10/8/19: Irish Debt Sustainability Miracle(s): ECB and MNCs

As a part of yesterday's discussion about the successes of Irish economic policies since the end of the Eurozone crisis, I posted on Twitter a chart showing two pivotal years in the context of changing fortunes of Irish Government debt sustainability. Here is the chart:

The blue line is the difference between the general Government deficit and the primary Government deficit, which captures net cost of carrying Government debt, in percentages of GDP. In simple terms, ECB QE that started in 2015 has triggered a massive repricing of Eurozone and Irish government bond yields. In 2012-2014 debt costs remained the same through 2015-2019 period, Irish Government spending on debt servicing would have been in the region of EUR 49.98 billion in constant euros over that period. As it stands, thanks to the ECB, this figure is down to EUR 27.94 billion, a saving of some EUR 4.41 billion annually.

Prior to 2015, another key moment in the Irish fiscal sustainability recovery history has been 2014 massive jump in real GDP growth. Over 2010-2013, the economic recovery in Ireland was generating GDP growth of (on average) just 1.772 percent per annum. In 2014, Irish real GDP growth shot up to 8.75 percent and since the start of 2014, growth averaged 6.364 percent per annum even if we are to exclude from the average calculation the bizarre 25 percent growth recorded in 2015. Of course, as I wrote on numerous occasions before, the vast majority of this growth between 2014 and 2019 is accounted for by the tax-optimisation transfer pricing and assets redomiciling by the multinational corporations - activities that have little to do with the real Irish economy.

8/8/19: Irish New Housing Markets Continue to Underperform

New stats for new dwelling completions in Ireland are out today and the reading press releases on the subject starts sounding like things are getting boomier. Year on year, single dwellings completions are up 15.5% in 2Q 2019, scheme units completions up 2.6%, apartments up 55.6% and all units numbers are up 11.8%. Happy times, as some would say. Alas, sayin ain't doin. And there is a lot of the latter left ahead.

Annualised (seasonally-adjusted) data suggests 2019 full year output will be around 18,000-18,050 units, which is below the unambitious (conservative) target of 25,000. And this adds to the already massive shortage of new completions over the last eleven years. Using data from CSO (2011-present), cumulated shortfall of new dwellings completions through December 2018 was 125,800-153,500 units (depending on target for annual completions set, with the first number representing 25K units per annum target, and the second number referencing target of 25K in 2011, rising to 30K in 2016 and staying at 30K through 2019). By the end of this year, based on annualised estimates, the shortfall will be 132,400-162,250 units. Taking occupancy at 2.1 persons per dwelling, this means some 278,000-341,000 people will be shortchanged out of purchasing or renting accommodation at the start of 2020.

Here is a chart summarising the stats:

Let's put the headline numbers into perspective: at the current 'improved' construction supply levels (using annualised 2019 figure), it will take us between 6.3 and 7.7 years to erase the already accumulated gap in demand. If output of new dwellings continues to grow at 11.8% per annum indefinitely, Irish construction sector will be able to close the cumulative gap between supply and demand by around 2029 in case of the targeted output at 25K units per annum, or worse, by 2031 for the output target of 30K units per annum.

8/8/19: Upbeat Jobs Reports Miss Some Real Points

Unemployment claims down, the weekly jobs report seemed to have triggered the usual litany of positive commentary in the business media

But all is not cheerful in the U.S. labor markets, once you start scratching below the surface. Here are two broader metrics of labor markets health: the civilian employment to population ratio and the labor force participation rate, based on monthly data through July:

The above shows that

1. Civilian labor force participation rate is running still below the levels last seen in the late 1970s, and the current recovery period average (close to the latests monthly running rate) is below any recovery period average since the second half 1970s recession end.
2. You have to go back to the mid-1980s to find comparable 'expansion period'-consistent levels of labor force participation rate as we have today. This is dire. Current recovery-period and President Trump's tenure period averages for labor force participation rate sit below all recovery periods' averages from 1984 through 2006. 

So much for upbeat jobs reports.

6/8/19: El Paso and Dayton mark 2019 as the worst year for mass shooting violence in America on record

In the wake of the extremely sad events of the last two weeks, it took me some time to run through the data from the https://www.gunviolencearchive.org/ on mass shootings in the U.S. 2014-2019 (to-date), and the numbers are shocking. The El Paso, TX shooting of August 3, followed by the Dayton, OH incident on August 4  (with combined numbers of those killed or injured at 82 with 30 people dead, may they rest in peace) have shaken the world (see, for example, https://www.nytimes.com/2019/08/06/world/europe/mass-shooting-international-reaction.html). 

Here is a summary table on U.S. mass shootings over the last 5 years and 7 months:

So far, 2019 has been the deadliest year on record in terms of overall number of mass shooting incidents, in terms of the numbers of people killed and injured, in terms of the number of people killed, in terms of the number of people injured, and in terms of the number of incidents with 10 or more people killed and injured.

Here is a summary of the 26 largest mass shootings on record:

There appears to be little in terms of distributional trends, especially given small number of years in data coverage, but so far, data suggests that there can be an ongoing increase in the number and severity of mass shootings over the years, with 2019-to-date reconfirming 2016-2017 dynamics that were partially reversed in 2018.

Two visualisation charts, identifying the Texas mass shooting of August 3rd:

 

As the charts above clearly show, August 3, 2019 shooting in Texas is the fourth largest in terms of people either killed or injured (46) after October 1, 2017 mass shooting in Nevada (500), June 12, 2016 shooting in Florida (103), and November 5, 2017 mass shooting in Texas (47).

Overall, there has been 1,925 mass shootings in the U.S. over 2042 days since the start of 2014, with 2,163 people killed and 8.160 people injured. Since January 1, 2014 through August 4 2019, on average, almost 1.06 persons died and 4 persons were injured in mass shootings per day.

The impact of these horrific incidents is, of course, far deeper-reaching, touching the lives of those close to people killed or injured, as well as those in public vicinity of those directly impacted. There is also an unquantifiable broader impact on the society at large. We need better data to better understand these deeper and broader impacts.

We also need better data to try and decipher any causal links and drivers for these horrific crimes. And we need more analysis of the deeper roots and causes of these.


As a tail end of the post, my deepest sympathies to the families and friends of those taken away by the gunmen in mass shootings, and indeed by all gunmen in all guns-involved violent events, and my best wishes for full and speedy recovery for all those injured by them.

1/8/19: Wages vs GDP growth: when economic growth stops benefiting workers

I have posted earlier some data on the gap between real GDP and real disposable income per capita in the U.S. (see here: https://trueeconomics.blogspot.com/2019/08/1819-debasement-of-real-disposable.html) that evidences the longer-term nature of the ongoing debasement of real incomes in the repeated cycles of financialisation of the U.S. economy. Here is another view of the same subject matter:

Per chart above, consistent with my arguments in the case of disposable income, U.S. labor incomes have been sustaining ongoing deterioration relative to overall economic growth since at least the 1970s. In fact, the current expansionary cycle (yellow line) shows relatively benign speed of deterioration in real wages or labor income share of total real GDP, although the length of the cycle means that the total end-of-recession-to-present decline of ca 54 percent is deeper than that in the expansion of the 2000s (decline of 50 percent).

A different view of the same data is presented below, plotting historical gap between wages and GDP over longer horizon and showing expansion-periods' averages, contrasted against Trump Administration tenure average:

Once again, all evidence points to the decreasing, not increasing rate of wages fall relative to GDP over the years.

Of course, the effects are cumulative, which means that our perceptions of labor share collapse and the amplifying pressure on labor income earners in the economy is warranted.

1/9/19: 'Losin Spectacularly': Trump Trade Wars and net exports

U.S. net exports of goods and services are in a tailspin and Trump Trade Wars have been anything but 'winning' for American exporters. You can read about the effects of Trade Wars on corporate revenues and earnings here: https://trueeconomics.blogspot.com/2019/07/31719-fed-rate-cut-wont-move-needle-on.html. And you can see the trends in net exports here:

This clearly shows that 'Winning Bigly' is really, materially, about 'Losin Spectacularly'. Tremendous stuff!

1/8/19: Debasement of Real Disposable Income share of GDP: Historical Trends

I have been crunching some data recently on the historical gap between real GDP growth and wages/income of households. Some of this work will be forthcoming in an article due later this month, so keep an eye out for it. Some of it is post-dating the article submission. Here is an example of the latter. The following chart plots index of real GDP from 1Q 1959 through 1Q 2019 against the index of real disposable income per capita. Both indices are set at 100 at 1959 average.

There are 5 distinct periods over which growth in real GDP moved further and further away from growth in real disposable income. All are associated with monetary accommodation periods post-recessions, and all are associated with increasing post-recession financialization of the U.S. economy and financial or real estate asset booms.

Interestingly, the current rate of acceleration in the gap between economic growth and disposable income growth is... underwhelming. It pales in comparison to what was witnessed in the 1980s, 1990s and 2000s. To see this, consider the chart showing this gap by itself:

Despite our commonly-expressed public, media and analysts' perceptions of the declining share of economic growth going to disposable personal incomes being a new (current) phenomena, the reality of historical data paints a different picture. Most of declines in the share of economic activity accruing to wages, bonuses and investment and retirement incomes have taken place in previous decades, with the ratio of real GDP to real disposable income being relatively stable from the start of 2013 on. Prior to that rate of the decline in the relative share of disposable income has been less sharp from 1999 through 2012, when compared against all other decades.

The debasement of real incomes has been a steady and historical continuous process over the last 60 years.

31/7/19: Fed rate cut won't move the needle on 'Losing Globally' Trade Wars impacts

Dear investors, welcome to the Trump Trade Wars, where 'winning bigly' is really about 'losing globally':

As the chart above, via FactSet, indicates, companies in the S&P500 with global trading exposures are carrying the hefty cost of the Trump wars. In 2Q 2019, expected earnings for those S&P500 firms with more than 50% revenues exposure to global (ex-US markets) are expected to fall a massive 13.6 percent. Revenue declines for these companies are forecast at 2.4%.

This is hardly surprising. U.S. companies trading abroad are facing the following headwinds:

1. Trump tariffs on inputs into production are resulting in slower deflation in imports costs by the U.S. producers than for other economies (as indicated by this evidence: https://trueeconomics.blogspot.com/2019/07/22719-what-import-price-indices-do-not.html).
2. At the same time, countries' retaliatory measures against the U.S. exporters are hurting U.S. exports (U.S. exports are down 2.7 percent in June).
3. U.S. dollar is up against major currencies, further reducing exporters' room for price adjustments.

Three sectors are driving S&P500 earnings and revenues divergence for globally-trading companies:

• Industrials,
• Information Technology,
• Materials, and 
• Energy.

What is harder to price in, yet is probably material to these trends, is the adverse reputational / demand effects of the Trump Administration policies on the ability of American companies to market their goods and services abroad. The Fed rate cut today is a bit of plaster on the gaping wound inflicted onto U.S. internationally exporting companies by the Trump Trade Wars. If the likes of ECB, BoJ and PBOC counter this move with their own easing of monetary conditions, the trend toward continued concentration of the U.S. corporate earnings and revenues in the U.S. domestic markets will persist. 

31/7/19: Canary in the Treasuries mine

Judging by U.S. Treasuries, things are getting pretty ugly in the economy:

The gap between long-dated bond yields and short-dated paper yields has accurately predicted/led the last three recessions (the latter are marked by red averages in the chart).

27/7/19: A Cautionary Tale of Irish-UK Trade Numbers

Per recent discussion on Twitter, I decided to post some summary stats on changes in Irish total trade with the UK in recent years.

Here is the summary of period-averages for 2003-2017 data (note: pre-2003 data does not provide the same quality of coverage for Services trade and is harder to compare to more modern data vintage).

So, overall, across three periods (pre-Great Recession, 2003-2008), during the Great Recession (2009-2013) and in the current recovery period (2014-2017, with a caveat that annual data is only available through 2017 for all series), we have:

• UK share of total exports and imports by Ireland in merchandise trade has fallen from an average annual share of 23.31 percent in pre-Great Recession period, to 18.06 percent in the post-crisis recovery period.
• However, this decline in merchandise trade importance of the UK has been less than matched by a shallower drop in Services trade: UK share of total services exports and imports by Ireland has fallen from 64.86 percent in pre-crisis period to 62.97 percent in the recovery period.
• Overall, taking in both exports and imports across both goods and services trade flows, UK share of Irish external trade has risen from 41.43 percent in the pre-crisis period to 45.4 percent in the current period.
• Statistically, neither period is distinct from the overall historical average (based on 95% confidence intervals around the historical mean), which really means that all trends (in decline in the UK share in Goods & Services and in increase across all trade) are not statistically different from being... err... flat. 
• Taken over shorter time periods, there has been a statistically significant decline in UK share of Merchandise trade in 2014-2017 relative to 2003-2005, but not in Services trade, and the increase in the UK share of Irish overall trade was also statistically significant over these period ranges. 
• Overall, therefore, Total trade and Services trade trends are relatively weak, subject to volatility, while Merchandise trend is somewhat (marginally) more pronounced.

Here are annual stats plotted:

Using (for accuracy and consistency) CSO data on Irish trade (Services and Merchandise) by the size of enterprise (available only for 2017), the UK share of Irish trade is disproportionately more significant for SMEs:

In 2017, SMEs (predominantly Irish indigenous exporters and importers who are the largest contributors to employment in Ireland, and thus supporters of the total tax take - inclusive of payroll taxes, income taxes, corporate taxes, business rates etc) exposure to trade with the UK was 51.2 percent of total Irish exports and imports. For large enterprises, the corresponding importance of the UK as Ireland's trading partner was 13.62 percent. 

In reality, of course, Irish trade flows with the UK are changing. They are changing in composition and volumes, and they are reflecting general trends in the Irish economy's evolution and the strengthening of Irish trade links to other countries. These changes are good, when not driven by politics, nationalism, Brexit or false sense of 'political security' in coy Dublin analysts' brigades. Alas, with more than half of our SMEs trade flows being still linked to the UK, it is simply implausible to argue that somehow Ireland has been insulated from the UK trade shocks that may arise from Brexit. Apple's IP, Facebook's ad revenues, and Google's clients lists royalties, alongside aircraft leasing revenues and assets might be insulated just fine. Real jobs and real incomes associated with the SMEs trading across the UK/NI-Ireland border are not.

Whilst a few billion of declines in the FDI activity won't change our employment rosters much, 1/10th of that drop in the SMEs' exports or imports will cost some serious jobs pains, unless substituted by other sources for trade. And anyone who has ever been involved in exporting and/or importing knows: substitution is a hard game in the world of non-commodities trade.

26/7/19: Stop Equating Low Unemployment Rate to High Employment Rate

There is always a lot of excitement around the unemployment stats these days. Why, with near-historical lows, and the talk about 'full employment', there is much to be celebrated and traded on in the non-farm payrolls stats and Labor Department press releases. But the problem with all the hoopla around these numbers is that it too often mixes together things that should not be mixed together. Like, say, mangos and frogs, or apples and moths.

Take a look at the following data:

Yes, unemployment is low. Civilian unemployment rate is currently at seasonally-adjusted 3.7% (June 2019), and Unemployment rate for: 20 years and over, at 3.3%, seasonally adjusted. On 3mo average basis, last time we have seen comparable levels of Civilian unemployment was in 1969, and 20+ Unemployment rate was in 2000. Kinda cool, but also revealing: historical lows in unemployment require  Civilian unemployment metric to confirm. Which means that factoring in Government employment, things are bit less impressive today. But let us not split hairs.

Here is the problem, however: record lows in unemployment are not the same as record levels in employment. Low unemployment, in fact, does not mean high employment.

To see this, look at the solid red line, plotting Employment rate for 20 years and older population. The measure currently sits at 71.2 percent and the last three months average is at 71.1 percent.  Neither is historically impressive. In fact, both are below all months (ex-recessions) for 1990-2008. Actually, not shown in the graph, you would have to go back to 1987 to see the same levels of employment rate as today. Oops...

But why is unemployment being low does not equate to employment being high? Well, because of a range of factors, the dominant one being labor force participation. It turns out (as the chart above also shows), we are near historical (for the modern economy's period) lows in terms of people willing to work or search for jobs. Or put differently, we are at historical highs in terms of people being disillusioned with the prospect of searching for a job. Darn! The 'best unemployment stats, ever' and the worst 'willingness to look for a job, ever'.

U.S. Labor Force Participation rate is at 62.9 percent (62.8 percent for the last three months average). And it has been steadily falling from the peak in 1Q 2000 (at 67.3 percent).

When we estimate the relationship between the Employment rate and the two potential factors: the Unemployment rate and the Participation rate, historically (since 1970s) and within the modern economy period (since 1990) as well as in more current times (since 2000), and since the end of the Great Recession (since 2010) several things stand out:

1. Unemployment rate is weakly negatively correlated with Employment rate, or put differently, decreases in unemployment rate are associated with small increases in employment; across all periods;
2. Labor force participation rate is strongly positively correlated with Employment rate. In other words, small increases in labor force participation rate are associated with larger increases in employment; across all periods;
3. Labor force participation rate, in magnitude of its effect on Employment rate, is roughly 14-15 times larger, than the effect of Unemployment rate on Employment rate; across all periods; and
4. The relatively more important impact of Labor force participation rate on Employment, compared to the impact of Unemployment rate on Employment has actually increased (albeit not statistically significantly) in the last 9 years.

These points combined mean that one should really start paying more attention to actual jobs additions and employment rate, as well as participation rate, than to the unemployment rate; and this suggestion is more salient for today's economy than it ever was in any other period on record.

But above all, please, stop arguing that low unemployment rate means high employment. Bats are not cactuses, mangos are not moths and CNN & Fox kommentariate are not really analysts.

22/7/19: What Import Price Indices Do Not Say About Trump's Trade War

A few days ago, I saw on Twitter some economics commentators, not quite analysts, presenting the following 'evidence' that Trump tariffs are being paid for by China: the U.S Import Price index has declined in recent months, to below 100. In the view of some commentators, this signifies the fact that the U.S. is now paying less for imports from the ret of the world because Chinese producers are taking a hit on tariffs imposed onto their goods by the Trump Administration and do not pass through these tariffs onto the U.S. consumers.

The argument is a total hogwash. For a number of reasons.

Firstly, as the U.S. Bureau of Labor Statistics notes (see https://www.bls.gov/mxp/ippfaq.htm), import price indices do not incorporate tariffs and duties charged at the border. They actually explicitly exclude these. The indices do not include any taxes, by design.

The indices are quality-balanced, so they are rebalanced to reflect relative quality of goods and commodities supplied. If the U.S. importer gets a better quality (new model, improved model etc) of a good from the exporting country for the same price as the older model, this registers as a decrease in the import price index.

Worse, as BLS notes: "Import/Export Price Indexes cannot be used to measure differences in price levels among different products and services or among different localities of origin. A higher index number for locality A (or product X) does not necessarily mean that prices are higher than for locality B (or product Y) with a lower index number. It only means that prices have risen faster for locality A (or product X) since the reference period."

Note the words: "reference period". Which leads to yet another major problem with the argument that BLS index shows that 'China is absorbing tariffs costs' from the Trump Trade War: it is based on a spot (one point) observation. So let's take a look at the time series. Remember, Trump Trade War started at the very end of 1Q 2018 (March 2018). So here are 'reference period' consistent comparatives for import price indices for a range of regions and countries:

What the chart above tells us is that over the period of the trade war so far, U.S. imports price index indicates some deflation of imports costs, somewhere in the region of 1.13 percentage points. But over the same period of time, China index experienced a decline of 1.36 percentage points. If China is 'paying for U.S. tariffs', the U.S. is paying more than China does, which is of course, entirely possible, but immaterial to the data at hand.

Worse, if declining import price indices are an indicator of a country 'paying for tariffs', well, Canada seems to be paying for most of the Trump Trade War globally, while Japan is paying a little-tiny-bit. Tremendous! Art of the Deal! And all the rest applies.

Of course, what the declines in the vast majority of import price indices suggests is the opposite of the 'China is paying for the U.S. tariffs' story. Instead, they tell us about the inherent weakening in the global demand, the deflationary pressures in key commodities markets (yes, oil, but also soy beans, etc), the deflationary pressures from new technologies and, finally, the changes in currencies valuations.

No, folks, there are no winners in the trade wars, but there are smaller losers and bigger losers. When you impose tariffs on final and intermediate goods, consumers and producers loose. When you impose trade restrictions on imports of basic commodities, without altering global markets supply and demand, you are simply substituting suppliers (see https://trueeconomics.blogspot.com/2019/05/14519-agent-trumpovich-fails-to-deliver.html).  The latter change might involve some costs, but these costs are much lower than restricting trade in higher value added goods.