fix what hardly seems broken.

What Trump said ...

My commentary ...

A new chapter —
(APPLAUSE)
— of American greatness is now beginning. A new national pride is sweeping across our nation, and a new surge of optimism is placing impossible dreams firmly within our grasp. What we are witnessing today is the renewal of the American spirit. 

That's an interesting spin on lowest approval ratings ever for a president''s first month. Or maybe he meant to say that a new surge of optimism is the impossible dream when so many Americans disapprove of your performance.

Dying industries will come roaring back to life ... Our terrible drug epidemic will slow down and ultimately stop, and our neglected inner cities will see a rebirth of hope, safety, and opportunity.

Trump continues to play the role of economic savior, promising to bring back the dead or dying. There's a little problem with this plan: manufacturing as a percentage of the American workforce has been steadily falling since about 1930. It's not a product of NAFTA or China joining the global economy. It's a product of our industrial economy becoming an information economy and of manual work being steadily automated.  He's exaggerating inner cities' plight - rural America is shrinking faster than any downtown - but if he really wants to revive an area he won't do it with manufacturing and mining jobs.

Since my election, Ford, Fiat, Chrysler, General Motors, Sprint, Softbank, Lockheed, Wal Mart, and many others have announced they will invest billions and billions of dollars in the United States and will create tens of thousands of new American jobs.

For reference, each month the America economy creates (and destroys) millions of jobs. Millions. (The difference between the number created and the number destroyed gives the net number of jobs gained, which is typically between 100,000 to 300,000 during a healthy expansion, as we've had in the 6 years.) Making deals with companies that may add tens of thousands of new jobs is a rounding error in a typical month - much less in a 4 year term - in this delightfully dynamic economy. 

The stock market has gained almost $3 trillion in value since the election on November 8, a record.

This is great. It also has pushed P/E ratios to a heady level that suggests it'll be tough to continue at this pace for another four years. Even so, this rise is rational: with tax cuts and deregulation, short-term profits should go up. It will take longer to find out what sort of trade deals he'll make and what that will do to the economy.

We have begun to drain the swamp of government corruption

Trump continues to make personal deals with foreign countries. The most suspicious example of this was China granting him a coveted and long-denied trademark just days after his win. This trademark will be worth millions to Trump.

We want all Americans to succeed, but that can’t happen in an environment of lawless chaos.

Lawless chaos? Violent crime has been steadily dropping since about 1980. Illegal immigration has been steadily dropping since at least the Great Recession. Trump is determined to take drastic measures to solve two imaginary problems: lawless chaos and a surge in illegal immigration. It's like a the father of a teenager cracking down on bed wetting, a problem that had disappeared about ten years earlier. 

Not only has illegal immigration slowed in the last 8 years or so, immigrants are less likely to commit crimes than native born Americans, as can be see in this graph.

Tonight, as I outlined the next steps we must take as a country, we must honestly acknowledge the circumstances we inherited. 94 million Americans are out of the labor force.

The economy Trump inherited is in stark contrast to the one Obama inherited. 76 months in a row, the economy has created jobs; breaking the old record of 48 months by roughly 2.5 years. In the year before Obama took office, the economy lost 4.4 million jobs; in the year before Trump took office, it created 2.2 million jobs. Put differently, the economy created 6.6 million more jobs in the year before Trump took office than it did in the year before Obama did. So how can Trump make it sound like he's inherited economic carnage? 

This 94 million out of the labor force number is one of the weirdest that Trump has cited. How does he arrive at this number he's repeatedly mentioned? He uses the labor force participation rate. This is a measure of folks not working or looking for work who are over the age of 16. If you are a 28 year old house husband or retired at the age of 71 or a 19 year old at university, you are counted as a non-participant. My 81 year old, retired mother is part of this 94 million. If you are over 16 and are not working or looking for a job, you are part of Trump's 94 million.  

We have measures of the labor force participation rate that date back to January of 1948. That year, life expectancy for men was 64.6. Today life expectancy is 76.2. The percentage of people who are retired now is higher than it has ever been - in part because people are living longer and in part because people are so much more affluent than they were in 1948. This alone would drive down labor force participation rates. But to offset that, women have joined the workforce in larger numbers.  These are just two of the demographic changes over time that have shaped this number since 1948. What is the net effect of these and other factors? 

Between 1948 and 2017, labor force participation rate has averaged 62.9%. What is it as of January 2017? 62.9%. Since 1948, the rate has ranged from 58.1% to 67.3% but the labor force participation rate for our most recent month is exactly what it has averaged since we began measuring it. To say that it's a problem now is to say that it has been a problem since just after World War II. Funny that no one has mentioned it before Trump, much less used it as proof that they'd inherited an economy in terrible shape because by that measure, every president has inherited an economic mess.

When Trump says that 94 million Americans are out of the labor force, he's decrying the fact that young mothers, old retirees, the idle rich, the handicapped and others have chosen not to work- in roughly the same proportion as they have since the end of World War II nearly 70 years ago. But how else to make an unemployment rate of 4.7% (a rate one standard deviation below average) sound bad? To say that he's inherited an awful economy is like saying that nobody since Reagan won by a wider margin of electoral college victory; it's wrong unless you discount all the other data points.

Summary

Trump's speech promised bold solutions to the imaginary problems of labor force participation rates, illegal immigration rates, violent crime and a loss of manufacturing jobs. Labor force participation rates are exactly at their historic average, and violent crime and illegal immigration have been steadily trending downwards for decades. A dwindling number of manufacturing jobs is a sign of progress in the same way that a dwindling number of farming jobs was. During the 1800s the American economy transitioned from an agricultural to industrial economy; during the 1900s, it transitioned from an industrial economy to an information economy.  These two transitions have meant a dwindling percentage of the workforce has been needed for farming and manufacturing. It's not a sign of economic apocalypse that we no longer have 90% of the labor force farming; it's a sign of progress.

Trump has consistently shown a disinterest in facts but even when he does pay attention to a current number he fails to put that within larger trends. It's tough to understand what should happen when you don't even understand what has happened. Trump's grasp on the situation is about as tenuous as his grasp on the facts.

---------------

This from CBS news on the 94 million not in the labor force.

https://twitter.com/CBSEveningNews/status/837085323679105028
14.6 million are students, 43.7 million are retired, and 28.4 million are disabled or out of work for family reasons (looking after a family member like a child or elderly parent).

Is This Record Streak of Job Creation Finally Raising Wages?

Today's job reports makes for some great facts.

In November, the American economy created 321,000 new jobs. 365,000 jobs were announced today, though, because the job creation numbers for September and October were revised upwards.

Since 2000, there have been only 2 months with job gains of more than 365,000.

It has been nearly 20 years since we've had 10 consecutive months in which the economy has created at least 200,000 jobs.

This month's positive number means the current uninterrupted streak of positive job numbers is now 50 months, breaking last month's record for longest streak since the US began keeping records in 1939.

Even if the economy creates zero jobs this month, 2014 will be the best year for job creation since 1999. That is, this is already the best year of the new century.

While the unemployment rate held steady at 5.8%, it is down 1.2% from last year and this sustained rate of job creation might finally be putting upwards pressure on wages.

There is also really promising news about wages. In the October report, wages were up only 0.1% from the previous month. This month, they were up 0.7%. Now 0.7% is almost surely unsustainable. (That would translate into a 8.2% raise in wages for the next year, a delightful prospect that's more fantasy than possibility in light of the last couple of decades but a rate that we actually hit in the 1970s and 1980s.) But such a sharp upwards trend in the context of lower unemployment rate and strong job growth suggests that we might finally be moving beyond the prolonged period of wage stagnation that has characterized this new century. If so, that could be the best news yet.

The Economy May Have Hit a Tipping Point for Wage Growth

It won't be until employees have choices about where to work that we will see wage growth, a key to progress. Ben Casselman reports at fivethirtyeight.com on a statistic that could signal a turn in labor market conditions.

Some people are unemployed because they lost their job. Others left their job or decided to rejoin the labor force and are looking for one. For the first time since the Great Recession began, the number in each group is roughly the same.

People don't leave a job unless they believe can do better. (Even if doing better means living closer to someone they love, working at a lower income.) Generally speaking, as more people leave jobs of their own choice, they head into better jobs. By contrast, when they are laid off, they often have to take lower-paying jobs. This difference in how they leave - of their own volition or because they are forced - could be the first strong signal that wages are about to start rising faster than inflation.

So many problems that people (rightfully) fret about, problems like stagnating wages and income inequality, might simply be the product of woefully inadequate job growth. It make take a decade of normal job growth to ameliorate these. The good news is that we're on track for creating about 20.5 million jobs this decade. The bad news is that we're coming off a decade in which we lost a million jobs and so far, we've gained only 9.7 million this decade. We're still coming out of a crater.

But with unemployment finally below 6% and still heading down, the labor market is healthy enough that it can start putting upwards pressure on wages.

Today's Jobs Report Sets a New Record for Consecutive Months of Job Creation

Last month the economy gained 248,000 jobs but today's announcement is for 317,000 new jobs since July and August numbers were revised upwards by 69,000.

The total for the year is already over 2 million with one quarter to go. Better yet, the fourth quarter has been one of the strongest during the recovery.

We're on track for the best year since 1999. 

This is now the longest uninterrupted streak of positive monthly jobs reports. For exactly four years BLS has reported net gains in job creation, matching the streak in the late 1980s. And this streak is almost certain to go longer. This in the midst of the Tea Party's near-government shut-down last year, Ebola panic this year, repeated Eurozone crises, Arab Spring, Russia's invasion of the Ukraine, and the fact that during no other recovery has the federal government been shedding jobs. There have been, in the parlance of the field, some strong headwinds. And during this volatile period, the American economy has created 9.1 million jobs, more than Japan, Western Europe, Canada, and Australia combined.

At 5.9%, the unemployment rate is below 6% for the first time since before the Lehman Brothers bankruptcy in September of 2008 that - for many - marks the beginning of the Great Recession. (In the 14 months after Lehman Brothers, the economy lost 7.2 million jobs, a staggering number.) Better yet, the rate at which the unemployment rate is dropping is accelerating. Accelerating at the point at which the longest previous recovery on record stalled. 

Perhaps the best news about this has yet to play out. For more than a decade, the jobs market has been weak. Imagine a rope that pulls up wages. If that rope is slack - if the unemployment rate is 6% or higher rather than 5% or lower, say - wages stagnate. We are entering a period in which the job market is finally strong enough to not just create jobs but to bid up wages. 

It might just get better. 

Households, Government and Businesses Are In Position for a New Boom

The economy is in the best position it's been for all of this century.

Households have paid down debt and increased wealth, now positioned to comfortably begin spending again. That will show up as additional tax revenues for governments and additional sales for businesses.

The government has brought spending and taxes back within the normal range. This doesn't just mean a lower deficit. It also means that the government no longer has to drag the economy down through austerity measures that raise taxes and lower spending.

As households and governments return to business as normal, businesses will boom as well, which will feed back to the other two sectors.

The Government Has Recovered

The deficit has come down one trillion dollars in four years. This deficit reduction during  the recovery has taken 1% out of GDP growth during that time through higher taxes and lower spending, but that drag is likely to stop. Remarkably, we've gone from record deficit to normal within just five years.

In the graph to the left you can see two straight lines representing the average tax revenue as a percentage of GDP (the lower of the two lines) and the average federal spending as a percentage of GDP (the higher).

The line that raises above the band shows actual spending. The line below the band shows actual tax revenues. In 2009, they were both at their most extreme, taxes at 14.6% of GDP and spending at 24.4%.

Since then, austerity measures and the recovery have changed  this. At 17.6% of GDP, taxes this year are projected to run just above the average of 17.4%. At 20.4%, government spending will be just below the average of 20.5%. And reports so far this year suggest the deficit will be even lower than this projection.

Government spending will - at a minimum - now be a stabilizing force on the economy rather than a drag on expansion as it has been throughout this long recovery. Government austerity is one reason it took 6.5 years for the economy to create the jobs lost during the Great Recession. (The other, of course, being simply the massive number of jobs lost during this financial crisis, as can be seen in the graph below.)

Households Have Recovered

Last month the economy hit a milestone: total employment hit a new high, finally restoring all the jobs lost during the Great Recession. This is a big deal for so many reasons. Just as the government has finally brought taxes and spending to within normal bounds, this means that households are finally returning to something like normal as well.

For the first time since 2000, the economy created more than 200,000 jobs per month for four months in a row. These sorts of realities change how people feel about spending. Even people who have kept their jobs have been more cautious about spending or taking out loans when the economy was so bad. The improving labor market helps them to begin feeling more confident about spending. And households are, by some measures, in their best position to begin spending in a generation.

Last year household wealth rose by $10 trillion, finally restoring all the wealth lost during the Great Recession. The stock market is regularly hitting new highs. Home prices are up 20% in the last two years.  While assets have been appreciating, households have also been paying down debt. What households pay to service debt is the lowest it has been since the Fed began to track this in 1980, a generation ago. All of this suggests that households will begin to spend again and that is good news for everyone - from businesses to government to other households.

Businesses, Households, and Government Are Now Positioned to Boom

So imagine this combination.
Households feel emboldened by additional wealth and a healthier jobs market to spend again.
Government spending will begin to grow at normal rates again.
Businesses - facing increased spending from households and government - will begin to invest and expand.
The combination of household spending and business expansion will provide more tax revenues, allowing the government to spend more and to pay down more debt, putting more capital into financial markets.
The combination of household spending and government spending will mean more business for business, allowing them to hire more and pay out more to shareholders.
The combination of government spending and business expansion will provide more jobs and income to households.

For the first time this century, we will enjoy an economy in which all the pieces - government, households, and business - are moving towards full capacity without resorting to excessive debt.

It's been a long time.

And it could result in a boom that will be even more impressive than the ones we had in the 1980s and 1990s.

P.S. 10 June, I would add this graph of the ratio of unemployed workers per job opening from 538.

This shows that there are fewer workers competing for the same jobs, which is great news for job-seekers. That ratio is nearly back to pre-recession levels. Once it hits that level, I predict wages will again start to climb.

Today's April Jobs Report Adds to the Promise of 2014

This is the jobs report I prematurely forecast last month for March. It took a month longer to happen than I thought, but this ~300,000 jobs report is good news.

288,000 jobs created in April plus the numbers for February and March revised upwards by 36,000 means that a total of 324,000 new jobs were announced this month. We may actually have a year in which monthly job creation numbers average more than 200,000; if so, it will be only the second time since 1999.

The unemployment rate, after being stuck at the same rate for four months, sharply fell. The unemployment rate for April in the last five years leaves little doubt that we're experiencing a real recovery. And it actually seems to be accelerating, 4+ years in.

Making Explicit What Republican Candidates Advocate

Let's get clear on what Republican candidates are advocating.

Right now - largely because of recovery from the Great Recession - the federal government has a deficit of $1.5 trillion.

US total GDP is about $15 trillion.

Republican candidates refuse to raise taxes but insist on lowering the deficit to zero. That is, they want to pull out $1.5 trillion of a $15 trillion economy.

Essentially, they are advocating that we eliminate 10% of the economy - mostly government and government contractor jobs. Even disallowing the ripple effect of this (think of all the "private sector" businesses near air or naval bases that would go under after such layoffs), such an action would more than double an unemployment rate that is already too high.

I do believe that we face a new set of problems that will require Obama to be as creative for this time as FDR was for his. His solutions to date has been expensive but timid, in the sense that it offers too little that could be called innovative. His solution has been timid but the Republican's solution is simply terrible.

Post Script: David Stockman - one of Ronald Reagan's chief advisers - admitted that their austerity plan to reduce the deficit will make the job market worse, probably resulting in a decade of double-digit unemployment. Read it here at Jonathon Cohn's column. 

The American Job Market - A Self Inflicted Wound

Excerpts from The Economist.  Government policy to reduce the deficit and move towards fiscal responsibility is proving economically reckless. It is now costing us jobs and putting us at risk for a double-dip recession.

After producing job gains averaging 220,000 per month in the three months to April, the economy added just 54,000 in May, below expectations. The private sector did a bit better, adding 83,000 jobs, but that was well off the healthy rate of hiring enjoyed earlier in the year. The unemployment rate rose to 9.1%, from 9.0% in April.
America's job woes have also been self-inflicted. Private firms have added over 1.7m jobs in the past 12 months, but the government has shed nearly half a million over the same period (not counting the loss of temporary Census jobs last year). Local governments alone have cut 446,000 positions since September of 2008. Some of those government jobs losses reflect a sensible rationalisation of workforces. Too many of them reflect the damaging effect of pro-cyclical budget cutting due to balanced-budget rules in cash-strapped states. More federal aid to states might have dampened the reductions, easing the drag on national growth.
The ongoing debt-ceiling battle is an additional source of uncertainty. Legislators continue to bicker over how and how much to trim from the federal budget in exchange for an agreement to raise the nation's statutory limit on borrowing. Failure to raise the ceiling by August will trigger default. Just yesterday Moody's, a ratings agency,threatened to downgrade America's debt rating if a deal on the ceiling weren't reached by next month.
In a global economy this volatile, the American economy is going to have a rocky month here and there. But American government officials are doing themselves no favours. Federal Reserve officials are overly concerned with inflation given the outlook for slowing global growth. Now is no time for policy tightening. And elected representatives in Washington are playing with fire. By cutting too much spending in the short-term and turning the debt-ceiling fight into a political battle, Congress risks making a large unforced error. The economy is simply too vulnerable at the moment for politicians to make those kinds of mistakes.

What if Debt were Driven by Productivity Gains?

I've never seen anyone suggest that growth in productivity might be the fuel for a growth in debt. The rate of productivity growth has been remarkable in the last couple of decades. So has the growth in debt. Maybe the one causes the other. And maybe debt is the result of a good thing (productivity growth) and not a bad thing (a sudden lapse in morality).

Try this thought experiment.

100 people all farm to eat. Then one day, one guy makes a machine that allows him to feed 100 people all by himself. Now, we've created 99 unemployed people who can only beg or borrow in order to eat.

One of two things happens next. Either no one else comes up with new products or services that generate income and the the starving 99 are unable to pay back the inventor, and the whole "economy" collapses back to some uneasy situation with 99 parasites and one productive inventor. Or two, inventors and entrepreneurs emerge from within the 99 to create new goods and services that allow them to eventually pay back the loan for food and create more jobs.

If we stop short at the debt of the 99 hungry hopefuls, we'll be stuck. The way through this is not to take on less debt but, rather, take on more.

This odd little thought experiment suggests that debt - whether of the newly unemployed who want to eat or of the new and would-be inventors and entrepreneurs - follows from productivity gains. And the debt may be really ugly. For instance, in this example, the unemployed food eaters are borrowing money to eat. And the "wealth" the inventor feeding 100 people has is in the form of IOUs from the hungry hopeful. And further, if the successful inventor backs a new inventor, he is actually loaning him money that is just promissory notes and not real cash. And yet if all these loans are not made, the system collapses.

Following this logic, it could be that debt follows from productivity gains. The point then is to stimulate more innovation - even if that means incurring more debt - in order to create the next venture that will provide jobs to the newly unemployed.

So, what is the solution to our current levels of unemployment and increased debt? It is not to worry about debt. It is to worry about creating the next new thing - from building infrastructure to creating new businesses.

I will maintain my contention that our problem is not a problem of too much debt or even of financial institutions that create too much wealth - real or bubbled. Our problem is that we aren't doing enough to translate our excess labor and capital resources into new ventures. This is not a failure of labor or capital markets. It is a failure of entrepreneurship. We need to do more to create entrepreneurship within organizations (what Gifford Pinchot calls intraprenuership) and without. The solution is that simple and that complicated. Focusing on debt right now is a distraction. We need to innovate our way out of this.

Which means, essentially, we're in the same situation we've been in for centuries, only more so.

Self-Spoofing News, Another in a Series

Trying to impress working class voters in Pennsylvania, Barack Obama bowled a 37. On a related note, trying to appeal to college-aged voters, McCain ran the 200 meter hurdles in just under an hour.

Ted Turner told Charlie Rose that global temperatures will rise about 8 degrees in another 30 to 40 years, depressing crop yields so much that it will trigger death by starvation and cannibalism. Fortunately, fast food places have been fattening up weaker members of the species in preparation for just this event.

Elliott Spitzer was forced to resign after it was revealed that he had had sex with a prostitute. David Paterson, who replaced him, announced the very day he was sworn in that he’d had numerous affairs. Spitzer’s opponents said that there is no truth in the rumors that Paterson’s indiscretions were acceptable whereas Spitzer’s were not simply because Paterson promises to be less aggressive in attacking corporate malfeasance. They said it is because Paterson is legally blind and, “did not actually know he was having sex with women other than his wife.”

After bailing out one company, Bear Stearns, with $29 billion, Congress will now give only about five times that much to the other 300+ million Americans. If your name is Bear or Stearns, you get $15 billion. If your name is Smith or Rodriguez, you get $1,500. Best of all? Given that the government does not actually have this money, they’re basically forcing a loan on households, a loan that Smith, Rodriguez, et al, will have to pay back in higher taxes along with the $29 billion loaned to Bear Stearns.

On net, Americans lost about 80,000 jobs last month – almost double the number lost in the first two months of 2008. Bush said not to worry – as part of the deal he made with Bear Stearns, they have promised to offer jobs to any laid off Americans. Asked about this deal, Bear Stearns clarified that the laid off Americans would have to first agree to move to India or China.

The Bush administration announced that it would not regulate tobacco products because it said that regulating these products would lead the public to believe that tobacco products are safe So, they are going to leave them unregulated, allowing Americans to freely use them. As with all other Bush policies, it is not clear whether anyone in the White House actually believes the story they’re telling. White House spokesperson Dana Perino said that this should be prove that, whatever Bush is smoking, it is not tobacco.