At last. Some real news!
Our federal government has been in gridlock since mid-Dubya, 13 years and counting, but this new chapter is noisier than the others, which makes it hard to concentrate, and we must focus because they might actually do something by accident.
Today… relief! The April employment report is just fine — better than that. The March job surveys were ambiguous: the “establishment” one of large businesses gets the headlines and was shaky, but the door-knocking “household” survey was strong and confirmed by April’s numbers.
The 10-year T-note in the last year. Held down now only by super-easing central banks overseas, our rates are high by comparison.
Other data concur. The two ISM surveys of purchasing managers in late April, especially, which show that manufacturing down a hair but healthy at 54.8, and the service sector is booming at 57.5.
Despite strong hiring and crazy-low unemployment, even “involuntary part-timers” finding full-time work, incomes are poking along at 2.5 percent annualized. And oil has thumped down below $50/bbl, these two factors reducing any threat of inflation. That, after all, is what the Fed most cares about.
Lacy Hunt and David Rosenberg (both smart guys) who have been on the bear side of the economy and forecasting imminent recession, but current data hold no sign of recession.
Even the Fed-sensitive 2-year T-note is fighting the obvious: the Fed is coming. A June hike is not fully built-in to this market, let alone the next one. Or two.
Thus the Fed will continue its 0.25 percent march in June unless May data crump. More likely than recession is the delayed but inevitable collision between the administration growth-boosters and the Fed. The tale begins with productivity and ends in health care.
“Productivity” is one of the two worst-measured concepts in economic analysis (the other is the “savings rate”), but crucial because of this equation: potential non-inflationary economic growth is the sum of productivity gain and population gain.
The Atlanta Fed GDP tracker chart looks weird — its Q2 forecast is the green line in top-right corner. It’s not likely to hold so high, but is likely to do well enough to offset the technically weak Q1.
U.S. productivity fell by 0.6 percent in the first quarter, and is now running barely above zero annually. Our population growth is struggling to hold 1 percent, and heavily dependent on immigration now threatened by the golf course guys. The Fed has assumed a 2 percent speed limit for after-inflation growth, and the new productivity stats make that look too high, and of course in conflict with the 3-4 percent aspirations of the golden-shovel men.
“Productivity” is computed by the crude division of workers into production. In theory, productivity rises as the result of capital investment into more and better means of production.
The U.S. magic era was 1950 to 1970, productivity rocketing 2.6 percent annually. But that was a time without foreign competition, much of the world’s productive machinery either wrecked by world war or locked up behind the curtain of stupid economics.
The ECRI index has continued to roll over, but from an extraordinary high toward sustainable terrain.
Productivity gains slid to 1.5 percent from 1970 to 2000, with oil prices obviously harmful. IT helpful in the ‘90s, but global competition rose every day. And, after 1990 came fantastic over-investment by China.
There are strong reasons to suspend belief in the productivity-defined speed limit. The best: The global inability of central banks to push inflation up to 2 percent.
Another: the world is drowning in production capacity. There is no reason to invest in more, hence the incredible piles of cash in the world’s most successful corporations.
The administration’s plan to cut taxes to encourage investment would just result in more ballyhooed but abandoned groundbreakings (and no, the tax freebie would not fall to paychecks).
Think it through. A string quartet may be doing very well, but no matter how much money it makes, it will not be hiring. However, businesses from manufacturing to services in recent conditions might well decide to hire from the big, cheap and idle worker pool instead of investing in physical production capacity.
Employment rising faster than GDP, productivity falling — that’s an inflationary nightmare for central bankers. But inflation refuses to rise.
The perfect example is health care, the strongest sector of hiring since the recession.
U.S. health care may be the most anti-productive system of anything ever created. Our politicians argue about who should pick up the bill, and who should be covered, but refuse to address the size of the bill — by any measure approaching double the bill in any peer nation with the same health results.
U.S. health care has no market limits to price (despite absurd market assumptions by both political parties), and is guaranteed to ratchet prices and over-capacity and inefficient delivery. Clean sweep.
The Fed needs to revisit its speed limit assumptions. The very meaning of productivity has changed.
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.
