Inquiring minds are digging into the stunningly bad Quarter-Over-Quarter decline in wages and real wages across all sectors as noted in the Revised First Quarter BLS Productivity and Costs report.
| Sector | Nonfarm Business | Business | Manufacturing | Durable | Nondurable |
|---|
| Productivity | 0.5 | 2 | 3.5 | 3.6 | 3.9 |
| Output | 2.1 | 3.1 | 5.3 | 6.4 | 4.2 |
| Hours | 1.6 | 1.1 | 1.8 | 2.8 | 0.2 |
| Hourly compensation | -3.8 | -3.1 | -6.9 | -8.1 | -4.9 |
| Real hourly compensation | -5.2 | -4.6 | -8.3 | -9.4 | -6.4 |
| Unit labor costs | -4.3 | -5 | -10 | -11.2 | -8.5 |
Year-Over-Year numbers are still positive but the revised quarterly numbers shown above are an unmitigated disaster.
The BLS notes "Unit labor costs in nonfarm businesses fell 4.3 percent in the first quarter of 2013, the combined effect of a 3.8 percent decrease in hourly compensation and the 0.5 percent increase in productivity. The decline in hourly compensation is the largest in the series, which begins in 1947."
What's Going On?
It's quite easy to explain why this is happening, and it was all too predictable as well. Obamacare and inane Fed policies are in play as noted yesterday in Fed Policies and Obama Programs Exacerbate Credit Crunch to Small Businesses.
The Fed believes that holding interest rates low fosters business growth, hiring, and bank lending?
So why isn't that happening? .... by holding interest rates low, the Fed encourages not hiring, but rather corporate investment in software and hardware solutions that enable companies to get rid of workers.
Why hire someone at increasing minimum wages, and increasing costs of medical care, when you can borrow money for next to nothing and invest in solutions that require fewer workers?
What About Obamacare?
Obamacare is a huge part of the jobless recovery problem as well. I have talked about this on numerous occasions. Here is a partial list:
The evidence is now so overwhelming that no one but Obama and the Democrats can deny that Obamacare is responsible for the massive surge in jobs (nearly all of them part-time).
Results In Today
The results are in today. The Fed and Obama are both engaging in counterproductive policies that discourage hiring, especially hiring of full-time employees.
Of course Obama will respond by asking for a raise in minimum wage (giving further incentives to businesses to seek ways to get rid of employees), and the Fed will vow to keep interest rates low (enabling companies to borrow money for next to nothing to do just that).
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
The Fed believes that holding interest rates low fosters business growth, hiring, and bank lending?
So why isn't that happening? I have discussed many reasons, but today I have another one from Steve H. Hanke, Professor of Applied Economics at The Johns Hopkins University who discusses The Federal Reserve vs. Small Business.
Hanke notes that one of the consequences of low interest rates is that "banks with excess reserves are reluctant to part with them for virtually no yield in the interbank market."
And why should they? Why take risk for nothing?
Interbank Lending
Banks Unwilling to Retain Loans
Hanke Writes ....
Without the security provided by a reliable interbank lending market, banks have been unwilling to scale up or even retain their forward loan commitments. This was verified in a recent article in Central Banking Journal by Stanford Economist Prof. Ronald McKinnon – appropriately titled “Fed ‘stimulus’ chokes indirect finance to SMEs.” The result, as Prof. McKinnon puts it, has been “constipation in domestic financial intermediation” – in other words, a credit crunch.
When banks put the brakes on lending, it is small and medium enterprises that are the hardest hit. Whereas large corporate firms can raise funds directly from the market, SMEs are often primarily reliant on bank lending for working capital. The current drought in the interbank market, and associated credit crunch, has thus left many SMEs without a consistent source of funding.
As it turns out, these “small” businesses make up a big chunk of the U.S. economy – 49.2% of private sector employment and 46% of private-sector GDP. Indeed, the untold story is that the zero-interest-rate trap has left SMEs in a financial straightjacket.
In short, the Fed’s zero interest-rate policy has exacerbated a credit crunch that has been holding back the economy.
Impossible to Prove
I believe Hanke's theory is accurate. It is also impossible to prove.
Nor can I prove my thesis that by holding interest rates low, the Fed encourages not hiring, but rather corporate investment in software and hardware solutions that enable companies to get rid of workers.
Yet, why hire someone at increasing minimum wages, and increasing costs of medical care, when you can borrow money for next to nothing and invest in solutions that require fewer workers?
People have replied that increasing productivity is the natural state of affairs. And Indeed it is. And the Fed can exacerbate that trend, just as Hanke claims "Fed’s policies are actually exacerbating the credit crunch" to SMEs (small and medium sized enterprises).
What About Obamacare?
Obamacare is a huge part of the jobless recovery problem as well. I have talked about this on numerous occasions. Here is a partial list:
The evidence is now so overwhelming that no one but Obama and the Democrats can deny that Obamacare is responsible for the massive surge in jobs (nearly all of them part-time).
Jed Graham at Investor's Business Daily writes ObamaCare's $96 an hour cost spike may end 30-hour workweek
Here is the crucial chart by Jed Graham.
Note the incremental cost of hiring someone who works more than 30 hours a week.
It's nice to see someone quantify exactly what I said would happen nearly 8 months ago. And it did, and the chart explains why. Companies across the board reduced hours of workers from 32 to 25 and had to make up for the difference by hiring hundreds of thousands more part-time workers.
This explains the massive surge in jobs, and why full-time hiring is stagnant at best.
One cannot blame the Fed for this. But one can blame Obama. One can also blame the Fed for holding rates so low that companies can borrow money for next to nothing and invest in hardware and software to eliminate employees.
The Fed and the administration wonder why their policies do not work. I just explained why, so did Hanke, and so did Graham. Nonetheless, the Fed and Obama are both committed to the same policies that cannot and will never work.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
The amount of economic illiteracy in France is simply staggering. Please consider French minister hits at Amazon ‘dumping’.
France’s culture minister has attacked Amazon, the online retailer, for deliberately undercutting traditional rivals to create a “quasi-monopoly”, in the latest assault by the socialist government on internet companies.
“Today, everyone has had enough of Amazon which, through dumping practices, smashes prices to penetrate markets to then raise prices again once they are in a situation of quasi-monopoly,” said Aurélie Filippetti, the culture minister.
Calling Amazon a “destroyer of bookshops”, she added that she was considering a ban on free postage offers and ending the current regime of allowable 5 per cent discounts on books.
Ms Filippetti was speaking in Bordeaux where the government announced a €9m joint plan with French publishers to support independent booksellers. “This is an unprecedented effort in favour of the book and reading because without independent bookshops there will be fewer publishers and authors, less choice for the reader and fewer social networks in towns,” she said.
What's the Goal?
If the goal is to get people to read books, logic would dictate the cheaper the price the better. Kindle, Nook, and other eBook readers come to mind.
What good would banning free shipping do? Amazon could easily up shipping charges and lower the price of the book and get the same result. Of course, France would then want to dictate the price of books as well, all in the name of "preserving culture."
It's easy to spot the problem. France does not need and cannot afford a culture minister whose obvious goal is to stop the spread of technology and preserve culture as she sees fit.
But France is France. So when does this fool announce a tax on Kindle or campaign to bring back the horse and buggy?
Prepare for Economic Collapse in France
Government spending is already 56% of GDP. Hollande has threatened to take over steel, auto makers, and other industries to preserve jobs. Every month, France becomes less and less competitive. It is no wonder French unemployment soared. And unemployment will continue to rise.
Economic idiocy in France has even led to an open feud between French President Francois Hollande and German Chancellor Angela Merkel. For details, please see Simmering Feud Between France and Germany Erupts Into Verbal Warfare; France Tells Brussels to Shove It
Prepare for an economic collapse in France, because it is on the way. And Germany cannot possibly carry the European economy on its own. That is yet another reason IMF Growth Estimate for Germany is Still Too Optimistic.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Looking for amazing arrogance coupled economic stupidity at the state government level?
You can find it in Oregon where Governor Kitzhaber Demands Tax Hikes and Emergency Powers and Warns he Might Turn to National Guard, if the legislature does not see things his way.
Gov. John Kitzhaber warned Monday that he could be forced to mobilize the National Guard to police financially troubled timber counties if legislators and local officials can't agree on a rescue plan to provide basic law enforcement.
Kitzhaber urged lawmakers to pass an unprecedented measure that would allow him -- with the approval of legislative leaders and local county commissioners -- to impose a temporary local income tax in counties that have slashed patrol, jail and prosecutorial services. Under House Bill 3453, those local taxes would be matched with an equal amount of money from state taxpayers.
Kitzhaber and several key legislative leaders are pressing ahead with the bill after Josephine and Curry counties rejected public safety property-tax levies last month. The two counties, which have lost the federal timber payments that once paid for most of their local operations, have largely halted their sheriff's patrols and cut the number of jail beds in use.
Under questioning, Kitzhaber said that he would first look at another option --asking legislators for more money for state police patrols in troubled counties.
"If I was unable to get that, I'd have about no other resources than the National Guard," he said, adding that the state has a "moral obligation" to preserve the public safety in those counties.
The governor said an income tax would be a better option than a property tax because it would affect those who have more ability to pay.
However, HB 3453 ran into strong opposition from several officials from Josephine County, which has a charter provision prohibiting a local income tax.
Rather than raising taxes how about cutting expenses, instituting right-to-work laws, ending prevailing wage laws, outsourcing police contracts to sheriff's associations, and most importantly letting counties govern themselves.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
With most of Europe in a nasty recession, and significant parts of it (Spain, Greece, Cyprus, Italy) in an outright economic depression, I wonder why it took so long for the IMF to Reduce Germany GDP Forecast. Germany's 2013 growth prospects have been cut in half by the International Monetary Fund, as it warned that the outlook for Europe's strongest economy could worsen if a eurozone recovery fails to materialise.
The IMF said falling business investment and the eurozone's ongoing recession, which have hampered German growth, meant the economy would grow by just 0.3pc this year, compared with an April estimate of 0.6pc.
"The uncertainty, mainly surrounding prospects for the euro area and the ongoing recession in the region, have led to declining German exports to the region as well as a sharp pull back in business investment," the IMF said in a report on Monday.
Ridiculous Talk of Uncertainty
Note the ridiculous talk about "uncertainty". What is certain is the IMF is in la-la land, attempting to paint a picture that does not exist.
It is all but 100% certain that a eurozone recovery is not coming, so warning that the outlook for growth "could worsen if a eurozone recovery fails to materialise" is like warning that it might hurt if you are punched in the nose by a professional boxer with full force.
Note too that Germany Q1 GDP Grew At 0.1%, missing expectations. That report came out on May 15, and the IMF just now figured out that German growth is slowing.
Given that Germany is headed for contraction, the IMF is still too optimistic.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
US Manufacturing as measured by the May 2013 Manufacturing ISM Report On Business® is treading water barely above contraction.
Economic activity in the manufacturing sector contracted in May for the first time since November 2012, and the overall economy grew for the 48th consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business®.
ISM at a Glance
| Series Data | Apr Index | Mar Index | Percentage Point Change | Direction | Rate of Change | Trend (Months) |
|---|
| PMI™ | 49.0 | 50.1 | -1.7 | Contracting | From Growing | 1 |
| New Orders | 48.8 | 52.3 | -3.5 | Contracting | From Growing | 1 |
| Production | 53.5 | 52.2 | +1.3 | Contracting | From Growing | 1 |
| Employment | 50.1 | 50.2 | -0.1 | Growing | Slower | 44 |
| Supplier Deliveries | 48.7 | 50.9 | -2.2 | Faster | From Slowing | 1 |
| Inventories | 49.0 | 46.5 | +2.5 | Contracting | Slower | 3 |
| Customers' Inventories | 46.0 | 44.5 | +1.5 | Too Low | Slower | 18 |
| Prices | 49.5 | 50.0 | -0.5 | Decreasing | From Unchanged | 1 |
| Backlog of Orders | 48.0 | 53.0 | -5.0 | Contracting | From Growing | 1 |
| Exports | 51.0 | 54.0 | -3.0 | Growing | Slower | 6 |
| Imports | 54.5 | 55.0 | -0.5 | Growing | Slower | 4 |
Synopsis
Last month I stated "Manufacturing employment has grown for 43 months. I expect that trend to break next month. Production was up but inventories were way lower. The drop in inventories, in conjunction with a big slowdown in employment, is likely a leading indicator of future production. The positive surprise that does not fit into the above assessment is that new orders grew at a faster rate. Next month may be telling. I expect the new order divergence to resolve to the downside as the global economy and the US economy are both slowing."
The consensus estimate was for slower growth, but here we are. Manufacturing is in contraction and the economy continues to weaken. Given the plunge in new orders and backlog of orders, jobs and the overall economy will likely weaken as well. Expect that trend of 48 months of economic growth to break next month.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
In response to Sweden Housing Crash Coming Up; Average Swede to Repay Mortgage in 140 Years; Swedish Central Bank Ponders New Rules I received an interesting email from reader Antti who writes .... Hi Mish,
An interesting factor, which is potentially going to amplify the pain (a lot) in Sweden is how their law is written regarding apartment buildings and ownership. Unlike my native Finland, where most apartment buildings have their special type of incorporation where each stockholder has mortgages as a personal liability, Sweden has what amounts to collective mortgages - meaning that in an apartment building, the remaining stakeholders are largely responsible for nonperforming stakeholders and their mortgage. This structure makes a cascading failure a very real possibility with regards to the Swedish bubble, and can take down even debt-free people (if they get swamped with other people's loans). As you know, most city folk live in apartments here in Europe, true for Sweden as well.
Best Regards,
Antti
Suffice to say Riksbank head Stefan Ingves who supports new rules that would require Swedes to pay down the principal on their mortgages has even more to worry about than I expected.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Average Swede to Repay Mortgage in 140 Years
Swedish repay their mortgages so slowly that it will take 140 years on average, according to the IMF.
The International Monetary Fund lamented Friday that Swedish households pay their mortgages so slowly that they are planning to do an average of 140 years.
"Financial stability is [...] reinforced by a steady reduction in repayment schedules - that exceed an average of 140 years," the IMF said in a statement after a mission in Sweden.
This statistic was revealed in March by a government agency, the inspection of the financial sector. It covers loans considered relatively safe, those where the real estate buyer had an initial contribution equal to or greater than 25% of the value of the property and pay the higher monthly interest alone.
According to the Washington-based institution, the Swedish real estate market is a major risk to the economy, along with the eurozone crisis.
"With household debt rising beyond 1.7 times disposable income, a sudden and significant drop in property prices could have an effect on consumption and banks, raising unemployment and further reduce the inflation, and increased the number of non-performing loans and financing costs for banks, "said the IMF.
Why bother paying anything at all? Yet think of the consequences of underwater mortgages on the banking system when an estate does not have enough money to repay loans. A housing bust will have enormous consequences in such a setup.
Swedish Central Bank Ponders New Rules
Sweden is in the midst of a property bubble and a debt bubble, so much so that the risk mentioned above was noticed by the Swedish central bank.
And central banks are always at the tail end of noticing risks of the policies they sponsor.
Please consider Swedes' high debts spark housing bubble fears.
Martin Andersson, the head of Sweden's Financial Supervisory Authority (Finansinspektionen), expressed his concern about Swedes' mounting debts. “Swedish households today are among the most indebted in Europe and we cannot have household lending that spirals out of control,” Andersson said.
One tool already in place to dampen the growth of Swedish household debt is a mortgage lending ceiling introduced in 2010 which caps the amount home buyers can borrow at 85 percent of the value of the property.
Riksbank head Stefan Ingves has also suggested new rules that would require Swedes to pay down the principal on their mortgages, although Andersson refused to say whether his agency would consider such a rule.
Last year, Swedes' household debt hit a record 173 percent of disposable income, well above the 135 percent level during the height of Sweden's banking crisis in the early 1990s.
Sweden Housing Crash Coming Up
By the time central banks notice bubbles and begin to discuss ways to alleviate them, it is far, far too late to do anything about them. A housing crash with huge consequences is 100% certain.
The longer it takes before the crash begins, the worse the crash.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Doug Short at Advisor Perspectives has a pair of interesting reports on price inflation as measured by the CPE and PCI.
Please consider PCE Price Index Update: Sorry Fed, The Disinflationary Trend Continues.
The latest Headline PCE price index year-over-year (YoY) rate of 0.74% is a decrease from last month's adjusted 1.01%. The Core PCE index of 1.05% is decrease from the previous month's adjusted 1.17%. It is the lowest Core PCE ever recorded; the previous all-time low was 1.06% in March 1963, fifty years ago.
The continuing disinflationary trend in core PCE (the blue line in the charts below) must be troubling to the Fed. After years of ZIRP and waves of QE, this closely watched indicator has been consistently moving in the wrong direction for over a year. It has contracted month-over-month for ten of the last 13 months since its interim high of 1.96% in March of 2012 and is now approaching half that YoY rate.
The first chart shows the monthly year-over-year change in the personal consumption expenditures (PCE) price index since 2000. I've also included an overlay of the Core PCE (less Food and Energy) price index, which is Fed's preferred indicator for gauging inflation. I've highlighted 2 to 2.5 percent range. Two percent had generally been understood to be the Fed's target for core inflation. However, the December 12 FOMC meeting raised the inflation ceiling to 2.5% for the next year or two while their accommodative measures (low FFR and quantitative easing) are in place.
click on chart for sharper image
For a long-term perspective, here are the same two metrics spanning five decades.
click on chart for sharper image
Inquiring minds may also wish to consider Two Measures of Inflation: Core PCE at Its All-Time Low
"Flation" Perspective
Inflation, deflation, and disinflation are all in the eyes of the beholder, and all depend on the definition. Still I expect another round of deflation possibly with prices but more importantly with credit, my preferred measure of "flation".
Regardless of how one measures "flation", the hyperinflationists missed the boat by a mile.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
