Questions, questions about construction and manufacturing employment..

Revisions to construction employment show substantial additional jobs having been created in the construction sector.  The revisions go some way back with even the December 2011 data being raised upwards significantly (66,000 difference between Nov 2012 report and the Jan 2013 report).   Most of the revision (based on November 2012 data) had been baked into the pie by May 2012 – revisions look to start in May 2011 data.  That is until the Jan 2013 report showed a large revision of 44,000 in November.  

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Chart fest: between the lines of US employment data

Let us not forget that the economic data globally, and not just in the US is still poor and the headwinds to achieving an exit from the crisis still strong.  We only need to look at the US employment figures to realise just how much the global economy is still being impacted by high debt levels and significant structural economic imbalances (too much investment and too little consumption in some countries and the opposite in others, some too dependent on exports etc.).

We must remember the frame in which we live today, and so it is with US employment data.   While employment data in one sense is a lagging indicator of economic activity, in a world where income and hence demand growth is critical, it is also a leading indicator of potential future consumption expenditure.

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Growth dynamics have changed a bit and are in between times…

Historical equity returns reflect past growth dynamics, dynamics which may be either weaker or in transition, or both – indeed, dynamics in mature economies are weaker, and combined global dynamics are in transition.  Return expectations need to be cognisant of these structural drivers of return.

The main drivers of growth are well known: a) population growth and employment participation rates, b) capital investment and c) increases in total factor productivity, or rather efficiency gains from the combination of a and b. Continue reading

“It’s time to reset your investment assumptions”..says the Globe and Mail. But is it, and should it be up or down?

Is it really time to reset your return assumptions downwards? A Rob Carrick articlein the Globe and Mail suggested that it might be so.

Revising return assumptions down after poor stock market returns is a Bete Noire of the financial services industry.  All other things being equal, and depending on your paradigm, you should be revising them up after a period of poor returns.

But you cannot revise upwards if your return assumptions were too high to start with. If you have relied on historical average returns or risk premiums to set return expectations you have also more than likely failed to adjust for cyclical and structural risks in markets and economies. Continue reading

Non Seasonally adjusted weekly claims

It is something I have been keeping an eye on, the non seasonally adjusted weekly claims data that is. 

The following chart shows the last 16 weeks of claims to 25 May rebased as index starting at 100 in week 1.   This is compared to the same 16 week period (+/- a couple of days for calendar differences) for prior years going back to 1997.

It shows that the current claims data is weak relative to all these prior dates, over the period in question, which is something considering the high levels of unemployment, low interest rates and significant monetary stimulus  the economy has received.

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Note also that I have highlighted the 2012 and 2000 data, both exceptionally warm winters.

Data is sourced from the US Dept. of Labor.

Links & comments 20 December 2011

The plight of the 1% – some good quotes here with respect to the upper echelon’s ignorance over the likely deteriorating quality of their own pies: upper echelon wealth depends on the health of the pyramid, something which many fail to understand.  In other words, the wealthy have more to lose if the supporting structures collapse.

Eurozone crisis hits US mortgage securities – Euro banks may be selling US asset backed (mortgage backed) paper causing a fall in the pricing of these assets( which incidentally may further influence Fed buying of mortgage based assets).  The dynamics of this activity can better understood by reading a recent paper by Hyun Song Shin, Global Banking Glut and Loan Risk Premium discussed in an earlier post of mine -   Light on the Euro Zone banking crisis.

Can Italy survive the financial storm? An article from Vox that suggests yes by providing a positive spin on recent developments in Europe.  I am not sure that I share these sentiments which depend on falling wage costs, stability in the banking system through the ECB longer term refinancing operations and a belief in the implementation and effectiveness of austerity measures:

“The Italian government is pushing a strong and credible fiscal adjustment through Parliament. “

“The stability of the Italian banking system now seems assured given that the ECB has made three-year funding available “

What has to start yet is to make the Italian economy competitive again by reducing labour costs……Provided the real sector of the economy can be shielded from the worst effects of the financial storm the country should have enough time for the real adjustment to bear its first fruits.”

With regard to wage costs, Germany has indeed benefitted from lower growth in wage costs, but its wage costs are still relatively high (higher than Italy’s) and a larger component of gross wages in Italy are non wage costs, which means non wage costs need to fall, itself implying in part further austerity.  Not only will wage costs and non wage costs need to fall if they are to compete with lower cost Eastern European countries, but productivity and skills will need to rise if they are to compete with the likes of Germany and the US.   It is not so much wage costs, but the wage costs relative to the added value produced by labour in the industries in which they are employed and hence a refocus and restructuring of capital employed which also depends on so many other factors.    This is a very long term outcome, and these are usually characterised by barely perceptible incremental changes along the way.  It may be hard to discern any benefit for some time and certainly not in sufficient time to assuage deflationary risks currently embedded in the economy..

As far as austerity measures, there is no guarantee that the short term impact of such measures will be negligible in economic terms, especially when combined with European, if not global austerity imperatives.   Finally, is the stability of the Italian banking system really assured, as suggested, by the new LTRO measures introduced by the ECB?  

Labour_cost_index_-_recent_trends/ Economic boom barely lifts German labor costs / EU-Comparison of labour costs and non-wage costs /LABOUR DEMAND IN GERMANY: AN ASSESSMENT OF NON-WAGE LABOUR COSTS / Problems of International Labour Cost Comparisons/ http://www.oecd.org/dataoecd/51/53/48723947.pdf / The margins of Labour Cost adjustment./ This Is The Chart That Really Makes The Germans Furious / After the Election: Germany Will Continue to Obstruct Global Economic Rebalancing/ What Explains the German Labor Market Miracle in the Great Recession?*/ Wage setting in Germany – new empirical findings /The economy of Germany: powered by reform