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August 31, 2006
Still Not As Good As It Looks
Once again, I find myself not so convinced by what at first appears to be good news on the inflation front. From Reuters:
In another sign of moderating inflation, the government reported earlier Thursday a smaller-than-expected 0.1 percent July rise in the core personal consumption expenditure index, the Federal Reserve's preferred inflation gauge. The core PCE advanced 0.2 percent in June.
That core personal consumption expenditure index, of course, is the PCE exlcuding food and energy components. But the Dallas Fed provides an alternative look, that is not so wonderful:
The trimmed mean PCE inflation rate for July was an annualized 3.1 percent. According to the BEA, the overall PCE inflation rate for July was 4.1 percent, annualized, while the inflation rate for PCE excluding food and energy was 1.7 percent.
That 3.1 percent represents a slight increase over the 3.0 percent annualized increase in June. I can really do no better than repeat what I said in my post about about the Consumer Price Index inflation report a few weeks ago: Unlike the traditional core inflation measure, which simply excludes food and energy components, the trimmed-mean measures excludes both high and low price changes, no matter what they might be. The idea is to get a picture that is not distorted by items with prices that are increasing by a lot, or decreasing by a lot. And that picture just isn't improving that much:
Almost 60 percent of expenditure-weighted price increases -- 59.16 percent to be exact -- were over 3 percent annualized in July. That is a slight deterioration relative to the year for a whole -- the corresponding figure for the first 7 months of 2006 is about 52 percent -- but, more importantly, the shift in the distribution is clearly toward higher rates of increase.
I'm not surrendering, but it is clearly too early to declare victory on the basis of a good PCE ex food and energy signal, even adjusting for the usual caveat to not get overly exxcited about one month's data.
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August 30, 2006
There is a little something for everyone -- that is to say, things to cheer about, things to frown about -- in the Census Bureau's report on Income, Poverty, and Health Insurance Coverage for 2005. MarketWatch summarizes:
Real U.S. median household income rose 1.1% in 2005, climbing for the first increase since 1999, but inflation-adjusted incomes still have not recovered fully from the 2001 recession, the Census Bureau reported Tuesday.
Real median incomes for 2005 rose 1.1% to $46,326 but were down 0.5% from 2001's $46,569. Median income means half of the 114.4 million U.S. households earned less, half earned more. The figures have been adjusted for inflation.
Income inequality continued to increase, with the top 20% of families accounting for a record 50.4% of all household income, just the third time since the mid-1960s that they've taken more than half. For the top 20%, the median income rose by $3,592, or 2.2%, to $166,000.
Meanwhile, the bottom 20% captured just 3.4% of income, matching their lowest share since the mid-1960s. Median incomes for the bottom 20% increased by $17, or 0.2%, to $11,288...
The poverty rate declined for the first time since 2000, nosing down to 12.6% from 12.7%, but this amounted to a statistically insignificant change, the government said. The poverty rate was 1.3 percentage points higher than 2001's 11.3% but was lower than the 13.8% average in the 1990s.
If you are poor and not working -- which is the most common circumstance for those under the poverty line -- the reasons are not obviously associated with a lack of jobs for those who choose to remain in the labor force.
August 29, 2006
More Confusion About The Return To Labor
Regular readers of macroblog know that one of my pet peeves is the insistence of some to measure labor compensation using narrow measures of hourly wages. Yesterday, The New York Times continued to insist in an article titled "Real Wages Fail to Match a Rise in Productivity."
Not to fret, though. Russell Roberts administers the smackdown:
Let me repeat the key sentence:
The median hourly wage for American workers has declined 2 percent since 2003, after factoring in inflation.
That's a very strange sentence for many reasons:
1. Why would you use a measure of compensation that ignores benefits, an increasingly important form of compensation?
2. Why would you use 2003 as your starting point when the recession ended in November of 2001?
... for every year since the recession of 2001, real hourly compensation has actually increased. It's up since 2003 as well. And this year it's up quite dramatically...
As I have mentioned here before--the standard claims you hear about labor's share declining come from using wages without other forms of compensation. When you include benefits, labor's share is virtually a constant at 70% of national income and has been steady since the end of World War II,
I might just stop there, but on this topic I really can't stop complaining. In reading the Times piece, The Capital Spectator instead focuses on what would appear to be the flip side of the claim that labor share is falling: A rising share of income accruing to capital. Again from the Times article:
In another recent report on the boom in profits, economists at Goldman Sachs wrote, “The most important contributor to higher profit margins over the past five years has been a decline in labor’s share of national income.”
I'm not sure how that conclusion is reached, but my colleagues Paul Gomme and Peter Rupert make this observation:
.. for labor’s share as computed by the Bureau of Labor Statistics, a fall in labor’s share does not necessarily imply a rise in capital’s share; indirect taxes and subsidies constitute a wedge between these two series. Consequently, a fall in labor’s share could be associated with a rise in capital’s share, but it could also be due to a rise in the share of indirect taxes less subsidies... Further, the terms “capital’s share” and “profit share” are often used interchangeably, ignoring the fact that capital income derives from more sources than just (corporate) profits.
What I think is more important in the Gomme-Rupert analysis is this, from one of my previous discussions on this topic:
... the “historic lows” in labor’s share are observed only in the nonfarm business sector series produced by the Bureau of Labor Statistics. Other measures of labor’s share—for example, for the nonfinancial corporate business sector or the macroeconomy more broadly—are currently near their averages over the last several decades.
Those alternative measures are ones that avoid, for example, the problems associated with allocating rental income and proprietor's income between labor and capital. (In other words, they avoid imputing things that we don't observe.)
In what I suppose is a related topic, there has been plenty of blogging in the last several days on the injunction against a strike by Northwest Airlines flight attendants, union-busting, and wage inequality -- from Dean Baker, from Brad DeLong, and from Mark Thoma (among others, no doubt).
Just about a month ago the raging debate was about why it might be that changes in income inequality have been concentrated among the top 1% of income earners -- excellent examples of that debate being found here and here. Once you have identified the real issue as being about the top 1% of the income distribution, I'd think you have pretty much ruled out unionization (or the lack of it) as a dominant driver of the major trends in who gets what. In any event, on the question of unionization and wage inequality, I'm with Greg Mankiw.
UPDATE: Max Sawicky takes me to task for omitting this from the Gomme-Rupert quotation above:
... we find that the share of indirect taxes less subsidies does not vary much.."
Well, it certainly wasn't my intention to deceive, but Max has a good point. I'll consider my knuckles duly rapped.
In a related vein, Dean Baker notes that depreciation can also cloud the picture on capital sharel. knzn thanks Dr. Baker for us all, but comes to the "indirect taxes" conclusion: There's not enough action there to eliminate the decline in standard labor share calculations.
Greg Mankiw covers the theory of productivity and wages, and provides several reasons the data might not cooperate with theory (including Dean Baker's observations that different price indexes are in play). If you would like to see the math behind Professor Mankiw's discussion of labor shares and the Cobb Douglas production function, Economic Investigations has just what you're looking for.
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August 28, 2006
Crabbing About Core
The Bank of England's Charles Bean had some negative things to say about core inflation at this year's edition of the Kansas City Fed's annual Jackson Hole thinkfest -- comments duly noted by Daniel Gross, by Mark Thoma, and by Michael Kowlaski -- but he was not the only one taking potshots at the core concept this weekend. William Safire -- the New York Times' wordsmithing maven -- had some complaints of his own:
The man whose words are parsed more closely than anybody else’s in the world opined in early June to a bunch of bankers that this year’s “core inflation” — setting aside volatile food and gas prices — “has reached a level that, if sustained, would be at or above the upper end of the range that many economists, including myself, would consider consistent with price stability.”
Ben Bernanke, current chairman of the Federal Reserve, in a written sentence that he must have sweated over for a week. I think his point was that inflation may be getting too high (in which case it would be inconsistent with price stability), and so I ran his words past Floyd Norris of The Times, a practiced Fedspeak cryptologist. “What bugged me most about the sentence is its reliance on ‘core’ inflation,” noted my colleague. “Using the core figure for very short periods of a few months may make sense as a way to avoid meaningless volatility, but using it for six months or even longer is hard to understand.”
Even harder to understand is why economists have picked up a vogue word in politics — every “power base” now boasts a “core constituency” — and are using it to modify “inflation.” It is a word with beautiful poetic associations, from Shakespeare’s “I will wear him in my heart’s core, ay, in my heart of heart” to Keats’s “A virgin purest lipp’d, yet in the lore/Of love deep learned to the red heart’s core.” Now here it is qualifying the rising cost of living. “The ‘core inflation’ rate,” Norris says, “is relevant for those who neither eat nor use energy.”
I don't know about that poetry stuff, but in conflating "core" with "cost of living", I think Mr. Safire gets exactly the wrong idea. My colleague Mike Bryan explains it this way:
In theory, cost-of-living changes are measured by envisioning the cost of attaining a certain level of welfare and comparing that cost in different places or different periods of time. Unfortunately, “welfare” is impossible to quantify and a more practical approach is to calculate the cost of a representative market basket of goods and services and compare that cost between two places (like Cleveland and New York) or two periods of time (like 1960 and today)...
Many of the problems identified with the CPI (and other similar market basket approaches) have been well known to economists for nearly a century. Most arise because the basket of goods and services used to compute the cost-of-living statistic gradually becomes dissimilar to the basket of goods and services actually purchased by consumers... But another problem is that market basket statistics also pick up inflation because they measure the money cost of the basket. That is, the CPI can rise even if the cost of living is constant if the Federal Reserve continues to oversupply money and makes the dollar an increasingly inflated measure of cost.
Price statistics that attempt to isolate the persistent rise in the general price level are commonly called core (or underlying) inflation statistics...
An alternative procedure for measuring core inflation is to reconstruct the market basket in a way that reduces the influence of transitory price fluctuations originating in various components of the index. The idea here is that although such price swings may reflect changes in the cost of living, they are not part of a persistent rise in the general price level that comes from a monetary source. The best-known core inflation statistic excludes food and energy goods from the consumer market basket...
... By excluding some components of the market basket, the measure no longer reflects consumer spending patterns and therefore fails to qualify, in a meaningful sense, as a cost-of-living statistic; volatile or not, food and energy are important to our cost of living.
But it may be a useful signal of the underlying rate of change in the purchasing power of money, which -- speaking for myself -- seems like just the right idea.
UPDATE: Greg Mankiw opines:
This is yet another reason to think that for the foreseeable future the Bernanke Fed's commitment to inflation targeting is likely to be vague and informal. Monetary policy will remain more discretionary than rule-based.
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August 26, 2006
A Laffer Critic With Critcism I Criticize
At disco-tech.org (hat tip, The Capital Speculator), Arthur Laffer comes under fire from fellow traveler Bret Swanson for his defense-of-the-Fed opinion piece in Thursday's Wall Street Journal. I'm not one to dive into family disputes, but there is at least one contention to which I feel a response is needed. Swanson writes:
-- Dr. Laffer says expected inflation gleaned from TIPS bonds is the best predictor of inflation, but in fact TIPS have not been very good at all at predicting inflation.
I don't think there is any way to draw that conclusion. When monetary policymakers think about inflation expectations, the focus is almost always on long-term expectations -- the assumption being that the central bank has only modest control over inflation on a year-to-year basis. Since Treasury Inflation Protected Securities were introduced in 1997, it is just not possible to determine whether they have been good predictors at the relevant 5 to 10 year horizon.
Of course, the argument works both ways. Though I tend to agree with the sentiments expressed by Ryan DeJarnette (thanks again, TCS)...
Mr. Laffer explains inflation is under control when looking at the TIPS spread, or the difference in yields on TIPS and the 10-year bond. This spread tells you the market, which is the most efficient and effective entity when it comes to valuation and prediction, expects 10 year inflation rates around 2.5% a year...
... the claim that the TIPS market is giving us the "the most efficient and effective" estimate of inflation expectations, and hence inflation, is still largely an article of faith. Though there are several reasons that the simple TIPS spread might not be an unbiased predictor of inflation -- because of differentials in liquidity, for example -- trusting in this market measure of expectations is a leap I'm willing to take.
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August 25, 2006
Is It Just Me?
Yesterday I contemplated this week's news from the U.S. housing market, and concluded with this:
There is plenty of cause for concern, and plenty of uncertainty about the outlook. But to me it seems just a bit premature to be pushing the panic button.
The early reviews from readers go something like this: The housing market is in the tank, and you, Mr. Dave, are either a knucklehead or afraid to tell the people the straight facts.
First, let me note that I did say this:
... rising inventories of unsold homes -- Barry Ritholtz has the pic -- seems unlikely to be a harbinger of a rally just 'round the corner. And I might join The Capital Spectator in concluding that "the pullback in housing is something more than a minor hiccup."
To put it straight, I harbor no illusions about the state of the residential housing market. But I am a macroeconomist -- and one primarily engaged in thinking about national economic monetary and fiscal policies at that -- so my tendency is to focus on the trajectory of the entire economy. In the best of times there are some sectors of the economy that struggle, and it is not clear that these are the appropriate objects of policy.
More to the point, softening in housing markets, and attendant consequences on consumer spending and GDP growth, are already embedded in every reasonable forecast. They also include the expectation that the future will in part bring a rising share of business investment along with a falling share of household consumption. So an important part of the news yesterday came in the form of the July durable goods report. From Reuters:
New orders for U.S.-made durable goods fell a much greater-than-expected 2.4 percent in July as civilian aircraft and car orders tumbled, the Commerce Department reported.
But non-defense capital goods orders excluding aircraft, seen as a signal of business spending, rose a much larger-than-expected 1.5 percent. Analysts had forecast a 0.4 percent rise in the category.
"The headline was disappointing, but that was offset by a much stronger-than-anticipated reading in the non-defense capital goods orders ex-aircraft component. That provided some reassuring news in terms of corporate business investment," said Alex Beuzelin, senior market analyst at Ruesch International in Washington D.C. "At the margin, this supports the view that the Fed's job may not be done yet."
I put it all together and I'm just not sure that the incoming data is convincing enough yet to substantially alter our forecasts about the general health of the U.S. economy.
I should emphasize that I am very far from sanguine about those forecasts. There has been a spirited conversation of late -- at Econbrowser (here, here, and here), at Greg Mankiw's Blog, at Economics Unbound, at Outside the Beltway, at Brad Delong's Semi-Daily Journal -- on when we ought to date the beginning of the last recession. It is an interesting conversation, but every speech I give these days includes these two pictures:
I've said it before: No matter when you date the official beginning of the last recession, there is absolutely no question -- none -- that the slowdown began in earnest mid-2000. And that despite the fact that everything looked just fine before the bottom fell out.
I haven't forgotten that lesson.
UPDATE: More related commentary can be found at Alpha.Sources (here and here), at The Big Picture (here and here), at Calculated Risk (here and here), at Economist's View (here and here), and from The Skeptical Speculator.
August 25, 2006 | Permalink
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» 37 Charts – In No Particular Order from Economist's View
Tim Duy wants help with his homework: 37 Charts – In No Particular Order, by Tim Duy David Altig discusses the challenge macroeconomists face as they aggregate a dizzying array of economic data into a coherent story: To put it [Read More]
Tracked on Aug 25, 2006 5:38:37 PM
August 24, 2006
Hot And Cool Heads Comment On The Housing Data
Reflecting on yesterday's existing home sales report, Dean Baker complained that The New York Times "included no comments from people expecting a serious downturn in the market." Maybe he should have waited a day for the July new home sales report. Or maybe he should be reading the Wall Street Journal (after obtaining the required subscription), where support for the plunging view is easily found:
Data on home sales is finally revealing what all the anecdotal reports have been telling us -- that demand for housing is plunging... Brian Fabbri, BNP Paribas...
The July new home sales report essentially mirrored the existing home sales report for the same month: weaker-than-expected sales, further deterioration in months' supply, and sharply lower house price appreciation. With mortgage purchase applications turning over again after a period of stability, further declines in home sales lie ahead. -- Haseeb Ahmed, J.P. Morgan Economics
Dr. Baker is surprised that "weaker-than-expected" wasn't the expectation in the first place, and favors terms like "bubble", "plummet", and "collapse". That is somewhat less colorful, but in the same spirit, as The Big Picture's "El stinko" and "stankbox" designations. But if you are looking for the true language of the apocalypse to come, Nouriel Roubini is your man.
I, however, find myself more aligned with points of view like this (again from the Wall Street Journal):
The demand for new housing is well pass its peak and is now on a retreating trend. Nevertheless, the level of new home sales remains quite high. Unfortunately, inventories of unsold new homes are very high, revealing moderate overbuilding. Finally, home price momentum has slowed significantly as home builders are using discounts to motivate new home buyers. -- Steven A. Wood, Insight Economics
At BizzyBlog, a useful distinction was made between year-over-year growth rates and the level of activity in housing markets. Here are the pictures that I think make the point:
Sure the pace is way off the recent records, but, by historical standards, things are still proceeding at a pretty good clip. As for prices, Calculated Risk has this ...
The national median existing-home price for all housing types was $230,000 in July, up 0.9 percent from July 2005 when the median was $228,000.
The median and average sales prices [for new home sales] were down slightly. Caution should be used when analyzing monthly price changes since prices are heavily revised.
I guess that means that, when all is said and done, prices could appear softer than they do now, but the evidence does not yet reveal much in the way of plummeting or plunging.
Of course, rising inventories of unsold homes -- Barry Ritholtz has the pic -- seems unlikely to be a harbinger of a rally just 'round the corner. And I might join The Capital Spectator in concluding that "the pullback in housing is something more than a minor hiccup." But I'm an optimist, and take this, from Jim Hamilton, to heart:
In the last 42 years (a period that includes 6 economic recessions), there was only one year in which we've seen a weaker December-to-July gain. The good news is that record year was 1994, in which the economy did not go into a recession, but instead was the prototypical "soft landing" which the Fed hopes to repeat this time.
Look. There is plenty of cause for concern, and plenty of uncertainty about the outlook. But to me it seems just a bit premature to be pushing the panic button.
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Tracked on Aug 26, 2006 12:33:26 PM