Category: infrastructure spending

An Economic Nexus

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September 8, 2024

by Stephen Stofka

This week’s letter is about the labor market, part of a series on investing. Friday’s monthly labor report indicated a job market that is cooling but still growing. Although the market reacted negatively to the news, the Fed will begin reducing interest rates at its meeting next week. The S&P 500 index, the most widely held basket of stocks, is up 15% for the year but the index has twice risen above 5500 before falling back. An index of business activity in the services sectors continues to expand but manufacturing activity is still contracting slightly. When investors get conflicting economic signals, they are responsive to negative data points more than positive ones. The approach of what may be a contentious election creates an environment where investors are more likely to protect their portfolio value and exit short-term positions. Let’s now turn to long-term trends in the labor market.

Economists at the Bureau of Labor Statistics (BLS) refer to workers aged 25 -54 as the core work force. To save some typing, I will refer to this age demographic as the “core.” During those thirty years we accumulate stuff while we build our careers. We buy cars, furniture, homes and vacations. We build retirement savings for ourselves and college funds for our kids. The core is the nexus of a growing economy.

This coming Wednesday we will remember 9-11 and the 3,000 civilian lives lost in the attack on the World Trade Center in lower Manhattan. Since that time, there has been little investment in those workers who form the core of the labor market. From August 2001 to August 2024, the economy has added less than seven million jobs in that age demographic, an annual growth rate of just 0.28% (See FRED Series LNS12000060).

As you can see in the chart above, most of the growth in the core has occurred during the Biden administration. The surge in employment in this age group led to growing incomes and greater purchasing power in an age group that is in the accumulation phase of its lifetime. That rapid growth in employment, coupled with pandemic recovery payments from the government were strong contributors to the rise in inflation in the 2021 – 2023 period. Voter sentiment in this age group focused on the inflation, not the job growth, demonstrating again that we pay more attention to negative rather than positive news.

Several factors contributed to the plateauing of job growth in the core. Demographics played some part. Population analysts have assigned a span of about 18 years to each generation so that the thirty-year span of the core labor force encompasses two and sometimes three generations. The first of the large post-war Boomer generation turned 54 in 2000. As the Boomers aged out of the core, a smaller Generation X, born 1964 to 1982, became the dominant component of this age group. In 2013, the first Millennials, a generation larger than the Boomers, joined the core, and in 2016, the last of the Boomers aged out of the core.

A few months after 9-11, China was admitted to the World Trade Organization, and within a decade became the world’s factory. Investors poured capital into China, taking advantage of low labor rates and a currency whose exchange rate was maintained at a low level by the Chinese central bank. Investors from outside China got more bank for their buck. As investment moved to China, many production facilities in the U.S. shuttered their doors. In the seven-year span between China’s admittance to the WTO and the start of the financial crisis in September 2008, manufacturing employment (see FRED Series MANEMP) fell by a fifth. By January 2010, employment in the manufacturing sector had declined by a third.

During the 2000s, low interest rates fed a frenzy in home financing and produced a bubble in the U.S. real estate market that imploded in 2008. The resulting financial crisis affected assets and financial institutions around the world. Millions of Americans lost their jobs. From the start of 2008 until the end of 2009, the core work force fell by 6%, about six million jobs. In 2018, an interval of ten years, the level of employment in this age group finally rose above its 2008 level.

Instead of vigorously promoting policies that encouraged job growth, the Obama administration offered policies to support families suffering from the lack of job growth. Democratic politicians eagerly passed ambitious social programs but faltered when implementing policy solutions that embodied their legislative goals. In Recoding America, Jennifer Pahlka (p. 125) recounts the efforts to fix healthcare.gov, the bungled rollout of the health exchanges created under the Affordable Care Act known as Obamacare. In The Rise and Fall of the Neoliberal Order, Gary Gerstle (p. 226) notes that the Obama administration focused more effort and political capital on providing healthcare insurance for poor people rather than supporting the 9 million households in danger of losing their homes to foreclosure.

A sense of betrayal soured voter sentiment and helped to support the emergence of the Tea Party in the 2010 election and the MAGA voters who supported Donald Trump’s candidacy in the 2016 election. In 1976, voters punished President Gerald Ford for pardoning Richard Nixon. In the 2016 election, voters punished Hillary Clinton as a symbol of a set of values disloyal to many Americans. Donald Trump promised to bring manufacturing jobs back to America by taxing Chinese imports and cutting corporate taxes. In the first three years after the 2008-2009 recession, manufacturing employment under Obama grew by more than it did in the first three years of the Trump presidency (see notes for details). No amount of political rhetoric can overcome the power of a supply chain now firmly anchored in Asia.

Biden’s infrastructure policies have actively promoted job growth in the core. Can the economy sustain such growth in this acquisitive age group while keeping inflation at a reasonable level? Should the Fed raises its target interest rate from 2% to 3% to accommodate job growth that supports people when they are raising families and building careers? I think so. Should Harris win November’s election, she should adopt Biden’s pro-growth policies. Should Trump regain office in the coming year, he will try to use tariffs to shift the nexus of the global supply network from Asia back to the U.S. That policy will only increase prices and help maintain a higher level of inflation without promoting the economic growth that supports households in their middle years.

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Photo by Tim Mossholder on Unsplash

Manufacturing employment notes: From January 2010 to December 2012 manufacturing gained 500,000 jobs, an increase of 4.4%. From January 2017 to December 2019, the manufacturing sector gained 432,000 jobs, an increase of 3.5%. In January 2010, manufacturing employment was near a low, continuing to fall after the official end of the recession in July 2009.

Keywords: Obamacare, inflation, labor, financial crisis, China, manufacturing, infrastructure

A Bridge Between Us

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June 27, 2021

by Steve Stofka

We are social creatures, our brains wired for comparing our situation with those around us. Children look only at the height of liquid in a glass and reason that the higher level is “more.” We understand tall and big and a lot. As our brains mature, our primitive understanding of equity evolves – a little. This week, a coalition of Senators reached an agreement in principle to spend money on infrastructure, a solution that has frustrated several presidents before Biden.

In 2007 the I-35W bridge in Minnesota collapsed. In March 2009, at the lowest point in the financial crisis, the American Society of Civil Engineers released their quadrennial report card on the nation’s infrastructure (2009). During the decade, infrastructure had slipped from a ‘D+’ to a ‘D.’ With millions out of work, the public and then President Obama hoped that the Congress could assemble an infrastructure bill. Couldn’t the government give money on a per capita basis to each state and let them spend the money on needed repairs and building projects? Less populous states argued against that idea. In the end, nothing happened.

In 1985, Congressman James Howard and Colorado Senator Gary Hart introduced versions of a National Infrastructure Act that died in the Committee on Environment and Public Works. In the decade from 1971-81, Howard noted that spending on infrastructure had declined by 50% (1985). Republicans held the Senate and Presidency; Democrats held the House. Other infrastructure bills have died in that same committee.

The U.S. built the nation’s interstate highways to deploy weapon systems in case of an attack from Soviet Russia. Without that direct threat, our elected representatives have been unable to coordinate unified action. Our federalist system promotes impotence, an antiquated political structure that will cause the U.S. to take a back seat on the global stage, according to China’s leader Xi Jinping. After fifty years of ineptitude, will the U.S. Congress and White House prove Xi wrong?

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Photo by Manny Ribera on Unsplash

American Society of Civil Engineers (ASCE). (2009). 2009 report card for America’s infrastructure. doi:10.1061/9780784410370

Howard, J. (1985, January 01). The national infrastructure act. Retrieved June 26, 2021, from https://cedb.asce.org/CEDBsearch/record.jsp?dockey=0043747

A Policy Pivot?

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February 21, 2021

by Steve Stofka

Climate change induces more erratic weather patterns. More dry and wet; colder and hotter. California has been hit by persistent drought. Texas and other southern states got walloped this week. Several dozen Texans lost their lives when electricity generation failed for several days this week. For two decades, Texas has adopted a relaxed regulatory policy that does not incentivize or require power generators to prepare for unusual events like this week’s cold snap. Texas legislators argued that these policies reduced costs and lowered bills for Texans. Other states with more stringent regulations weathered the cold snap because power operators beef up their generation system to withstand extremes.

Natural gas supplies 46% of Texas’ electricity generation. The valves and regulators on those lines froze because of a lack of heating equipment. Wind turbines supply 23% of Texans electricity but had no heaters installed as they do in other states. Because Texas has its own electricity grid, it has no power balancing arrangements with other states. Texans pride themselves on their self-reliance to the point of arrogance. They are the Lone Star State, Texans first, Americans second.

Through district gerrymandering a minority of Republican voters in Texas control policy. The state has a constitutionally weak governor with little power. The legislature promotes someone to the post who will be agreeable. Politics is heavily influenced by the oil and gas industry whose rights are senior to property owners. If a gas company wants to run a pipeline through someone’s property, an owner has a difficult fight.

Because Texas was part of Mexico until the 1840s, its laws and culture are influenced by the hacienda system set up by Spain in Latin and South America during the 17th century. In that colonial period, the Spanish monarchy took control away from parliament, imposed a uniform religion and a rigid centralized bureaucracy. Land in the Americas was parceled out in large tracts called haciendas to those who were loyal to the crown. This promoted a system of personal relations among landowners, people over principle, and a lack of growth and technological improvement. Like cuttings on a plant, the culture of white settlers in Texas were grafted onto this system. Texans adopted the “good old boy club” that has plagued politics in Latin America for centuries and made it their own.

Northern states were initially settled by colonists from England. In the 17th century, the English Parliament took power from the monarchy, a power shift opposite that in Spain. Religious and political diversity carried over from the motherland to the colonies and became institutionalized. Property rights, and the products of property could be conveyed to others. This encouraged a system of principle over person, a more impersonal exchange that fostered technological development.

Texas culture relies on tradition more than innovation, but the state provides a fertile and friendly atmosphere for innovative businesses from other states. Business growth relies on a flourishing human capital. Texas’ K-12 schools rank in the middle of the 50 states and above California, both with large immigrant populations and low English fluency (McCann, 2020). However, a state that cannot manage its power grid is not an attractive environment for business.

Will this crisis spark a shift in policy? Texas has long been captured by special interests, who are antagonistic to change. The past few years Texas politicians have stood proud, calling to California businesses, “Come here and get away from those regulations.” That cheery welcome has been tarnished this week. Business executives might wonder if Texas has other infrastructure problems. Texans hope that the fast-moving news cycle will turn its attention elsewhere.

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Photo by Alexander Schimmeck on Unsplash

McCann, A. (2020, July 27). States with the best & worst school systems. Retrieved February 20, 2021, from https://wallethub.com/edu/e/states-with-the-best-schools/5335

Not Easy Being Green

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February 24, 2019

by Steve Stofka

Newly elected Democratic Rep Alexandria Ocasia-Cortez has introduced a House resolution that details a broad basket of long-term infrastructure and humanitarian goals titled a Green New Deal. Connecticut Senator Ed Markey has introduced the resolution in the Senate. Whether it makes it to the floor of either chamber for a vote is uncertain. Some of the attacks on the resolution have been on points that were rejected from the resolution but were raised in a Q&A passed around to some House members in the building of a political consensus (Note #1).

The aspirations behind these improvements echo the infrastructure dreams of a post-World War 2 America. Politifact recently summarized the various points (Note #2). The key characteristics of the infrastructure goals are “safe,” “efficient” and “clean.” Those characteristics are embedded already in thousands of laws and regulations – but with practical limitations. A flexible approach is key to achieving these goals.

This week, I’ll focus on the infrastructure goals, starting locally at the granular level. “Upgrading all existing buildings in the United States and building new buildings to achieve maximum energy efficiency, water efficiency, safety, affordability, comfort, and durability, including through electrification.”
Someone clumsily attached those last three words, but they are critical. The words may be read to include an electrical upgrade of all buildings. They may be understood to include all buildings which could be improved with new electrical service. The language may be interpreted as a call for building retrofits for solar power.

These are expensive retrofits, so it is important that this clumsy language be sold as an aspirational guide, not the model language of a law or an agency rule. Local building regulations often “grandfather” older buildings so that they do not have to meet more recent building guidelines if they passed existing codes when they were built or remodeled. Anything other than a gradual approach in this area will be doomed.

“Universal access to clean water.”
Shortly after WW2, the Federal government took an increasing role in regulating local water supplies and sanitation, while helping to fund improvements (Note #3). This Green resolution is a reaffirmation of those goals. After seventy years, many existing water systems need massive and costly improvements. A contaminated water supply forced the residents of Flint, Michigan to use bottled water for more than three years.

The key word in this goal is “universal” and how that word is read. An exodus of residents and industry from poorer rural communities have crippled their budgets and resources. Who will pay to rebuild the aging plumbing systems of these hollowed out communities? Within many thriving metro areas are rural communities who do not have a central water system or sanitation. Homeowners and commercial buildings rely on private wells and are responsible for the maintenance of their wells and septic systems. Poorer residents may not have the means to service their systems properly. Will proposed legislation subsidize those residents? Since the Clean Water Act was passed fifty years ago, state and local governments have been fighting a legal battle with the Federal government over improvements to the water supply. Without a deft approach, legislation would continue to keep the lawyers busy.

Smart grids, a more efficient electrical delivery system, is a regional goal that is a restatement of the EISA law created in 2007 (Note #4). Our existing grids are more than fifty years old and need upgrading to a system that senses and adjusts to the changes in the system load. It would enable more clean power alternatives. Federal legislation which mandates upgrades to existing buildings to implement this vision will be met with impassioned resistance. Shall all power lines and power stations throughout the country be upgraded to meet new standards?

In conjunction with a transition to smart grids, this Green resolution restates an earlier vision: “eliminating pollution and greenhouse gas emissions as much as technologically feasible.” In the years after WW2, there was talk that the country would transition to nuclear power plants, a source of clean, cheap energy. The accident at the Three Mile Island nuclear plant in 1979 disrupted that vision (Note #5).

“Clean, affordable, and accessible public transit, and high-speed rail.”
This was a 20th century goal whose implementation stumbled. In 1960, my family traveled by train from Chicago to Dallas. We enjoyed the passing countryside from the upper deck of an observation car on the train. When Amtrak was created in 1971 (Note #6), there was going to be a highly efficient and affordable rail network built throughout the country. We are still waiting. After 9-11, let’s face it – plane travel sucks. The U.S. has the finest rail transport for goods in the world. Why are we so bad at moving people by rail?

There are many reasons. Following WW2, America invested more in highways than railroads. Families fell in love with the individual freedom of their automobile. The public is more resistant to the Federal government’s exercise of eminent domain. When the Civil War Republican Congress passed the Railway Act in 1862, the Federal government took what land it needed, and gave vast tracts to railroad companies who became rich selling off the land after laying the rails (Note #7). The Federal government played a key role in creating the corporate America that now wields an extraordinary amount of political and economic control of our daily lives. The public is weary and wary of large Federal projects.

Sweeping Federal legislation to achieve these goals must overcome the constitutional design of the country which gives those in rural areas a greater say in policy than their numbers warrant. This design was a 19th century compromise between agricultural and industrial states. Until a Supreme Court decision in 1964, many rural states did not redraw their state electoral maps after each census. In some states, one rural vote counted the same as forty urban votes (Note #8). Fifty years later, the structure of many state houses is designed to weaken the power of urban voters within the state.

The infrastructure goals contained in this resolution are essentially Infrastructure 2.0, an update of 20th century dreams. As in the past, economic and political realities will present formidable obstacles. Next week, I’ll look at the humanitarian goals contained in the resolution.

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Notes:
1. Green New Deal article at the Hill
2. Green New Deal article at Politifact
3. Water and sanitation regulation after WW2
4. Smart grid
5. Three Mile Island 
6. Amtrak history
7. Pacific Railroad Acts 
8. Reynolds v. Sims reinforced the idea of one person, one vote

 

The Coming Boom or Not

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November 27, 2016

For most of Obama’s time in the White House, the Republican led House has fought more borrowing to repair the nation’s decaying infrastructure.  The incoming Trump administration has promised to fulfill a campaign pledge to spend $500 billion or more on these repairs. Funding this spending while reducing taxes may prove to be improbable.  A lack of available labor in parts of the country may stress the economies of some states.

In 2010, economists Robert Frank and Paul Krugman recommended additional infrastructure spending to take care of much needed repairs at low interest rates and an idle construction workforce.  In February 2010, the unemployment rate among construction workers was 27% (FRED).

Since early 2010 construction spending has increased by 42% (FRED).  As older workers in the field retire, the severe downturn in the housing industry dissuaded many young workers from entering the profession in the past decade.  Following the housing bust and the 2008 crisis, many workers native to Mexico left the U.S. to find lower paying work in their home country. Continuing high unemployment did not attact new migrant workers who would contribute to the productivity of the U.S. economy. A mood of hostility towards foreigners has furthered dampened the appeal of work in the U.S.  Only the desperate now risk the dangers of crossing the border.

While roofing companies struggle to find workers at $20 an hour, farmers are simply leaving crops to rot for lack of available workers to pick the vegetables and fruits.  Automated picking machines still can not tell ripe from unripe produce. As job openings go unfilled, employers cut back on plans for expansion.  After six years of paralysis and debate, fiscal stimulus may be achievable under a Trump regime.  Irony may have the final curtain if the extra spending is too much too late. Readers with a WSJ subscription can read more here.

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Existing Home Sales

Sales of existing homes in October notched a recovery high at 5.6 million.  Home prices are rising fastest in the western states at a 7.8% clip.  Prices are now 50% higher than the country’s median. (NAR)  Volume increases of 10% are far outpacing the national yearly increase of 5.9%. Expect continuing price increases in the western states.

Mortgage interest rates have risen 1/2% but are still low by comparison with past decades.  The increase has prompted an uptick in refinances.  Higher rates will put homes in some neighborhoods out of reach for first time buyers as well as current owners who were hoping to trade up.

In the early part of 2008, the delinquency rate on single family mortgages rose above 5%.  During the 90s and 00s, the rate averaged a little over 2%.  Despite seven years of recovery, escalating home prices and extremely low mortgage rates, the delinquency rate just fell below 5% earlier this year.  In short, there is still a lot of pain out there.

On the other hand, credit card delinquency is at an all time low.  So are consumer loan delinquency. Consumer credit continues to grow but at a slower pace since the financial crisis.

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Commercial Loans

Tightening lending standards for large and mid-size companies has proven to be a reliable recession indicator.   When the percentage of cautious banks grows above 25%, recession has followed within the year.

We can also see periods of doubt in this chart.  In late 2011 to early 2012 a short rising spike indicates a growing caution following the budget standoff in the summer of 2011.  In response to an economic dip in the beginning of this year, banks again grew more cautious.

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Stocks make new highs

Stocks continue to rise modestly on hopes of greater economic growth, future profits, lower taxes and tax policy changes.  After more than a year of declining profits, price levels are a bit rich but may be justified if…  After spiking up on election night, volatility has fallen near year to date lows.   Traders have priced in the likelihood that the Fed will raise rates in mid-December.