Category: Economics

Sunday Cartoon Blogging – August 7, 2022

The Labor Department on Friday reported that the economy added a seasonally adjusted 528,000 jobs in July, far more than the 258,000 economists expected to see. And the headline rate of unemployment  fell to 3.5%, back to the multi-decade low we experienced just before the start of the pandemic.

With the upward revisions to the last two months, there are now 22,000 more jobs than there were just before the pandemic. Further, the mix of these new jobs skews away from the lower paying sectors toward higher paying ones. The WSJ reports that in July, there were about a million more jobs combined in the so-called goods-producing sectors—manufacturing, construction, mining and logging—plus the retail trade and warehousing and transportation sectors, than in February 2020. And there were about a million fewer jobs in the remaining service-sector industries.

Leisure and hospitality jobs, which were the most hard-hit during the pandemic, rose by 96,000, but are still -7.1% below their pre-pandemic peak. And within the leisure and hospitality sector, food and drink establishments added 74,100 jobs, but are still about 635,000, or -5.1% below their pre-pandemic peak.

But it wasn’t all good news. The number of people employed as a share of the working-age population was 60% last month, below February 2020’s 61.2%. If it could return to that percentage, there would be millions more Americans working. An interesting fact in the employment report was that there were 656,000 more people out sick last month than in July 2019. On to cartoons.

The Kansas vote dropped on the wicked witch:

What Kansas taught us this week:

Pelosi sparks a flame:

Alex Jones finally grabbed by his appendage:

The US kills another al-Qaeda leader, but nothing changes in Afghanistan:

RIP Bill Russell:

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Monday Wake Up Call – July 11, 2022

The Daily Escape:

Penstemon and Paintbrush, with Mt. St. Helens in background – June 2022 photo by Edwin Buske Photography

There are two big economic issues that the media and pundits say will influence the 2022 mid-terms: inflation, and the possibility of a recession.

Let’s start with the scare of a looming recession. Most Americans have been told that a recession occurs when real GDP contracts for two consecutive quarters. Sounds easy to figure out, but this definition wasn’t met in two out of the last three recessions. Some facts: The 2020 downturn lasted just two months, not two quarters. And during the 2001 recession, real GDP didn’t contract for two quarters in a row either.

The difference is that recessions are determined not by pundits but by a group of economists at the National Bureau of Economics (NBER), and they use several measures beyond GDP to make it official. Here’s how they explain it:

“A recession is a significant decline in economic activity spread across the economy, normally visible in production, employment, and other indicators…”

They go on to say that:

“There is no fixed rule about what measures contribute information to the process or how they are weighted in our decisions.”

In recent decades, the two measures that have had the most weight are real personal income and non-farm payroll employment. So, despite what you’re hearing from pundits about GDP, it basically boils down to income and employment. If income and employment turn south, there’s a good chance economic output will be lower.

But after two quarters of 2022, while output is slowing, income and the labor market are both still solid. The WSJ quotes Robert Gordon a Northwestern University economics professor and member of the NBER’s committee that decides on recessions:

“We are going to have a very unusual conflict between the employment numbers and the output numbers for a while…”

The US economy added 1.6 million jobs in the first quarter, and another 1.1 million jobs in the second quarter. Those numbers certainly don’t look recessionary, despite what the media is trying to tell us. U6, which is a measure of underemployment declined -0.4% to 6.7%. This is a new all-time low for U6, which has been tracked since 1994.

It may seem like splitting hairs to talk about the definition of a recession. But we need to be prepared for the coming political scenario where some argue we’re in a recession while others will refute that idea vigorously.

In this mid-term season, things are going to get weird.

Let’s turn to the scourge of inflation. It is among the first stories on the local news every night, but you might not know that as Paul Krugman says:

“The wholesale price of gasoline has fallen about 80 cents a gallon since its peak a month ago. Only a little of this plunge has been passed on to consumers so far, but over the weeks ahead we’re likely to see a broad decline in prices at the pump….what are the odds that falling gas prices will get even a small fraction of the media coverage devoted to rising prices?”

That seems to point to profit taking by the petroleum corporate interests. Have you noticed how much profit they have made lately? ExxonMobil plans to buy back $30 billion of stock this year with the extra money that we all paid at the pump.

Last Friday, PBS talked about a looming wage-price spiral, a neoliberal concept that says rising wages drive prices. But the annualized rate of wage growth, comparing the last three months (April, May, June) with the prior three months (January, February, March), was 4.3%,down from a previous annualized rate of 6.1%.

This is big since the Fed’s plans for aggressive interest rate hikes is based on its concern about a 1970s-type wage-price spiral. It is impossible to have a wage-price spiral when wage growth is slowing. The current 4.3%  wage growth is less than one percent higher than the 3.4% rate in 2019 when inflation was comfortably below the Fed’s 2.0% target.

Retailers are now stuffed to the gills with merchandise. What happened was that all of the product that was stranded at sea has finally reached store shelves. They will hold massive sales this fall to get rid of it, and that will lower prices.

The lockdowns in China are mostly over, last year’s fiscal stimulus has worked its way through the economy, and the Fed has begun sharply raising interest rates.

Krugman feels that as the economy weakens, the prospect for sustained inflation is receding.

Time to wake up America, don’t get demagogued by the scary economic terms that the politicians will throw at you. To help you wake up, let’s listen to Barenaked Ladies – “If I Had a Million Dollars” Live in Michigan in 2007:

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The US Jobs Market and The EU vs. Russia

The Daily Escape:

Sunset, Lake Sammamish, Issaquah, WA – June 2022 photo by Gary Hamburgh

Two pieces of news to think about today.

First, you can always tell when an economic boom is nearing its end, because the jobs market begins to get shaky. That seems to be starting. The WSJ reports that:

“Businesses in several different industries are rescinding job offers they made just a few months ago, in a sign the tightest labor market in decades may be showing cracks.”

No need to panic just yet, the labor market remains strong, with an unemployment rate at 3.6%, near a half-century low. But signs of retrenchment in hiring shows that executives are having trouble predicting the economy over the next 12 months.

And when companies revoke job offers, it indicates their view of the future business outlook has changed so quickly that it’s undoing hiring plans made only a few weeks before.

Many hiring managers say signing up new recruits remains highly competitive. The WSJ reports on a Gartner survey of more than 350 HR executives conducted in May that found around 50% thought the competition for talent would increase over the next six months. Nearly two-thirds said they hadn’t made any changes to their hiring practices or HR budgets in response to economic volatility.

But it seems there are changes afoot. Country wisdom says that a storm rarely hits us without warning. The skies turn dark, the wind picks up, the birds go quiet. It’s possible to see the signs before the storm hits if you know what to look for. We’re seeing signs now of what’s to come.

Second, there’s an adage, attributed to Trotsky, but difficult to verify, that says: “You may not be interested in war, but war is interested in you.” Those words are apt in today’s situation between Europe and Russia. CNN is reporting about an emerging flashpoint between Russia and the EU:

“Tensions are mounting around…the Russian exclave of Kaliningrad, an isolated but strategically significant territory on the Baltic coast…Russia has reacted furiously after Lithuania banned the passage of sanctioned goods…into Kaliningrad. But Lithuania says it is merely upholding European Union sanctions, and the European bloc has backed it.”

Kaliningrad is Russia’s westernmost territory and it has no land connection to Russia. It’s the only part of Russia that is completely surrounded by EU states. Here’s a map:

Estonia, Latvia, Lithuania, and Poland are all members of NATO, surrounding Kaliningrad militarily. Since Russia invaded Ukraine, experts have feared that Kaliningrad might become the next flashpoint in tensions between Moscow and Europe.

Russia says that Lithuania’s sanctions on goods transit is a blockade in violation of a 2002 agreement to allow goods to flow between Kaliningrad and Russia. Sanctions apply to about 50% of Russian shipments. The sanctioned products include construction machinery, machine tools and other industrial equipment. But food and personal travel are not sanctioned.

Since the Baltic freezes during the winter, resupplying Kaliningrad will become particularly difficult in about six months. Lithuania has also closed its airspace to Russia. A Berlin-style airlift could prove problematic as well.

Lithuania has spent years building a liquid natural gas (LNG) port and the infrastructure necessary to connect to Nordic and EU grids. She was therefore able to shut off Russian oil, gas, and coal quickly and is in a better position to do without Russia’s gas than the rest of the EU.

Lithuania imports 70% of its electricity from Sweden through a dedicated underwater cable. Sweden’s power is nuclear and hydroelectric, thus independent of Russia as well. Lithuania is also in a position to supply gas to Latvia, Estonia, and Poland through their LNG terminal.

So is Europe at a flashpoint? There’s little Moscow can do to Lithuania beyond threaten.

Is it just a matter of time before NATO and Russia are in a shooting war? Doubtful. Russia could try cutting off all oil, gas, and coal exports to the other NATO countries. Russia could then say they would sell to any countries that left NATO. That might not pop NATO’s balloon, but it might take some of the air out of it.

If Russia decided to do that, it would have to find a way to transport it’s oil, gas, and coal to alternate customers. That can’t happen quickly. Given that the adversarial relationship between Europe and Russia may last a decade or more, Russia will probably have to find alternative customers regardless.

Neither side wants to undertake drastic changes in energy supply too precipitously.

Wrongo doubts the Kaliningrad situation will lead to war, but each provocation and escalation increases the odds. We’re playing in a very high stakes game, given the nuclear weapons on all sides. But Europe and NATO can’t automatically bow to Russia’s threats.

NATO can’t be unwilling to fight, but there’s a difference between that and provoking a war. Right now, it’s difficult to see a peaceful end game between the US, NATO, and Russia

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Saturday Soother – May 7, 2022

The Daily Escape:

Griffith Observatory, LA, CA – April 2022 photo by Mike Holzel

You undoubtedly missed it, but on Wednesday, Biden gave a short speech on the budget deficit and the national debt. You can watch a video of his talk here. You didn’t see it because it received virtually no coverage in the media. From Robert Hubbell:

“….let’s engage in a thought experiment: Ask yourself, ‘By what amount has the deficit increased during Biden’s tenure—rounded to the nearest $1 trillion?’”

It’s a trick question. During Biden’s first year in office, the deficit decreased by $350 billion and is on track to decrease by an additional $1.5 trillion by the end of this fiscal year (9/30/22). It will be the largest single yearly decline in American history. Biden also said that this quarter, for the first time since 2016, the Treasury Department is planning to pay down a small portion of the national debt.

Biden pointed out that the deficit increased for each year of the Trump administration, both before and after the pandemic. Let’s remember that the main driver for deficits during Trump’s administration was the Republican 2017 tax cut for corporations and millionaires. The Trump tax cuts didn’t add any additional revenue, and without any offsetting savings, deficit spending went way up.

After Biden finished speaking, he took a few questions from the press. He was immediately asked about Russian sanctions and the leaked draft of the Supreme Court’s abortion opinion. Biden responded by saying:

“No one asked about deficits, huh?….You want to make sure this doesn’t get covered.”

Why isn’t good economic news covered by the media? Most members of the media seem to be uncomfortable with it. Biden shares responsibility for getting the good news out as well. He should speak to the American people directly, not just indirectly through the press in the middle of the day.

Maybe Ukraine’s Zelensky could be a role model. He speaks directly to his people every day. Had Biden announced paying down the debt and cutting the deficit while seated at the Resolute Desk in the Oval Office, people would know that it was a big deal.

He should also speak about the location and targeting information we gathered about Russia’s cruiser and then shared with Ukraine:

“Intelligence shared by the US helped Ukraine sink the Russian cruiser Moskva, US officials told NBC News, confirming an American role in perhaps the most embarrassing blow to Vladimir Putin’s troubled invasion of Ukraine….The US…was not involved in the decision to strike.”

Despite America’s chicken hawk pundits’ finger-wagging, releasing this information hurts Russia’s already badly-run war effort. It shows Putin’s bad decision-making, poor command structure, and with it a likely collapse of morale. Going public also helps other NATO members see the differences with Trump’s four years of doing everything he could to sow distrust in the alliance.

There is a big country outside of DC desperate for good news. And therein lies the central problem for Democrats. Biden delivered this speech just before a meeting with Olympic athletes. Wrongo bets that this is the last we will hear from Biden on this accomplishment.

Just like FDR used his “fireside chats” to brief Americans on what his administration was doing, Biden should speak directly to the American people when necessary on matters of significant importance to the nation. He needs to discuss his accomplishments at every opportunity—and not just from the East Room of the White House.

Better messaging has to come from the top. If it does, voter support will follow. Oh, and by the way, we had another very good jobs report on Friday. The unemployment rate is 3.6%, and 428,000 new jobs were created last month according to the BLS. But the media only report about inflation.

It’s a continuation of Biden’s record job creation. In his first year in office, there were 6.6 million jobs added to the economy, 60% more than the next highest total, which was 3.9 million under Jimmy Carter. Wait, you thought Trump was the biggest job creator in history just because he said so? Wrong!

You might say that Putin is losing his domestic disinformation war while Biden is losing his domestic information war.

Time to turn off the news for a few minutes, and center ourselves for another rock ‘em, sock ‘em week ahead. It’s time for our Saturday Soother!

Here on the fields of Wrong, our crab apple trees’ blossoms will open over the weekend. It appears that we may not have bluebirds in our nest boxes for the first time in 10 years. A juvenile Cooper’s Hawk is using a box as his perch to survey our mix of woods and open grassland. That has driven many birds away.

So, grab a seat by a south-facing window and listen to Beethoven’s “Triple Concerto in C Major, Op. 56 No. 2” Largo, and Attacca, performed in 2019 by Anne-Sophie Mutter, Daniel Barenboim, and Yo-Yo Ma, accompanied by the West-Eastern Divan Orchestra at Philharmonie Berlin:

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Saturday Soother – March 5, 2022

The Daily Escape:

Herring Cove, Provincetown MA – February 2022 photo by Karen Riddett

Wrongo and Ms. Right went to the big box store yesterday. Most of the things on our list were out of stock. We also needed to fill the car’s gas tank. Local prices ranged from $3.65 to $3.92/gal. We filled up at the place with the lower number.

This is before any effects of Putin’s War on prices here at home. One product that will be impacted is wheat. Russia is the largest exporter of wheat in the world, and Ukraine is #2. Reuters says that the two countries account for about 29% of global wheat exports. They also say that US wheat futures rose to a 14-year high earlier this week.

The reason is that major wheat exporters aren’t holding as much wheat in storage as they do usually. Wheat stocks are set to fall to a nine-year low of 57 million tons by the end of the 2021/22 season. The news gets worse: If Russia and Ukraine are excluded from those holdings, other major global wheat exporters account for just 16% of the global stock.

That’s enough wheat to feed the world for less than three weeks.

The majority of wheat stock that isn’t in the hands of major exporters is held by China. China’s expected to account for 47% of global inventories at the end of the year. And last Thursday, China started approving imports of Russian wheat that had been blocked for years over Beijing’s concerns about fungus and other contaminants. The countries had announced that China would begin importing Russian wheat and barley shortly after Putin visited China ahead of the Beijing Olympics.

Emptywheel reports that Russia imports a significant portion of the wheat seed it needs for each growing season:

“…where will Russia buy the wheat seed needed? (Depending on source, there’s a disparity in what percentage of wheat seed Russia imports, but it’s between 18-40% depending on spring, hard wheat, or other type.)”

Will Russia purchase seed from China and India? Will those two countries accept rubles? Or will they look to barter for something else in trade, like natural gas?

Ukraine is in an even worse position. Reuters says that Ukraine has confirmed stoppage of its grain exports until the end of the Russian invasion. There is a chance that supplies for the next season from both Ukraine and Russia could also be in jeopardy, pending the duration and outcome of the war.

They also report that Ukraine accounts for 16% of world corn exports. Ukraine and the US are the only world corn exporters until Argentina and Brazil gear up to export their crops. Apparently, Ukraine still has a good deal of its 2021 corn crop to ship, but given Russia’s closing of Ukraine’s access to the sea, that may be problematic.

As the Northern Hemisphere enters spring, grain planting is right around the corner for both Russia and Ukraine.  Corn is going in for Ukraine and spring wheat for Russia. It’s highly uncertain how Putin’s War will impact crop production this spring. Russia has yet to plant 30% of its 2022 wheat crop.

Brazil imports wheat because it can’t grow enough for its own consumption. After Trump closed soybean exports to China, Brazil moved land into soybean production for the Chinese market. Brazil could try to increase acreage dedicated to wheat, but new Brazilian acreage comes at the expense of further destroying their forests, a terrible tradeoff.

We are looking at the emergence of a global economic war of attrition brought about by the sanctions regime. The target is Russia, but economic costs will spill over to the rest of the world.

On that note, it’s time to unplug from the terrible news that for the moment, is mostly caused by a terrible country.

It’s time for our Saturday Soother. We can’t escape the cold blustery weather in Connecticut, so it’s another indoors weekend here at the Mansion of Wrong. Let’s start by brewing up a mug of Monarch Estate Gesha ($42/4oz.) from Honolulu’s own Monarch Coffee. The roaster says it has subtle, sweet flavors of berries, mango, honeydew, apple, and pear. Note the price. Coffee prices have spiked along with many other items.

Now grab a seat by a big window and listen to Hauser performing the cello solo in “Adagio” by Albinoni, accompanied by the Zagreb Philharmonic Orchestra in Zagreb, Croatia in 2017. This weekend, given the tragedy in Ukraine, it’s nice to listen to music that transports us to a place where there’s peace:

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Pundits are Crowing About Inflation

The Daily Escape:

Colorado River north of Moab, UT – February 2022 photo by Rich Briggs Photography

(New columns will be light and variable for the rest of the week. Wrongo’s having cataract surgery today)

Last week, the Labor Department published data that showed consumer prices rose 7.5% in January from a year earlier, the biggest increase in decades. This brought all of the economic know-nothings who have pundit positions in the media to say that Biden’s presidency is in grave danger.

David Axelrod, former senior adviser to Obama, has an op-ed in the NYT that suggests Biden needs to show humility in his upcoming state of the union speech on March 1:

“…recognize that we are still in the grips of a national trauma. Polls show that the vast majority of Americans believe we are on the wrong track, and people will have little patience for lavish claims of progress that defy their lived experiences.”

It’s true that Americans have been through hell in the past two years. It’s also true that they have been helped in their negative thinking by the media. Despite all the bad news on high inflation since August, Bloomberg reports that US consumers don’t expect sky-high inflation levels to last:

“…the January consumer survey from Federal Reserve Bank of New York…showed that the median one-year-ahead inflation expectations fell for the first time since October 2020, to 5.8%. The outlook over three years dropped even more sharply, and the decline was broad-based across age, education and income.”

Bloomberg says that in that recent Fed survey, the median three-year ahead inflation expectation decreases to 3.5%.

Politically, that could still be a potential crisis for Democrats. While there’s no question America is creating jobs at a record pace and GDP growth bounced back faster than anyone imagined possible, the public is quite grumpy about the state of the economy. Rising costs for groceries and gas are points of economic pain, and good economic news is always trumped by anger about high inflation.

Dan Pfeiffer says Democrats need to go on offense: (Brackets by Wrongo)

“Democrats should consider turning the entire conversation around inflation into an argument for populist economics….[they should] expose Republicans for siding with highly profitable corporations.”

Pfeiffer says that Democrats should focus on a message on inflation that in polling seems to work:

“President Biden says that we need to bring back manufacturing jobs in the United States to drive down prices. Our supply chains need to be housed here at home, rather than outsourced abroad.”

Pfeiffer adds that this is a big point of contrast with the message Republicans are using. The 2018 Trump Tax law rewarded companies that shipped jobs overseas. That fact can give Democrats an opportunity to punch back with an argument about how Republicans have made the problem worse.

A poll by Data for Progress showed that the Republicans have an eight-point advantage over Democrats on which Party can better control inflation. But Democrats have a nine-point advantage on “cracking down on corporate abuses and corruption.” Other polls show that most voters cite increased government spending as the leading cause of inflation. This is what Republicans are saying, but it isn’t completely correct.

We know that corporations are reaping record profits while prices are rising. CEOs are bragging about how they’re able to use inflation as a cover for their price hikes. These higher prices are adding to inflation, while shareholders are seeing record profits.

There’s a sense that Democrats won in 2018 because they ran on “kitchen table issues”, specifically, on health care, and some Dems want to go back to that. It’s partially true. But 2018 was also a referendum on Trump, and Democrats turned out in large numbers to vote against him and his fellow traveler Republicans.

In November, some Republicans will run away from Trump. But for most of them, he can be made to be an anchor on their coattails.

As Axelrod says, the country is still traumatized by the pandemic and the economic challenges that came with it. But it’s also traumatized by what Trump did, and what the Republicans are doing now to our democracy. If the Dems fail to address both they will look completely out of touch to most voters who aren’t huge partisans.

Both Biden’s State of the Union address, and the Party’s mid-term messaging needs to also focus on the state of our democracy because it’s in danger. Americans are struggling and many, many are angry, so Biden needs to accept responsibility for high prices. But he must also spell out specifically where Republicans bear responsibility for obstruction.

If Democrats tell themselves that inflation is the only important issue, and ignore the Republican threat to democracy, they will lose.

The messaging choices Democrats make right now will determine the country’s future.

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NYT Editorial Board Misunderstands Economic Concept

The Daily Escape

Santa Catalina Mountains, Saguaro NP, Tucson AZ – December 2021 photo by Paul J Van Helden

Last Saturday, the NYT had an editorial called “President Biden’s Economy Is Failing the Big Mac Test”. The Times said that when the average worker’s paycheck doesn’t buy as many hamburgers from McDonald’s as it did last year, Biden’s in trouble.

Unfortunately for the NYT, that isn’t what the “Big Mac test” is about. They properly credit the idea to The Economist magazine, which originated it in 1986. It was intended as a semi-humorous illustration of Purchasing Power Parity (PPP). PPP basically tells economists what the comparative strengths and weaknesses are of each country’s currency by looking at the cost of the same “basket of goods” across geography.

The thesis is that in a free market, foreign exchange rates should adjust to equalize the price of goods and services across different nations.

According to The Economist, the Big Mac PPP denotes the exchange rate at which the Big Mac would cost the same in the US as it would in other countries. There are all sorts of comparison problems with the Big Mac index. Russia has one of the cheapest Big Macs, despite the fact that Moscow is among the most expensive cities in the world.

But the Times didn’t want to talk about exchange rates at all. It wanted to make a point about US prices in the time of Covid, and Biden’s so-called failure to control them. It says:

“The dollar figures on workers’ paychecks rose handsomely over the past 12 months. But for most workers, that wasn’t enough to keep pace with the highest inflation in several decades, which eroded the value of each of those dollars….The purchasing power of the average worker’s weekly pay declined by 2.3% from December 2020 to December 2021.”

True, and that sounds bad, but maybe we should add some context. First, Investopedia says that US sales of Big Macs have been falling since the 1980s. Second, the NYT itself says a few paragraphs later: (emphasis by Wrongo)

“Lower-wage workers have seen particularly strong wage growth. For workers in the bottom third of the wage distribution, Arindrajit Dube, an economist at the University of Massachusetts, Amherst, estimates that average wage gains have exceeded inflation.”

Just guessing, but Wrongo thinks that lower-wage workers are likely to be the primary market for Big Macs. And if workers in the bottom third of wage distribution are experiencing the strongest wage gains, maybe that’s what the Times should refer to as a Biden BFD!

And apparently, the Times doesn’t read its own business section, which on Monday said that US fast-food menu prices rose by 8% in 2021. For you non-economists, that means McDonald’s prices rose at a rate faster than US inflation, but instead, the NYT editorial board says Biden blew it.

The NYT tries to take what is a useful way to teach something about comparative exchange rates and forces it to say something critical about Biden. The title of the editorial says that Biden is failing, but in the fourth paragraph, they say:

“Mr. Biden inherited an economic crisis precipitated by the coronavirus pandemic, and his administration deserves credit for orchestrating a fiscal response on a scale commensurate with the nation’s need. The outstanding achievement of Mr. Biden’s first year in office was the passage of an economic aid package in March that shielded Americans from the economic effects of the pandemic and helped to deliver a faster recovery than in other developed nations.”

They seem confused. Later, they say:

“The challenge now is to bring inflation back under control without undermining the economic recovery. The work will mostly be done by the Federal Reserve, not by Mr. Biden or his administration. The role of presidents in shaping the nation’s economic fortunes is generally overstated.”

So presidents really don’t have a big role in improving the economy, except that Biden caused bad inflation, which he can’t fix, because that’s the job of the Federal Reserve.

Does any of this make the NYT sound smart to you?

As someone who was a working adult in the 1970’s and 1980’s, Wrongo remembers truly high inflation. He remembers having a 14% home mortgage. Today’s inflation doesn’t compare to that, something that the editorial board of the NYT must know.

There is so much media laziness in America today. The NYT missed a chance to educate the public about why the prices of various products are increasing. Instead, they settled for an easy criticism of Biden.

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How Bad Is Inflation?

The Daily Escape:

Chaco Canyon’s Chetro Ketl Great House – January 2022 photo by James C. Wilson

Every media outlet is talking about the latest inflation numbers. The NYT reported that the Consumer Price Index climbed to 7% for the year through December, and 5.5% after volatile prices such as food and fuel were stripped out. Sounds terrible, right?

Nobody likes higher prices. But remember that 12 month inflation rates (called year over year rates) are a look backward in time. And consumer prices increased 0.5% in December, lower than in the past several months. Month-to-month measures are more reflective of current conditions, although they bounce around more than year/year numbers. A half of one percent rise in December annualizes to a 6% inflation rate, less than the headline rate, if it remains at that level going forward.

Also, wholesale prices rose just 0.2% in December, the smallest increase in 13 months. So maybe inflation is starting to level off.

So, maybe this is a case of beware the headlines. Eric Boehlert says that US media can’t (or won’t) give people context for the current inflationary trend:

“Convinced that rising prices are the defining economic issue of the day — not huge job gains, record-setting GDP predictions, or boosted wages — the press continues to portray inflation as a uniquely American problem that’s hounding Democrats.”

Boehlert says that what’s missing from our inflation coverage is information that inflation is a global phenomenon, fueled by the pandemic. He cites the following articles:

Republicans claim that Biden’s agenda is responsible for inflation. The average person can be forgiven if they believe that Biden’s policies are the cause, but Biden didn’t cause inflation to jump in all of these other countries.

The Economist reports that since the pandemic, there has been a total of $10.8 trillion in worldwide fiscal stimulus, equivalent to 10% of global GDP. The result was that developed countries finally moved the needle on inflation, after they added money to their economies for nearly 15 years since the Great Recession.

So, while each item of the Consumer Price Index — cars, homes, energy and so on — has unique factors driving its prices, there’s an overall reality: The economy is recovering far more quickly than it normally does following a severe recession. But that recovery is uneven, showing up in some sectors as high prices. From The Grid’s Matthew Zeitlin:

“What really worries economists is not just inflation per se, but a situation, as in the 1970s, where prices are rising and the economy is otherwise stagnant, with little job growth or overall growth. This condition is called, naturally enough, ‘stagflation’.”

Zeitlin goes on to say:

“There’s clear evidence that stagflation is not the direction in which the economy is headed. The unemployment rate is down to 3.9%, and overall output is easily above its pre-Covid level…..it’s simply not the situation that the labor market is trending in the wrong direction.”

And the Conference Board is forecasting that 2022 GDP growth will be 3.5% and it will be 2.9% in 2023, so no worries about stagflation in our future.

Zeitlin points out that the supply chain is also a culprit. Over the course of the pandemic, Americans shifted their consumption from services to goods, especially durable goods like furniture and cars. While services still amount for the bulk of US consumer spending, shifting the balance between goods and services can have large effects:

These changes in consumer spending have caused major stress at ports, and throughout the logistics system that moves goods around. This has raised the costs of everything that needs to be shipped.

China’s Zero Covid policy is creating severe lockdowns to keep the variant from spreading ahead of the Beijing Olympics next month. This raises the prospect of more disruptions for supply chains that are based there. China remains the largest supplier of goods to the US.

The Zero Covid policy has economic consequences: Delivery times for ocean shipments from China to the US stretched to a record 80 days in December, up 85% from 2019. This also impacts the cost of shipping a 40-foot container from Asia to the US West coast: It currently costs $14,572 this week, down from a peak of more than $20,000 in September. But that’s about a tenfold increase from two years ago.

The major question facing the Federal Reserve, as well as Biden, businesses and everyday consumers who have to make decisions, is how likely is increased inflation to persist? If the inflation problem is largely being driven by how consumers and businesses have had to adjust to Covid, then while it’s severe, it may be temporary.

Nobody likes or wants higher prices. Pent-up demand and abundant cash savings are part of what’s causing inflation. The other part of the problem is labor shortages, which are resulting in large wage increases for certain occupations.

The only way to stop prices from rising is for the Fed to reduce the money supply, raising rates until demand comes down far enough to match supply. The balancing act for the Fed is to tamp down price increases, while not causing a recession.

Whether the Fed can do that remains to be seen.

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Why Isn’t Good Economic News Covered?

The Daily Escape:

Crater Lake, OR – winter 2020 photo by Austin James Jackson photography.  

We need to talk about the economy. The underlying economic news is very good, but both the press and the Republicans say it’s bad, while Democrats say very little.

There are three things being discussed. First, inflation is terrible. This is a key Republican talking point about how Biden is failing the country. Second, jobs are going begging in what journalists have dubbed “The Great Resignation”. This is supposedly the fault of giving too much in unemployment benefits, allowing people to stay home rather than work. Third, if the economy is so great, why isn’t employment growing faster?

Starting with the last point, take a look at this graph showing jobs growth since 2008. The blue bars are when a Democrat was president, and the red bars are when a Republican was president:

That last blue bar is the strongest jobs growth in history. During 2021, the US created more than 6 million jobs, the most since records began in 1939.

That means Biden has just managed a year of stunning jobs growth, but consumers were constantly fed headlines about “disappointing” jobs reports, because the initial reports rarely align with skewed “expectations” by economists and pundits. Explaining this should be fairly easy, but the press can’t seem to get it across to the American people.

In addition, wages have been moving up across the board:

In December, average hourly earnings for Production and Non-supervisory Personnel rose $0.12 to $26.61, which is a 5.8% year over year gain. This shows that American workers are finally building some economic power. People have choices right now. After years of worker insecurity in the wake of the financial crisis followed by the pandemic, they have options. Jobs are going unfilled, while virtually no one is getting laid off.

The unemployment rate has now fallen close to a 50 year low, at a level exceeded only by one month in 2000, and during 2018-19. The economic result of this is visible on the graph above.

While employment is continuing to be strong, we’re still lagging in terms of filling job openings created by pandemic losses. America must gain an additional 3.6 million jobs in order to equal the number of employees in February 2020, just before the pandemic hit. At the current average jobs growth rate for the past 6 months, that should take about 7 more months to reach the pre-pandemic employment level.

Economists are tying themselves in knots trying to figure out why more Americans aren’t going back to work. Some of those reasons are understandable: Fears about health, caring for someone who’s sick, and lack of childcare. But there’s a big reason that isn’t talked about. Employment has declined in the last year among workers who were 55 or older at the start of the pandemic. A WaPo analysis found that over 1.5 million more people were retired in November 2021 than would have been expected based on pre-pandemic trends. That would help explain the employment story if the mainstream media would look at the big picture instead of dutifully following Right-wing propaganda.

Turning to inflation, the WaPo says:

“The US economic recovery from the Covid pandemic was the strongest of any of the big Western economies
The Biden stimulus pushed the bank accounts of even the lowest-income Americans to unexpected heights. On average, they had more than twice as much in their savings accounts as they did when the pandemic began.

The Federal Reserve…helped, too. It held rates near zero and pumped hundreds of billions of dollars into the economy. The twin fire hoses of cash — one from Congress, one from the Fed — sent Americans’ spending roaring back.”

Bloomberg reports that manufacturing companies are saying their supply chains are performing a little better. Their message seems to be that things aren’t worsening.

While oil prices get the most attention, the ISM surveys show manufacturers say the cost of more commodities are falling. In December, there were eight commodities that were identified as falling in price. In November, it was four. In October, just one (wood).

Finally, the NY Fed is out with its 2022 inflation expectations survey. It shows that In December, US consumers expected inflation to average 6.0% over the next 12 months and 4.0% over the next three years. Those expectations were unchanged from November 2021.

It also showed that Respondents were more optimistic about their future wage and income growth, as well as their ability to hold a job or find a new one.

One big question for Republicans is what will they pivot to if inflation actually slows down?

A larger question is why the Democrats and the press can’t explain good news when it happens?

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Saturday Soother – December 4, 2021

The Daily Escape:

Mexican Hat Rock, Mexican Hat UT – 2021 photo by Jacky and Rick

The media keeps talking about inflation, saying that it’s bound to hurt the economy any time now. They mean that inflation will make workers ask for higher wages. That will force companies to pay workers more, and thus, lower corporate profits.

Sounds like a problem, but as Bloomberg reports, the fattest corporate profits since 1950 are debunking inflation stories spun by CEOs. US corporations enjoyed the widest profit margins in more than 70 years during the second and third quarters of 2021. US corporate profits before adjustments rose to a record high of $3.14 trillion in the third quarter of 2021. From Bloomberg:

“On earnings calls, plenty of executives complained about the squeeze from rising costs of labor as well as materials. But overall, profits were up 37% from a year earlier, according to data out last week from the Commerce Department.”

Nearly two thirds of publicly traded US corporations have reported higher profit margins this year compared to 2020. One hundred of the largest have booked profit margins at least 50% higher than last year’s levels.

Bloomberg reports that businesses have been paying more to their employees too, with total compensation up 12% in the last quarter vs. a year earlier. It’s not that every worker got a raise. A significant part of the increase was due to millions of Americans simply returning to work. But many got raises too. To date, hourly earnings broadly kept up with the fast-rising cost of living. And in some low-pay industries like leisure and hospitality they’ve outpaced it, although not by enough for those firms to get fully staffed.

The new data on corporate earnings suggest businesses are comfortably passing on their higher costs. In recent months, a number of US companies including Coca-Cola, Procter & Gamble, Chipotle, and Dollar Tree have announced price hikes, claiming that the increases were necessary because of higher wages and material costs.

But the Bloomberg data say that these corporate kings are using price hikes to pass their sky-high CEO pay and marginal increases in material and labor costs to consumers, in order to keep padding their already historically strong profit margins.

Still, politicians are calling for Fed Chair Jerome Powell’s head. Sen. Tom Cotton (R-AK) wrote in the WSJ that Powell doesn’t deserve another term because he caused inflation. Powell’s policies have contributed to US inflation, but there’s zero evidence that US inflation is a problem today.

For months, corporate executives and right-wing politicians have been parroting the claim that inflation in the US is due to Biden’s social spending policies. But the new data show that inflation is going up largely because corporations are driving it.

Remember, corporate profits are up by 37% while inflation amounted to about 6.2% in the same period. In other words, as the economy reopened and prices for goods went up, and corporations used the situation to raise prices a lot.

In fact, the FTC just announced it voted 4-0 to investigate the relationship between competition and supply chain problems. The FTC sent letters to nine dominant firms in supply, retail, and wholesale, mandating they respond within 45 days to a host of questions, as well as give internal documents on various topics.

This matters. Inflation and shortages aren’t neutral forces. The twin problems seem to be *helping* big business improve their profit margins. It’s important to ask why they are happening and who has an incentive to keep them going.

Even Morgan Stanley is now asking corporations to hit the brakes on accumulating profits. Their research division released a report highlighting the gap between corporate profits and worker wages. From the report:

“Real wages…still have to grow by 7.3% in excess of productivity growth to make up the gap….If this catch-up takes place over the next 5 years, unit profits will fall 33% from current levels
This would move the corporate profit share back to its 1990s average on a pre-tax basis and leave it just marginally above on a post-tax basis.”

Imagine. An investment bank telling corporations that they really should be making less profit. Things must be really going to get much worse than we think.

Let’s launch into our weekend, starting with a Saturday Soother. Try to forget about whether a government shutdown will hurt you or Biden, or whether the Supreme Court is now filled with ideological hacks.

Instead, grab a seat by a window and listen to “The Girl with the Flaxen Hair” by Claude Debussy. The Art Nouveau period was obsessed with women’s hair. Debussy was immersed in that world. It’s played here by the LA-based, Sakura cello quintet. Wrongo is a sucker for cello, and there are five of them! This was originally written for piano, and is transposed here for cello:

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