Wednesday, June 5, 2013

Today's links

 

1---Corporate revenues are starting to falter, prag cap

  Companies hire when they’re swamped with demand.  And based on corporate revenues demand is at its lowest point since the recovery began.  That means the likelihood of hiring picking up steam is extremely low.  More likely, corporations will play it safe and try to maintain margins as they offset revenue weakness with cost cutting.  If hiring isn’t going to gain momentum then the Fed isn’t easing.  It’s that simple.
revs

2---The Fed, Inequality and Accounting Identities, CEPR


The country has an output gap of around 6 percent of GDP. This is due to the plunge in residential construction following the collapse of the housing bubble and also the lost consumption that resulted from the loss of $8 trillion in housing equity. Standard measures of the housing wealth effect imply that a reduction of $400 billion to $560 billion in annual consumption.

There are a limited number of channels to fill this lost demand and thereby make up the 9 million jobs deficit we now face. One route is large government deficits, either from increased spending or tax cuts. That is probably the quickest and surest way to make up the demand gap, but the Serious People insist that we can't run large deficits.

Another obvious route, and probably the best long-term solution, is to get the dollar down. This will improve the international competitiveness of U.S. goods and bring the trade deficit closer to balance. Unfortunately this has not been a high priority for the Obama administration. There are powerful interests like Walmart, many large manufacturers, and the financial sector which benefit from an over-valued dollar. As a result, getting the dollar back to a more sustainable level has not been a priority for the administration.

When these routes are excluded there are not many other options to increase growth and create jobs. Low interest rates will help by allowing homeowners to refinance their mortgages and free up money for other spending. However this effect will be limited. Even if all $8 trillion in mortgage debt were refinanced at a 1.0 percentage point lower interest rate that would only free up $80 billion. And, this is offset by the fact that those lending the money will have less to spend.

The bigger impact is likely to be the stock and housing wealth effects. These likely explain the fact that the savings rate is now hovering near 3.0 percent, as opposed to an 8.0 percent pre-bubble average.

3---The Fed and inequality, NYT
 

It is certainly true that inequality, in terms of both income and wealth, has widened since the recession. A study by the lauded economist Emmanuel Saez of the University of California, Berkeley, found that the top 1 percent of earners have accounted for all of the income gains in the first two full years of the recovery. Their incomes have climbed about 11.2 percent. The incomes of the 99 percent have declined by about 0.4 percent.

Those patterns repeat when looking at measures of wealth, meaning the value of a family’s assets, like its house and savings account, minus the value of its debts, like mortgages and credit card balances. A
recent report from the Pew Research Center found that the wealth of the richest 7 percent of households climbed about 28 percent from 2009 to 2011. For the remaining 93 percent, average wealth dropped about 4 percent.

4---Fiscal Headwinds: Is the Other Shoe About to Drop?, by Brian Lucking and Daniel Wilson, FRBSF Economic Letter, economists view 
While our estimates show that fiscal policy has held back the recovery slightly to date, the effect over the next three years looks much bigger. The CBO projects that the federal deficit as a share of GDP will drop 1.4 percentage points per year over the next three years. This projection would ease slightly to 1.2 percentage points per year if sequestration spending cuts were reversed. By contrast, our calculation of the historical-norm deficit decline through 2015 is 0.4 percentage point per year based on the CBO’s output gap projections. This implies that the excess drag from the rapidly shrinking deficit would reduce real GDP growth annually by between 0.8 and 1.0 percentage point, depending on whether sequestration is reversed. Thus, with or without sequestration, fiscal policy is expected to be a much greater drag on economic growth over the next three years than it has been so far.
Surprisingly, despite all the attention federal spending cuts and sequestration have received, our calculations suggest they are not the main contributors to this projected drag. The excess fiscal drag on the horizon comes almost entirely from rising taxes. Specifically, we calculate that nine-tenths of that projected 1 percentage point excess fiscal drag comes from tax revenue rising faster than normal as a share of the economy. As Panel B shows, at the end of 2012, taxes as a share of GDP were below both their historical norm in relation to the business cycle and their long-run average of about 18%. However, over the next three years, they are projected to rise much faster than our estimate of the usual cyclical pattern would indicate. The CBO points to several factors underlying this “super-cyclical” rise, including higher income tax rates for high-income households, the recent expiration of temporary Social Security payroll tax cuts, and new taxes associated with the Obama Administration’s health-care legislation.
Conclusion
Federal fiscal policy has been a modest headwind to economic growth so far during the recovery. This is typical for recovery periods and in line with the historical relationship between the business cycle and fiscal policy. However, CBO projections and our estimate based on the countercyclical history of fiscal policy suggest that federal budget trends will weigh on growth much more severely over the next three years. The federal deficit is projected to decline faster than normal over the next three years, largely because tax revenue is projected to rise faster than usual. Given reasonable assumptions regarding the economic multiplier on government spending and taxes, the rapid decline in the federal deficit implies a drag on real GDP growth about 1 percentage point per year larger than the normal drag from fiscal policy during recoveries.
America's sub-prime mortgage market is beginning to reheat, leading investors to warn of the possibility of a renewed financial crisis 
Demand for sub-prime mortgage bonds, which are not backed by US government-controlled mortgage lenders Freddie Mac and Fannie Mae, has surged since the start of last year, as yields on treasury bonds remain low.
Returns jumped 41pc last year, and have climbed a further 12.7pc this year, according to data from Barclays.

6---Consumers Feel Pinch as Income Flat, Spending Off, CNBC
 

...consumer spending fell in April for the first time in almost a year and inflation pressures were subdued, pointing to a slowdown in economic activity that should see the Federal Reserve maintaining its monetary stimulus for a while. 

      The Commerce Department said on Friday consumer spending fell 0.2 percent, the weakest reading since May last year, after edging up 0.1 percent in March. Economists had expected a 0.1 percent gain.

Personal income growth was flat, also against an expected 0.1 percent gain.
Consumer spending, which accounts for about 70 percent of U.S. economic activity, was held down by weak demand for utilities and weak receipts at gasoline stations on the back of a drop in gasoline prices at the pump.

Consumer spending is on a very modest track because income is not growing very much. Wage gain is very low even though job growth has picked up," said Kevin Logan, chief U.S. economist at HSBC Securities in New York.

      The economy has been hit by higher taxes and deep government spending cuts as the government tries to slash its budget deficit.

It grew at a 2.4 percent pace in the January-March period, but is expected to slow to a rate of between 1.5 percent and 2.2 percent this quarter because of the government budget cuts, which are already putting a strain on manufacturing.
A price index for consumer spending fell 0.3 percent last month after dipping 0.1 percent in March. A core reading that strips out food and energy costs was flat after rising 0.1 percent the prior month. 
 
 
 Over the past 12 months, inflation has risen just 0.7 percent, the smallest gain since October 2009 and pushing further below the Federal Reserve's 2 percent target. The index had increased 1.0 percent in the period through March.
Core prices are up 1.1 percent, the smallest rise since March 2011 and slowing from 1.2 percent in March. 

      The weak spending and the lack of inflation pressures could dampen market speculation the U.S. central bank might start scaling back monetary easing later this year.
Fed Chairman Ben Bernanke said last week a decision to start tapering the $85 billion in bonds the Fed is buying each month could come at one of its "next few meetings" if the economy appeared set to maintain momentum

7---The 2008 crisis and the restructuring of class relations in America, wsws

...the 2008 crisis was not a passing conjunctural crisis, but one rooted in deep underlying contradictions of American and world capitalism. The entire past period has shown that there can be no solution in the interests of the working class that does not direct itself at overturning the dictatorship of the financial aristocracy through the socialist transformation of economic life

The Federal Reserve Bank of St. Louis released a report Friday showing that, after adjusting for inflation, the average US household has recovered only 45 percent of the wealth it lost during the 2008 crash. This undermines claims that the US is experiencing an “economic recovery,” and points to the vast effects of the collapse in home values, falling wages, and mass unemployment.

After noting that 62 percent of the increase in aggregate wealth since 2009 has come from increasing share values—which are overwhelmingly owned by the rich—the report notes with understatement, “Considering the uneven recovery of wealth across households, a conclusion that the financial damage of the crisis and recession largely has been repaired is not justified.”

A principal factor in the collapse of household wealth beginning in 2007 was the collapse of the housing market bubble. This particularly affected lower-income families, whose main asset is their home. While the stock market has soared back to record highs as a result of government policy, the housing market has remained stagnant.

Even the St. Louis Fed report, however, masks the vast redistribution of wealth that has taken place during the economic collapse of 2007-2008 and the so-called “recovery” starting 2009. The aggregate figure—a 45 percent increase in average household wealth—masks vast inequalities.

According to figures from the Census Bureau, between 2005 and 2009, the median net worth of the lowest fifth of income earners fell from $6,870 to $3,500, an astonishing drop of 50 percent. By contrast in the same period, the wealth of a typical household in the top fifth of earners fell from $343,863 to $283,081—a reduction of only 18 percent.

While the wealth of the super-rich has surged with the roaring stock market, the vast majority of the population has had no recovery in its wealth. In fact, between 2009 and 2011, the poorer 93 percent of households had their wealth fall by four percent, according to a Pew Research Center analysis of Census Bureau data.

The top seven percent of households, however, had their wealth increase dramatically, by 28 percent—from $2.4 million to $3.2 million, on average.

The Pew report concluded, “From the end of the recession in 2009 through 2011... the 8 million households in the U.S. with a net worth above $836,033 saw their aggregate wealth rise by an estimated $5.6 trillion, while the 111 million households with a net worth at or below that level saw their aggregate wealth decline by an estimated $0.6 trillion.”

Five years since the 2008 crash, over twenty million people remain unemployed or underemployed, while wages continue to fall. Between 2007 and 2011, the US median household income has plunged by 11.6 percent, from $57,143 (in 2011 dollars) to $50,502.

What has taken place since the beginning of the crisis in 2007 is a massive intensification in the social oppression of the working class, reflected in a vast transfer of wealth from the working class—that is, the vast majority of the population—to the rich...

As a result of these parasitic operations, the major US banks have once again posted record profits in the first quarter of this year: $40.3 billion. These profits are not made from creating jobs or boosting economic production, but rather by impoverishing the working population and blowing new financial bubbles that are sowing the seeds of the next, even more explosive crisis.

This confirms the analysis made by the World Socialist Web Site that the 2008 crisis was not a passing conjunctural crisis, but one rooted in deep underlying contradictions of American and world capitalism. The entire past period has shown that there can be no solution in the interests of the working class that does not direct itself at overturning the dictatorship of the financial aristocracy through the socialist transformation of economic life
 
8---The ISM report: US manufacturing slowest since 2009, sober look

Today's ISM report confirmed what was already visible in the Markit PMI figures (
see discussion
) - the "spring slowdown" in US manufacturing is here. The table below shows the breakdown of the month-over-month changes - orders and production seem to be the main drivers. Weakness in Backlog of Orders does not bode well for the sector going forward.

The ISM manufacturing indicator is now at the lowest level since 2009:



 9---Weak income growth holding back consumer spending, sober look
As discussed previously, economists maintain that in spite of the slowdown in manufacturing, the US consumer should provide the necessary lift to improve growth. According to the theory, with consumer confidence improving, the spending should follow. But that's not exactly what happened. While consumer spending is up on the previous year, the growth in spending has moderated to the lowest level in three years.
Source: US Department of Commerce

The explanation is simple: incomes are just not growing very fast
 
 
 
Restrained by slow wage growth, personal income rose a disappointing $30.9 billion (0.2 percent) in March—half of what economists expected—as spending rose $21.0 billion or 0.2 percent, the Bureau of Economic Analysis, reported Monday. ...
 
The personal income number is a key driver of the economy fueling consumption which is, according to Friday’s Gross Domestic Product report, about 71 percent of the total economy. Wages grew just 0.2 percent in March, down from 0.7 percent in February. In 2012, wages grew an average of 0.3 percent per month.
...
The personal savings rate—measured as a percentage of disposable income—remained at February’s rate of 2.7 percent....

Inflation (as measured by the personal consumption expenditures price index) fell 0.1percent in March after rising 0.4 in February. Excluding volatile food and energy, the core index was unchanged in March compared with a 0.1 bump in February. Year-over-year, overall inflation was 1.0 percent in March, down from 1.3 percent in February. The core inflation rate—excluding food and energy—was 1.1 percent in March, down from 1.3 percent in February

11---Profits don't flow through to wages, USA Today


Hourly wages ticked up 4 cents in April to an average $23.87, rising at about the same tepid 2% annual pace since the recovery began in mid-2009.

But taking inflation into account, they're virtually flat. Workers who rely on paychecks for their income have been running in place, financially speaking. Adjusting for inflation, an average worker who was paid $49,650 at the end of 2009 is making about $545 less now — and that's before taxes and deductions.

Stagnant wages aren't only tough on workers — the American economy is paying a price, too. Living standards aren't rising. Consumer spending, which is 70% of the economy, is more restrained. And the recovery advances at a slower pace.

"Ultimately, for the economy to thrive we need everyone participating," says Mark Zandi, chief economist of Moody's Analytics.

The profits of Standard & Poor's 500 corporations hit a record in the first quarter. Their healthy earnings have boosted stocks, and April's encouraging jobs report propelled the stock market even higher Friday. The blue-chip Dow Jones industrial average crossed 15,000 for the first time and closed at a record 14,973.96, up 142.38 points.

     The roaring market is making the richest Americans richer, and giving them more money to spend. But in 2010, only 31% of U.S. households had stock holdings of $10,000 or more, according to the Economic Policy Institute (EPI). During the first two years of the recovery, average net worth rose for the top 7% of households but fell for the other 93%, the Pew Research Center says.

Meanwhile, Corporate America isn't sharing their record earnings with their own employees.
"Don't hold your breath," for employers to become more generous, says John Lonski, chief economist for Moody's Investors Service. One reason, he says, is that revenue growth has been meager, up between 0.5% and 1% in the last year.

In fact, higher profits owe partially to employers' success in controlling labor expenses, by holding down raises and hiring conservatively.
Productivity, or output per labor hour, has risen an average 1.5% a year since the recovery began. Companies are squeezing more out of each worker even as inflation-adjusted wages have stagnated.

Another reason for stagnant wages is the law of supply and demand. Sure, the job market has picked up. Employers added 165,000 jobs last month and an average 196,000 a month this year, up from 183,000 in 2012. And the unemployment rate has fallen from a peak of 10% in 2009.

    But today's 7.5% jobless rate is still high. Nearly 12 million Americans are unemployed, and millions more want to work but are so discouraged they've stopped looking. With an abundant supply of potential workers, employers have little reason to shell out big raises.

     "High unemployment hurts workers' bargaining power," EPI economist Heidi Shierholz says. "Employers know they can go get someone else."
So many Americans are out of work that employers could get away with giving no raises at all, Zandi says, leaving household income falling behind inflation. Employers, however, realize that would hurt morale and, in turn, productivity, he says.
Still, wage increases that just barely keep up with inflation don't make for a prosperous economy.

   "We're not seeing the the living standard growth of American workers that we should be seeing," Shierholz says.
Stagnant wages also hurt consumer spending. Low- and moderate-income workers typically spend nearly all of their paychecks, juicing the economy, while high-income workers tend to save a significant portion, says Dean Baker, co-director of the Center for Economic and Policy Research. ...

 economists say consumer spending won't take off in earnest until inflation-adjusted wages return to a normal growth rate of about 1.5% a year. Baker says that likely won't happen until unemployment falls below 6%, probably in 2016...
 
, up 18.6% from a year ago.” Corporations are currently making more as a percentage of the economy than they ever have since such records were kept. But at the same time, wages as a percentage of the economy are at an all-time low, as this chart shows. (The red line is corporate profits; the blue line is private sector wages.):

Corporations made a record $824 billion in profits last year as well, while the stock market has had one of its best performances since 1900 while Obama has been in office.
Meanwhile, workers are getting the short end of the stick. As CNN Money explained, “a separate government reading shows that total wages have now fallen to a record low of 43.5% of GDP. Until 1975, wages almost
always accounted for at least half of GDP
, and had been as high as 49% as recently as early 2001.”
 
 
 
 
The next chart is my preferred way to show the nominal and real household income -- the percent change over time. Essentially I have taken the monthly series for both the nominal and real household incomes and divided them by their respective values at the beginning of 2000. The advantage to this approach is that it clearly quantifies the changes in both series and avoids a common distraction of using dollar amounts ("How does my household stack up?").
 
 
The stunning reality illustrated here is that the real median household income series spent most of the first nine years of the 21st century struggling slightly below its purchasing power at the turn of the century. Real incomes (the blue line) peaked at a fractional 0.7% in early 2008, far below the nominal illusionary peak (as in money illusion) of 27.2% six months later. Also the real recovery from the trough has been depressingly slight...

In Summary...
As the excellent data from Sentier Research makes clear, the mainstream U.S. household was struggling before the Great Recession. At this point, real household incomes are in significantly worse shape than they were over three years ago when the recession ended

16---Wage growth ,WSJ

Wage growth provides a clean, clear picture of the health of the citizenry. If wages are rising at a healthy clip, it speaks to a healthy labor force. If wages aren’t growing, it speaks to a labor force under pressure. An economy as dependent upon consumer spending as the U.S. can’t remain strong if wages aren’t growing.

A single, real-world example illustrates this. In the first decade of this century, when housing prices were doubling in a matter of years, wages were largely stagnant. You didn’t need to know about securitizations or leverage to understood that housing prices couldn’t outpace wage growth at that exponential rate without repercussions.

“We’re just not going to see big increases in wages when we have unemployment this high,” said Heidi Scheirholz, an economist at the Economic Policy Institute. Stagnant wages are hitting low-income workers the most, she noted, but it’s also affected the middle class as well. People with college degrees haven’t seen any wage growth in a decade, she noted. “Wage stagnation is about so much more than people not having the right skills.”

Flat of falling wages have been papered over for years; consumers have taken on more credit, for instance, and raided their savings. The Fed’s monetary policies since 2008 have also cushioned some of the blow. But none of that is a panacea.

“Neither low interest rates nor low savings are likely to prove sustainable over the long term,” Russ Koesterich, chief investment strategist at BlackRock’s iShares Funds, wrote last month. “The Federal Reserve is likely to eventually raise rates and without faster personal income growth, consumers are likely to run out of savings, especially considering the massive amount of debt they are still unwinding.
“If consumption and the broader economy are to remain resilient going forward in the face of consumer deleveraging, they will need to be supported by an improving labor market leading to faster personal income growth.”

Obviously, wage growth is tied at the hip to job growth, and that presents another problem. At the current rate of jobs growth, EPI’s Sheirholz said, the nation won’t reach full employment again until 2019. “We’re going to see downward pressure on wage growth for a very long time,” she said.

That means that the next five years could look a lot like the last five years. Except for the generational low in the stock market, of course.

17---Flatlining wages, NYT

FEDERAL income tax rates will rise for the wealthiest Americans, and certain tax loopholes might get closed this year. But these developments, and whatever else happens in Washington in the coming debt-ceiling debate, are unlikely to do much to alter one major factor contributing to income inequality: stagnant wages. For millions of workers, wages have flatlined....

Wages have fallen to a record low as a share of America’s gross domestic product. Until 1975, wages nearly always accounted for more than 50 percent of the nation’s G.D.P., but last year wages fell to a record low of 43.5 percent. Since 2001, when the wage share was 49 percent, there has been a steep slide.
“We went almost a century where the labor share was pretty stable and we shared prosperity,” says Lawrence Katz, a labor economist at Harvard. “What we’re seeing now is very disquieting.” For the great bulk of workers, labor’s shrinking share is even worse than the statistics show, when one considers that a sizable — and growing — chunk of overall wages goes to the top 1 percent: senior corporate executives, Wall Street professionals, Hollywood stars, pop singers and professional athletes. The share of wages going to the top 1 percent climbed to 12.9 percent in 2010, from 7.3 percent in 1979. ...
 
From 1973 to 2011, worker productivity grew 80 percent, while median hourly compensation, after inflation, grew by just one-eighth that amount, according to the Economic Policy Institute, a liberal research group. And since 2000, productivity has risen 23 percent while real hourly pay has essentially stagnated.
Meanwhile, it’s been a lost economic decade for many households. According to the Center for Budget and Policy Priorities, median income for working-age households (headed by someone under age 65) slid 12.4 percent from 2000 to 2011, to $55,640. During that time the American economy grew more than 18 percent.
      
Emmanuel Saez, an economist at the University of California at Berkeley, found that the top 1 percent of households garnered 65 percent of all the nation’s income growth from 2002 to 2007, when the recession hit. Another study found that one-third of the overall increase in income going to the richest 1 percent has resulted from the surge in corporate profits.
MANY economists say the stubbornly high jobless rate and the declining power of labor unions are also important factors behind the declining wage share, reducing the leverage of workers to demand higher wages. Unions represent just 7 percent of workers in corporate America, one-quarter the level in the 1960s.
 
18---The US consumer is not okay, Stephen Roach, project syndicate
Over the 21 quarters since the beginning of 2008, real (inflation-adjusted) personal consumption has risen at an average annual rate of just 0.9%. That is by far the most protracted period of weakness in real US consumer demand since the end of World War II – and a massive slowdown from the pre-crisis pace of 3.6% annual real consumption growth from 1996 to 2007.
 
With household consumption accounting for about 70% of the US economy, that 2.7-percentage-point gap between pre-crisis and post-crisis trends has been enough to knock 1.9 percentage points off the post-crisis trend in real GDP growth. Look no further for the cause of unacceptably high US unemployment.
 
To appreciate fully the unique character of this consumer-demand shortfall, trends over the past 21 quarters need to be broken down into two distinct sub-periods. First, there was a 2.2% annualized decline from the first quarter of 2008 through the second quarter of 2009. This was crisis-driven carnage, highlighted by a 4.5% annualized collapse in the final two quarters of 2008.
 
Second, this six-quarter plunge was followed, from mid-2009 through early 2013, by 15 quarters of annualized consumption growth averaging just 2% – an upturn that pales in comparison with what would have been expected based on past consumer-spending cycles.
 
 
A new study suggests that the decline of labor unions, partly as an outcome of computerization, is the main reason why U.S. corporate profits have surged as a share of national income while workers' wages and other compensation have declined.
The study, "The Capitalist Machine: Computerization, Workers' Power, and the Decline in Labor's Share within U.S. Industries," which appears in the June issue of the American Sociological Review, explores an important dimension of economic inequality...
Tali Kristal, an assistant professor of sociology at the University of Haifa in Israel ... found that from 1979 through 2007, labor's share of national income in the U.S. private sector decreased by six percentage points. This means that if labor's share had stayed at its 1979 level (about 64 percent of national income), the 120 million American workers employed in the private sector in 2007 would have received as a group an additional $600 billion, or an average of more than $5,000 per worker, Kristal said.
"However, this huge amount of money did not go to the workers," Kristal said. "Instead, it went to corporate profits, mostly benefiting very wealthy individuals."
The question is: why did this happen?
"Some economists contend that computerization is the primary cause and that it has increased the productivity of machines and skilled workers, prompting firms to reduce their overall demand for labor, which resulted in the rise of corporate profits at the expense of workers' compensation," Kristal said. "But, if that were the case,... then labor's share should have declined in all economic sectors, reflecting the fact that computerization has occurred across the board in the past 30 to 40 years."
This is not the case, however... "It was highly unionized industries — construction, manufacturing, and transportation — that saw a large decline in labor's share of income," Kristal said. "By contrast, in the lightly unionized industries of trade, finance, and services, workers' share stayed relatively constant or even increased. So, what we have is a large decrease in labor's share of income and a significant increase in capitalists' share in industries where unionization declined, and hardly any change in industries where unions never had much of a presence. This suggests that waning unionization, which led to the erosion of rank-and file workers' bargaining power, was the main force behind the decline in labor's share of national income."
In addition to the erosion of labor unions, Kristal found that rising unemployment as well as increasing imports from less-developed countries contributed to the decline in labor's share.
"All of these factors placed U.S. workers in a disadvantageous bargaining position versus their employers," said Kristal...
 

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