Building A Peak

June 3, 2018

by Steve Stofka

First I will look at May’s employment report before expanding the scope to include some decades long trends that are great and potentially destructive at the same time. In the plains states of Texas, Oklahoma, Kansas, and Nebraska, summer rain clouds are a welcome sign of needed moisture for crops. That’s the good. As those clouds get heavy and dark and temperatures peak, that’s bad. Destruction is near.

May’s employment survey was better than expected. The average of the BLS and ADP employment surveys was 203K job gains. The headline unemployment rate fell to an 18 year low. African-American unemployment is the lowest recorded since the BLS started including that metric in their surveys more than thirty years ago. As a percent of employment, new unemployment claims were near a 50-year low when Obama left office and are now setting records each month.

During Obama’s tenure, Mr. Trump routinely called the headline unemployment rate “fake.” It’s one of many rates, each with its own methodology. Now that Mr. Trump is President, he takes credit for the very statistic that he formerly called fake. The contradiction, so typical of a veteran politician, shows that Mr. Trump has innate political instincts. A President has little influence on the economy but the public likes to keep things simple, and pins the praise or blame on the President’s head.

The wider U-6 unemployment rate includes discouraged and other marginally attached workers who are not included in the headline unemployment rate. Included also are involuntary part-time workers who would like a full-time job but can’t find one. Mr. Trump can be proud that this rate is now better than at the height of the housing boom. Only the 2000 peak of the dot com boom had a better rate.

Let’s look at a key ratio whose current value is both terrific and portentous, like a summer’s rain clouds. First, some terms. The Civilian Labor Force includes those who are working and those who are actively seeking work. The adult Civilian Population are those that can legally work. This would include an 89-year old retiree and a 17-year old high school student. Both could work if they wanted and could find a job, so they are part of the Civilian Population, but are not counted in the Labor Force because they are not actively seeking a job. The Civilian Labor Force Participation Rate is the ratio of the Civilian Labor Force to the Civilian Population. Out of every 100 people in this country, almost 63 are in the Labor Force.

While that is often regarded as a key ratio, I’m looking at a ratio of two rates mentioned above: the Labor Force Participation Rate divided by the U-3, or headline, Unemployment Rate. That ratio is the 3rd highest since the Korean War more, ranking with the peak years of 1969 and 2000. That is terrific. Let’s look at the chart of this ratio to understand the portentous part.

CLFUIRatio
Whenever this ratio gets this high, the labor economy is very imbalanced. Let’s look at some previous peaks. After the 1969 peak, the stock market endured what is called a secular bear market for 13 years. The price finally crossed above its 1969 beginning peak in 1982. In inflation-adjusted prices, the bear market lasted till 1992 (SP500 prices). Imagine retiring at 65 in 1969 and the purchasing power of your stock funds never recovers for the rest of your life. Let’s think more pleasant thoughts!

For those in the accumulation phase of their lives, who are saving for retirement, a secular bear market of steadily lower  asset prices is a boon. Unfortunately, bear markets are accompanied by higher unemployment rates. The loss of a job may force some savers to cash in part of their retirement funds to support themselves and their families. Boy, I’m just full of cheery thoughts this week!

After the 2000 peak, stock market prices recovered in 2007, thanks to low interest rates, mortgage and securities fraud. Just as soon as the price rose to the 2000 peak, it fell precipitously during the 2008 Financial Crisis. Finally, in the first months of 2013, stock market prices broke out of the 13-year bear market.

We have seen two peaks, followed by two secular bear markets that lasted thirteen years. The economy is still in the process of building a third peak. Will history repeat itself? Let’s hope not.

May’s annual growth of wages was 2.7%, strengthening but still below the desirable rate of 3%. The work force, and the economy, is only as strong as the core work force aged 25-54. This age group raises families, starts companies, and buys homes. For most of 2017, annual employment growth of the core fell below 1%. It crossed above that level in November 2017 and continues to stay above that benchmark.

Overall, this was a strong report with job gains spread broadly across most sectors of the economy. Mr. Trump, go ahead and take your bow, but put your MAGA hat on first so you don’t mess up your hair.

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Executive Clemency

This week President Trump pardoned the filmmaker Dinesh D’Souza, serving a five-year probation after a 2014 conviction for breaking election finance laws. He helped fund a friend’s 2012 Senate campaign by using “straw” contributions. D’Souza complains that he was targeted by then President Obama and General Attorney Holder for being critical of the administration. A judge found no evidence for the claim but if he didn’t see the conspiracy against D’Souza, then he was part of the conspiracy, no doubt. I reviewed the 2016 movie in which D’Souza unveiled the perfidious history of the Democratic Party and its high priestess, Hillary Clinton.

Post-Election Bounce

January 1, 2017

Happy New Year!  How many days will it take before we remember to write the year correctly as 2017, not 2016? It is going to be an interesting year, I bet.  But let’s do a year end review.

Homeownership

The home ownership rate has fallen near the lows set in 1985 and the mid-1960s at about less than 64%. (Graph)  In 2004, the rate hit a high of 69%.  For the U.S., the sweet spot is probably around 2/3 or 66%.  Most other countries have higher rates of home ownership, including Cuba with a rate of 90%. (Wikipedia article)  Rents in some cities have been growing rapidly.  In the country as a whole, rents have increased almost 4%, about twice the growth in the CPI, the general rate of inflation for all goods and services. (Graph)

Earnings

Real, or inflation-adjusted, weekly earnings of full time workers spiked up during the recession as employers laid off lower paid and less productive workers.  By late 2013, weekly earnings had fallen to 2006 levels and have risen since, finally surpassing that 2009 peak this year.

Core Work Force

Almost every month I look at the changes in the core work force of those aged 25-54 who are in their prime working years, who buy homes for the first time and have families.  These are the formative years when people build their careers, and form product preferences, making them a prime target for advertisers.  The economy depends on this age group.  They fund the benefit systems of Social Security and Medicare by paying taxes without collecting a benefit.  In short, an economy dependent on intergenerational transfers of money needs this core work force to be employed.

For two decades, from 1988 to 2008, the labor participation rate of this age group remained steady at 82% – 83%. (BLS graph) By the summer of 2015, it had fallen to 80%.  A few percent might not seem like much but each percent is about a million workers.  For the past year it has climbed up from that trough, regaining about half of what was lost since the Great Recession.

Consumer Confidence

A post-election bounce in consumer confidence has put it near the levels of 2001, near the end of the dot-com boom and just before 9-11. (Conference Board)  In 2012, the confidence index was almost half what it is today.

Business Sentiment

Small business sentiment has improved significantly since the November election (NFIB Survey).  Almost a quarter of businesses surveyed expect to add more employees, a jump of 2-1/2 times the 9% of businesses who responded positively in the October survey.  In October, 4% of companies expected sales growth in the coming year.  After the election, 20% responded positively.  This jump in sentiment indicates the degree of hope – and expectation – that business owners have built on the election of Donald Trump.

Hope leads to investment and business investment growth has turned negative (Graph). Recession often, but not always, accompanies negative growth. Since 1960, investment growth has turned negative eleven times.  Eight downturns preceded or accompanied recessions.  Let’s hope this renewed hope and some policy changes reverses sentiment.

On the other hand, those expectations may present a challenge to the incoming administration, which has promised some tax reform and regulatory relief. Small business owners will lobby for different reforms than the executives of large businesses.  Regulations of all types hamper small business but large businesses may welcome some regulation which acts as a barrier to entry into a particular market by smaller firms.

Publicly held firms will continue to lobby for repeal or reform of Sarbane Oxley reporting provisions.  For six years, the Obama administration has wanted to roll back these regulations but has been unable to come up with a compromise between the SEC, which regulates publicly traded companies, and Congress.  A Trump administration may finally reform a law that was rushed into place by George Bush and a Republican Congress in response to the Enron scandal.  That scandal grew in part from the Bush administration’s push to deregulate the energy market.

Voters Veer From Side To Side

We have stumbled from an all Republican government in 2002 to an all Democratic government in 2008 and now come full circle again to an all Republican government. Once in power, neither party can resist using economic policy to pick winners and losers.  Every few years the voters throw out the guys in charge and bring the other guys in, hoping that the party that has been out of power will be chastened somewhat.  Within a few months of taking power, each party digs up their old bones and begins to gnaw on them again.  Tax reform, prison reform, justice and fairness for all, climate change, more regulation, less regulation – these bones are well chewed.

Still we keep trying.  The priests and prophets of long ago kingdoms could not govern.  Neither could the kings and queens of empires.  So we have tried government of the people, by the people and for the people and it has been the bloodiest two centuries in human history.  Still we keep hoping.

The Presidential Test

Most presidents are tested in their first year in office.  Kennedy had to grapple with the Soviet threat and Cuba almost as soon as he took office.   Johnson struggled with urban violence, social upheaval and the war in Vietnam.

Nixon confronted a newly resurgent Viet Cong army when he first took office.  His second term began with the Arab oil embargo.  Ford dealt with the aftermath of Watergate and Nixon’s resignation under the threat of impeachment.

Jimmy Carter began his term with the challenges of high inflation and unemployment, and an energy crisis to boot.  Ronald Reagan wrestled with sky-high interest rates and a back to back recession in his early years.  His successor, H.W. Bush, met a Soviet Union near the end of its 70 year history as Gorbachev loosened the reins of Soviet control of eastern European countries and the Berlin Wall collapsed.

After an unsuccessful attempt to reform health care in his first year of office, Clinton suffered in the off year election of 1994.  G. W. Bush had perhaps the worst first year of any modern President – the tragedy of 9-11.  Obama entered office under a full blown global financial crisis.

Despite Putin’s bargaining rhetoric regarding President-elect Donald Trump, every President has to learn the lesson anew – Russia is not our friend.  Trump will have to learn  the same lesson.  China’s territorial claims in the South China sea may prompt an international incident.  N. Korea could launch a missle at S. Korea and start a small war.  Iran, Afghanistan, Iraq and Syria, Israel’s settlements, Palestinian independence – the crises may come from any of these tinderboxes.  We wish the new President well as he hops into the fire.

Building Or Not

March 13, 2016

There are some upcoming changes to claiming rules for Social Security (SS) that take effect at the end of April.  A few weeks ago, Vanguard posted an article explaining some of the changes.

1) The end of “file and suspend,” the strategy where one half of a married couple, “John” we’ll call him, files for SS, then requests that those benefits be suspended.  The spouse, “Mary”, claims a spousal benefit while John’s benefits continue to grow at 8% per year until John is 70 years old.

2) The end of the “restricted application” strategy that allowed a person between the ages of 62 and 70 to collect benefits based on either their work history or their spouse’s history.  This allowed married couples to suspend taking benefits so that they could grow as under the file and suspend strategy.

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You Didn’t Build That
In a 2012 campaign speech, President Obama infamously said, “If you’ve got a business — you didn’t build that. Somebody else made that happen.”

With the aid of teleprompters (only $2700) Mr. Obama  is a stirring orator, unlike his predecessor, Mr. Bush, who struggled with pronunciation, cadence and tone.  In contrast to his sweeping rhetoric, impromptu remarks by Mr. Obama are notoriously equivocal or inartful.  This remark was one of those.  Later on in the speech, Obama clarified his sentiments, “we succeed because of our individual initiative, but also because we do things together.”

In the 2012 election, Republican nominee Mitt Romney used Obama’s own words against him many times.  Many small business start-ups fail and when they do, the bank does not say, “you don’t need to pay your business loan back.  Somebody else made that failure happen.”  In Obama’s philosophy, failure is our personal responsibility but success is not?  It doesn’t play well in the small business community.

In response to February’s job report released last week, Mr. Obama is quite willing to take credit for the jobs created in the past seven years: “the plans that we have put in place to grow the economy have worked.” (Video and transcript) Mr. Obama doesn’t specify what plans.  The President and Congress, Democratic and Republican, have failed to enact fiscal policies that will help American businesses grow.  These leaders, these lifeguards of the economy, can not swim.  The Federal Reserve has had to implement extraordinary monetary policy to keep Americans from drowning.  0% interest rates for SEVEN years and $4 trillion of asset purchases by the Fed have reinflated the stock market and housing prices, the life raft of wealth for most Americans.

A fundamental theme of many elections is “It’s the economy, stupid,” a core mantra of the 1992 Clinton campaign coined by strategist James Carville.   Race and bigotry, defense and security play a part in a candidate’s appeal, but jobs, wages, benefits and taxes motivate voters to pull the lever in a voting booth.  The two outsider candidates, Bernie Sanders and Donald Trump, play to these economic concerns by promising jobs, or free college and medical care. Both candidates have been accused of being unrealistic and dangerous.

Once in office, most Presidents come to realize the reduced power they have in a Constitutional framework of checks and balances.  Each President must cooperate with a Congress easily swayed by lobbying interests, and fifty state legislatures with varying priorities and interests.

FDR exerted king-like powers during the multiple tenures of his Presidency thanks to the unprecedented majorities in both the House and Senate during the 1930s.  In the 1937-38 session, the Senate was dominated by 76 Democrats out of 100 members.  334 Democrats overwhelmed the 88 Republican members in the House.  During those years, the Supreme Court radically shifted the permissible Constitutional role of the Federal government in our lives.  The four generations that have lived since those policies were enacted continue to struggle with the social and financial consequences of those policies.

We are unlikely to repeat the lopsided majorities of that era simply because we recognize that unrestrained legislative power is dangerous and unhealthy for both our society and economy.  The Parliamentary systems of other developed countries allow a minority of citizens to have it their way, to dominate the policy choices of the majority.  The republican (small ‘r’) and federalist values embedded in the U.S. Constitution make it so much more difficult for a group of American citizens to get their way.  While this is often a source of frustration to policy advocates, we don’t veer off center as easily as other countries.

Focused on the 2016 election, voters may not notice the creeping dangers implicit in the extraordinary monetary measures and debt accumulation of the past twenty years.

Recession and the Presidency

On Tuesday, President Obama will give his annual State of the Union address to Congress and the nation.  This past Saturday, South Carolina chose Newt Gingrich, the former Speaker of the House, as the front runner in their Republican primary.  In three grassroots states, Iowa, New Hampshire and South Carolina, primary voters have chosen three different Republican contenders who are vying for the Chief Executive Office.

For the past 150 years, every President except Lyndon Johnson, Jack Kennedy and Bill Clinton has had to contend with recession during their tenure. (NBER Source)  Every Presidential contender promises that they are going to stop the vicious business cycle that inevitably leads to recession.  With the advent of “JIT” – Just In Time Inventory – increasingly adopted by businesses and their suppliers in the mid to late 90s, recessions were pronounced a thing of the past.  No more would there be an excess build of supply by the nation’s businesses, leading to a sagging economy when product demand inevitably fell.  Advances and investments in technology enabled businesses to respond quickly to fluctuations in demand.  As the milennium approached, it was truly the dawning of a new age.

What was dawning was the advent of a secular bear market, a long period of time when the market falls for a few years, struggles up again, then falls, then rises again as fear and hope compete against one another.

A few weeks ago, I noted that in the middle of 2011, we had finally come out of an almost four year  recession.  This was not the official National Bureau of Economic Research end of the recession.  That happened in the middle of 2009.  This mid-2011 recession end was the “How It Feels” variety as real GDP finally gets back and surpasses the level it was at before GDP started its decline.

Below is a graph comparing the official lengths of recession and the “how it feels” recession length and a comparison of the two during each President’s tenure in the past sixty years.  This comparison helps explain the mood of the country when Presidents Ford, Carter and HW Bush lost re-election bids (Ford was actually not up for re-election since he had taken over the Presidency when Nixon resigned in August 1974).  The chart also gives an insight into the success of re-election bids by Eisenhower, Nixon, Reagan, and GW Bush. The economic pain was either less than or about equal to the official figures of economic distress during their presidencies.

As he prepares for his third State of the Union address, the lesson for President Obama is stark.  History unfortunately repeats itself.  It is also a lesson for any Republican Presidential hopeful; the odds are that he will have to contend with a recession during his tenure if he wins election.  On the campaign trail, how many Presidential hopefuls of either party ever broach the subject of what their administration will do during the eventual recession while they are in office?  Better to promise that it won’t happen on their watch.  It will.

Reagan and Obama

As the 1982 elections approached, Ronald Reagan’s Presidency was unpopular. The unemployment rate was 9.7%, about the same as it is now. Interest rates were high: a 6 month CD paid about 13% interest, which was good for those who had savings but terrible for small business owners who had to work extra hard to pay the 20% interest rate banks were charging for business loans. The dead carcasses of 17,000 businesses littered the economic and social landscape, one of the highest failure rates since the 1930s depression. The stock market was in the doldrums – why bother investing in stocks when bonds and CDs paid such generous interest rates?  GDP had grown an anemic 2.2% the past year.  The national debt had gone up by 14% that year.  In short, the Reagan Presidency was promising to be one of the worst in American history. 

In 1982, the voters realized that they had traded in a bumbling governor from Georgia, Jimmy Carter, for a bumbling governor from California, Ronald Reagan. After the election, Democrats, already in control of the House of Representatives, were given another 25 seats and a commanding majority.  The Republicans continued to hold a slim majority in the Senate.

Shortly after the election, Reagan launched his “Star Wars” or Strategic Defense Initiative (SDI), long on imagination and his willingness to further bankrupt this nation, but rather short on any actual ability to employ such a grandiose scheme.  In the first year of Reagan’s reign, tax rates had been cut but the Social Security tax had been raised so, for most of us working for a living, it was pretty much of a wash.  Inflation was killing us.

If you are an older Republican, you may have forgotten those years.  They have been conveniently hidden under the party mattress by the Republican campaign machine and the retelling of the “Reagan legacy.”  In the seventies and early eighties, there was so much distrust in the judgment and morality of elected representatives that it was a strategy by some disaffected voters to pull alternate levers in the voting booth, voting Democrat on one row, then Republican on the next row, in order to gridlock the government.

Reagan kept on borrowing on the taxpayer’s credit card.  By the time he left office, the national debt had tripled. 

Midterm elections often are a vote on the Presidency and the dominant party. The Democrats may have to give up most of the 30+ Congressional seats they won in 2008, making it even more difficult for President Obama to get his agenda enacted.  In 30 years, how will the story of the Obama presidency be told?  Will it be altered or swept under the table by the Democratic campaign machine just as the Republican machine has retold the Reagan years?  Probably.

Both Reagan and Obama had monumental tasks in their first few years, burdens so great that neither of them could achieve their goals in a short two years.  However, voters focus on the present, throwing hindsight, history and perspective out the window as they drive down the rutted road of the present.  The political machines of both parties know this and play to that short attention span. Unemployment is high, just as it was in Reagan’s 2nd year.  Obama can only hope that, by 2012, the unemployment rate gets down to the 7.4% rate it was in 1984, when Reagan came up for re-election. 

Traditionally, the political campaigns get into gear after the Labor Day holiday.  There is one thing we know for certain:  we will be entertained by a lot of lies and half truths for the next few months.  If you listen to talk radio, both conservative and liberal, you are accustomed to this kind of entertainment year round.

(Side note 9/8) Here is a CNN  review of some of the tax policies and their effects during the Reagan administration.

Obamanomics

In a 3/28/09 WSJ op-ed, Robert Reich, Clinton’s Secretary of Labor, compares two economic approaches, Reaganomics (R) and Obamanomics (O).

The key distinction is the role of government in fostering economic growth. R’s essential approach was top down – lower taxes on the wealthy and benefits will trickle down the lower income workers. Before R, the top 1% of earners “took home 9% of total national income.” In 2007, the richest 1% took home 22%.

O’s approach is a bottom up philosophy – help lower income Americans become more productive and the benefits will trickle up. R places little or no value on public spending as an investment in the future. In the past 30 years, “federal spending on education, job training, infrastructure and basic R&D … have all shrunk as a proportion of GDP.”

R focuses on the low cost of labor within a country to be competitive in the global market. This approach “inevitably exerts downward pressure on the real wages of a larger and larger portion of our population.” O focuses on high productivity to gain that same competitive advantage in the global marketplace.

“R assumed that deregulated markets always function better.” Although this is often the case, it is not always the case and when markets don’t work, “all hell can break loose, retarding economic growth.”

O “views appropriate regulation as an essential precondition for sustainable growth.”

My question to Robert Reich is: who decides what is “appropriate regulation?”

Lawmakers like to use three words when they craft legislation: appropriate, reasonable and excessive. They leave it up to administrators and courts to determine what these key words mean. As an example, under Colorado law an employee is not entitled to unemployment benefits if they were terminated for “excessive absenteeism.” As an employer, I think one day absent a month is excessive. A Colorado Unemployment administrator thinks it is not. I can hire an Employment Advocate certified in Colorado to plead my case and they might be successful but it will not be cost effective if I only have a few employees. The state does not reimburse my company for costs if they lose.

R is a top down approach economically but a bottoms up approach on the regulatory side. O is a top down emphasis on the regulatory side but a bottoms up approach on the economic side. There are major problems with both of these systems.

O requires an employer to spend more resources coping with regulation than providing a product or service. R requires an employer to spend more resources to cope with a declining infrastructure and a “no holds barred” marketplace.