Economics 14/05/09: Economy bottoming out?

Per Davy note today: "pace of decline of activity has slowed: January-February was the worst point of the recession. All available indicators suggest that the Irish recession is past the most acute point. It is becoming clear that January-February was the most intense phase."

This statement is conditional on two assumptions - not explicitly identified -

1. Irish fiscal position remains sustainable underpinned by relatively easy borrowing, despite the demand for new and massive volume of funding under NAMA; and
2. Global economic stabilization is going to spill-over into Irish growth.
   

"Consumer confidence bottomed last summer," says Davy. I would not be impressed by this statement too much. Consumer confidence can be volatile. Underlying fundamentals are still weak and even assuming consumer confidence is on an upward trend (I am yet to see this happening), consumer spending might not resume, as jobs losses fear and taxation increases expectations are still there. It will take a NAMA-induced budgetary hit on households after-tax income to send confidence tumbling down to historic lows, but this is on the books for H2 2009 anyway.

"Core" retail sales are rising says Davy note. Hmmm, rising? Latest data for retail sales ex motor (core) we have shows that in February 2009 core sales rose 1.3% after contracting 1.1% in January and rising 1.1% in December after falling 2.3% in November... A saw-like pattern at the very best. If Davy want to stake their claim on February numbers, why not call for the 'bottoming out' in December?

"Survey indicators for services, manufacturing and construction have improved". Now, don't tell that to PMI survey administrators at Markit and NCB...

"Unemployment claimants are increasing more slowly". I am stunned to see Davy economics team actually looking at month-to-month dynamics for something so rich in lags and various degrees of severity by unemployment type as unemployment figures. Presuming they are referring to the Live Register data, what we do know is the following:

• the pace of overall increases in Live Register data have slowed down from a destructively high level in January-February 2009;
• this does not tell us anything about a trend, but can either signal a temporary bounce or indeed a reversal in trend;
• I prefer the former explanation to the latter because I can clearly see a new wave of layoffs rising - construction sector jobs destruction is by now complete. But financial services and business services jobs and retail sector workers are probably going to see rising rate of layoffs. If I were working for Davy, I would explained to the 'masters ordering the music' for this note that laying off a financial services worker is 6-8 times more expensive for the economy than laying off a low-skilled construction worker. I would also explain that the probability of a laid off construction worker leaving this country is probably 10-15 times greater than the probability of a laid off Financial or Business Services worker going elsewhere. I would further add that our banks have issued much larger and more stretched mortgages to the latter, not the former and thus their impairments on mortgages side is, guess what, much more adversely impacted by the next wave of layoffs than by the former one.
  

"Meanwhile, the fact that Irish exports outperformed during the collapse in global trade late last year and in early 2009 received little attention". I agree with this statement. The problem is can we hold on to this performance and also, how much of the good news is driven by the resilient and competent MNCs and how much is driven by the lower value-added domestic exporters? One only needs to look at the combination of sectors with rising imports (inputs) and exports (outputs) to see where the answer to this question lies.

Having told us the half-baked story of the 'green shoots' Davy forecast the economy will bottom in Q1-Q2 2010. Now, this is puzzling. If we are seeing reductions in the rates of decline in some series today, while other are, according to Davy recording an outright improvement, what will be happening to the economy between Q3 2009 and Q2 2010? Bouncing at the bottom? No - Davy say that it will bottom out in Q1-Q2 2010. So things will be deteriorating then through Q4 2009. But hold on a second. The same Davy note also says - in its title - that "Ireland is probably past the worst of the recession"...

Anyone to spot a blatant contradiction here?

Well, Davy didn't:

"Consumer spending may trough in six to nine months due to the savings ratio peak and slower income declines" - so we are not past the worst yet in terms of consumer spending?

"The risks to our forecasts are evenly balanced: the economy may hit the floor sooner if we are too pessimistic about the fragile recovery in the global economy, but a double-dip recession is possible if the reaction of households to the recent Budget is negative". So again, under both scenarios, we are not past the worst point yet.

And as a side bar - how far detached from the reality do you have to be to presume that the household reaction to the recent Budget can be anything but negative?

I am simply amazed at the lack of consistency or basic logic in the Davy's arguments! But enough on this - there is an article of mine coming out on Sunday on the issue of 'green shoots'... so until then the topic shall rest.

But here is a good analysis of 'green shoots' theory for the global economy that folks in Davy might want to read.

A fresh candidate for City Council

Those of you who know me are aware that I extremely rarely support political candidates. Not because I do not share their views - although most of the time, I do not. And not because I do not find some of them to be honest and well-meaning enough to deserve a public office - although often that is the case. I simply never find their passion for independent thinking and existence to be sufficient enough to warrant my honest support. I treasure independence of my own thinking and my own passion for living enough to do something halfheartedly.

There were and are exceptions to the rule:

• David Norris commands my admiration. Not because I agree with him on most issues, but because he is a person I truly respect for being original and true to himself.
• Michael McDowell has won my support as a politician who tried to do what he promised to the best of his ability - and I am happy to hear that he is going to run again for the Dail in the next contest.

That was pretty much it, until today, when by a sheer accident I have learned that Mannix Flynn is running as a New Independent for Dublin City Council. Again, as with Senator Norris, I find myself in disagreement with some things Mannix advocates. But I think I know this man to be a truly independent thinker and a person with great real passion for what he feels to be right.

Check out his website www.votemannixflynn.ie. Don't come telling me that his ideas are wrong. They might be. It's your own call. But in our depreciated age when virtually every politico (add the same for academics, journalists and so on) is a carbon copy of the other, Mannix offers something different from the tired parade of the councilors who, come elections, fake passion better than the Eurovision contestants and then spend years in the City Council dividing the spoils.

Economics 12/05/2009: housekeeping & AIB

For those impatient to see analysis of the AIB Interim Results H1 2009 - scroll down to the last entry.


We are launching Ireland Russia Business Association tomorrow - the official D-day. Invitation is here. The website is next and we are currently getting this built, alongside a separate blog for IRBA. Of course, from next week on I will be in Moscow (with our trade mission) and later in St Petersburg in June for St Petersburg Economic Forum. I will be blogging from there - occasionally - so stay tuned...

And upon my return back to Dublin, I will be hosting a round table discussion on Sustainable Finance: Academic-Practitioner Interface at the Infinity Conference in TCD, June 8. The round table will be dealing with issues of facilitating a research interface between industry and academia in the area of sustainable (IIIrd generation sustainability concept) finance.


Here is an excellent article on how Schengen Visa Regime is turning Eastern European border into a new 'Velvet' Curtain. Of course, one can also add that in Ireland's case, lack of Schengen harmonization is resulting a ridiculous situation whereby people from non-EU states working in this country cannot travel on business to the rest of EU or the UK without having to spend days applying and queuing for visas and paying for these. Hours and days of work are being lost, businesses are paying for this and workers are wasting health and time doing needless pages upon pages of applications and documents collecting...


And here is another interesting thingy - for the upcoming European elections, you can actually see the records and votes, and attendance, and days worked, and more... for all our MEPs - here: http://www.votewatch.eu/.

I am not going to do detailed analysis, but Proinsias De Rossa ranks second in the entire Parliament in terms of Parliamentary Questions tabled and 43rd in terms of speeches delivered. I might not agree with most of what the man has to say, but at least he deserves a credit for asking questions.

Eoin Ryan ranked 35th in terms of Motions for Resolutions. Ryan was ranked 456th in terms of Reports Amended by him, above De Rossa - ranked 492nd. In terms of reports drafted, De Rossa ranked 101st, Ryan 170th. In terms of opinions issued, De Rossa ranked 208th, but Ryan ranked 25th. Attendance to plenary meetings: De Rossa scored 499th (97.85% loyalty to political group in voting, 73.21% loyalty to the member state, 85.23% attendance record); Ryan's stats were slightly poorer (82.26% - making him more independent than De Rossa, 87.95% - making him more focused on Ireland's votes, with attendance of 83.22%) giving him a ranking of 553. Mary Lou MacDonald failed to register on the radar at all, although her specific record is there as well: here.


AIB Interim Management Statement (available in full: here) my analysis in blue, IMS original text in black.

Operating Profit: Profit before bad debt provisions has been good in the year to date and up on the corresponding period in 2008. However, this outcome benefited from base period effects, most notably higher costs in the early part of 2008.

Read: the cost base has been trimmed and there isn’t much else we can do from here on. Of course, AIB won’t admit it, but it basically has the same number of employees on its books as at the peak of the growth cycle. In exchange for taxpayers’ money, the three banks have not laid any staff, so it is the taxpayer who is paying wages for over-bloated staff ranks in the Big 3 Irish banks.

The outcome reflects the very strong performance of Capital Markets and Global Treasury in particular, driven by interest rate management activities. Performance in our other operating divisions is in line with our expectations ...down relative to the same period last year.

It does appear that AIB is lending out to other banks and is borrowing from ECB – this is the rates wedge that can be exploited by the Treasury via ‘interest rate management activities’.

Costs are being very actively managed and are down by a higher percentage rate than income at this point. Downward pressure on income is expected as the year progresses due to a continuation of poor economic conditions and dislocated funding markets.

One would presume this is due to management efforts to extract value out of operations?.. Ah, nope, it is more likely due to the positive impact of the following factors:

• Lower ECB rates spilling over into lower financing costs;
• Declining spreads due to taxpayers’ guarantee and capital injection;
• Lower financing rates on property and other operating credit lines;
• Lower cost of physical capital and capacity;
• Lower bonuses.
  

All of this has very little to do with banking.

Loan and deposit volumes: ...loan balances remain broadly in line with the end of last year in each division [so no pay down of loans?]. In our Republic of Ireland business there has been a recent pick up in home mortgage applications but no material increase as yet in drawdowns. This increased activity reflects an attractive customer offering and very weak competitor presence in the market. [So why no drawdowns then, if AIB’s offer is so strong? may be because AIB is not originating any mortgages, despite giving pre-approvals? See their statement on the direction of loan to deposit ratio below...]

Customer deposits have stabilised in recent weeks following some outflows earlier in the year [How much in outflow?]. In the current recessionary conditions balances in current (money transmission) accounts have reduced. Customer resources, which include deposit and current accounts, are down by around 10% in the first four months of this year. This mainly reflects seasonal factors and outflows from our foreign institutional deposit base earlier in the year and a reduction from what was a very strong position at the end of 2008. Customer resources were up c. 9% year on year at the end of the first quarter.

I wonder if any of this is Irish wealth fleeing the Land of Brian (see here). I like, in particular the reference to a 'very strong position at the end of 2008'. Per 9% increase in y-o-y terms in customer resources in Q4 2008, how much of this is due to redundancy payments lodgements? How much is due to precautionary savings? and How much of it is due to a flight from other - weaker - Irish institutions, e.g Nation-vile and Anglo?

Margins: In highly competitive markets and a low interest rate environment, customer deposit margins continue to contract. The elevated price of wholesale market funding is also having an adverse effect on the net interest margin. Though negative effects are being partly offset by better margins on our lending, overall the net interest margin is expected to reduce this year.

Margins contraction is not surprising, given they are forced to pay higher rates to customers to retain deposits. What is surprising, however, is that lending margins are up. This could mean three things:

1. Elevated charges on new loans - AIB doing their 'patriotic duty to lend' bit for the economy;
   
2. Increased roll-over of debt at higher rates; and
3. They are lending out cash to other banks - see the Treasury operations results above - and loving it.

Asset Quality: At our 2008 results announcement on 2nd March we outlined a base case and a stress scenario. The bad debt charge in the first quarter of 2009 of close to n800m was a little ahead of the upper end of that base case. Conditions across our markets have worsened and there will be further pressure on the bad debt provision charge for full year 2009.

Read this as: S***t is hitting the fan and we are in a 'stress' scenario now. For a bank whose chief executive just 9 months ago was raising dividends, this is really an admission that takes courage.

...our key macro assumptions for Ireland are now more negative than in the stress scenario presented at our results announcement. The pace of change is increasing loan impairment and bad debt charges. This continuing factor means that the previous stress scenario charge is likely to be exceeded and we now expect our bad debt charge for 2009 to be around n4.3 bn, c. 325 basis points of average loans.

This is still a denial case scenario. AIB's book is heavily geared toward property-related loans and its business lending is also heavily tied into Irish economy. With companies going bust at a rate rising some 400% since 2007 and accelerating, with house prices hurling toward -50% contraction on 2007 levels, land values heading for -70% and commercial propety values falling toward -50% mark, and with unemployment threatening to reach more than 3 times 2007 level, does anyone believe an impairment charge of 3.25%? In my view, they will face impairments of at least 6% across the entire book, or 3.5% on post-NAMA book.

Group criticised loans (watch, vulnerable and impaired) have increased in the first quarter to c. n24.3 bn, an increase of close to n9 bn [or a whooping 37%]. Republic of Ireland division represents over 70% of the increase and c. 75% of the group bad debt charge. Increases continue to be heavily influenced by downgrades in the property, building and construction sector [so, looking ahead, expect construction sector to flatten out in late 2009, but other sectors pick up the slack in exerting downward force on loans performance: households, personal & motor loans, business investment loans etc].

Informed by the deteriorating environment and evidenced by the increase in criticised loans, we are aggressively recognising impairment as it arises.

It will be important to see how aggressively they do this. Remember - the more they write down today, the heavier will be the total discount that they will face post-NAMA. How? Suppose you have a loan valued on your books at €100 today. Scenario 1: write down the loan value on the books by, say 10% - remaining face value is €90. Here comes NAMAsaurus - with an offer at 25% discount - you get €67.5 on the loan that originally stood at €100. Scenario 2: pretend nothing is wrong with the loan. NAMAsaurus takes a bite at the same discount (they'll have to, simply because they are short talent or staff numbers or both to examine every loan) - you have €75 on your hands. So tell me if you can spot a rational reason for AIB to take 'aggressively' to 'recognizing impairment'?

Increases in the levels of criticised loans in other sectors are now more evident in the Republic of Ireland. Mortgage arrears stand at c. 2.0% of total mortgages at the end of March up from c. 1.5% in December 2008 and impaired loans have increased to n234m [that is a 33% increase in mortgage arrears and this is just the beginning as it takes time for these to build up due to redundancy payments cushion and savings cushion - both of which have to be exhausted before mortgage payments stop. Now, average tenure on the job in Ireland is ca 5 years. This means average statutory redundancy is 10 weeks pay. Add to this consolation 'bonuses' some lucky souls are getting - say we are at 12 weeks pay. Take tax out and spread over existent balances - you are getting closer to that 9% increase in y-o-y terms in Q4 2008 customer resources mentioned above. So we have: potentially, redundancy payments have been inflowing into customers accounts. These are sufficient to cover mortgages with a cushion of, say, x1.5 times the pay length covered - i.e. 18 weeks or 4 months, roughly. That spike in unemployment in January-February 2009 will be felt in mortgage default terms only around May-June! So expect the numbers to nose dive rapidly in months to come. Even more revealing in the light of this is the subsequent fall of 10% in January-April 2009 in customer deposits - this, given inflow of redundancy payments can mean that some (those who can?) are shifting money out of AIB... and they might be doing this by B&B-ing cash abroad... away from Genghis Brian Khan...]

Capital: Our capital remains well in excess of regulatory requirements. Our core tier one capital ratio was c. 5.5% at the end of March and will be strengthened in the event that the n3.5 bn Government recapitalisation proposal is approved at the Extraordinary General Meeting on 13th May. We have previously announced our aim to further increase our core tier one capital by n1.5 bn and will advise progress on this initiative as it takes place. [With recapitalization in place AIB should have just around 10% T1 - 2-4 percentage points shy of the international industry standard. And this is before fresh writedowns... In absence of that €1.5bn capital injection, I fear AIB will not be able to retain 8% core ratio post Y2009 writedowns - let alone post-NAMA. Although this is my suspicion at this time as we await for more detailed statement at EGM].

Funding: ...Market conditions improved during April and we successfully increased our existing Government guaranteed issue maturing in September 2010 by n1 bn to n3 bn. There was good demand for the issue and overseas investors subscribed for 78% of the additional amount. We have also recently seen very good demand for private placements. [I wonder how much of this latest issue is contingent on the markets expectation that the Government guarantees will have to be extended beyond 2010. In fact, AIB, by piling on the debt that it will have to roll over comes September 2010 - for it won't have funds to simply repay it -is, willingly or not, you judge, creating the emergency conditions for the Government to extend the guarantee scheme... Oh, and by the way - do they mean the ECB discount window when they are talking about 'private placements'?]

Over time, we continue to target a reducing loan to deposit ratio although the already referred to reduction in customer resources since the end of 2008 has subsequently increased that ratio.

So, as deposits are down, loans/deposit ratio can fall only if... loans fall even more than deposits. How can this be achieved with a AIB offering "attractive customer offering and very weak competitor presence in the market" for mortgages? Ah, you say - by aggressively attracting new deposits. Indeed, that would be the case, except then, of course, you are offering higher rates than your competitors, e.g the Anglo, which in turn shrinks your margins... which you have just promised to protect (above)...

And the conclusion to all of this is - AIB's statement to the economy: "We love you, man, but we've got numero uno problem of getting these pesky loans to deposits ratios down... so bugger off, you would-be-borrower!"

The unravelling of the core?

The latest report (here) from Switzerland is claiming that the Swiss are considering imposition of limits on the admission of the migrants from the EU15 + Malta & Cyprus. First, background, then conclusion:

Per EUObserver report, "under bilateral accords signed with the EU, the Swiss government is entitled to limit the number of workers entering the country" from the original EU15 states, plus Cyprus and Malta, whenever Swiss unemployment rises above a certain threshold.The threshold is not an absolute level of unemployment, but a rate of increase in jobless of more than 10% in a year "compared to the average rate in the previous three years". The latest data shows that Swiss unemployment reached a new three-year high of 3.5% in April - a 35.5% increase y-o-y. EU27 is now forecast to reach 9.7% unemployment in 2009 and 10.9% in 2010.

Currently there are no restrictions on the number of EU15+2 workers that can take jobs in Switzerland. "If the clause is activated", says EUObserver, "immigration from the EU15, plus Cyprus and Malta, will be limited to the average migration rate of the previous year plus five per cent for a maximum of two years.

So what is my analysis of this development? Access to the Swiss market - within a broader EEA community - is a legitimising point for EU in so far as it shows that European Union has attraction as a trading, capital and migration partner for countries which, unlike Eastern Europe, cannot be either bought or bullied into submission. Norway, Iceland, Lichtenstein (EEA members) and Switzerland are, at this point in time, the only countries that can claim such a status, although in the past the EU tried to 'compel' all of these states in relation to various aspects of their internal regulations.

Should Switzerland put in place even symbolic restrictions on the EU citizens' ability to gain work there, one of the three legs of this pillar will be gone. The questions to be asked in this context are:

1. Should Swiss authorities limit inward migration from the EU15+2, will this trigger a push within the EU15 to further restrict access to their own labour markets for the EU12 Accession states?
2. Should the Swiss elect to enact the restrictions clause, what signal on the integrity of EEA+ does this send out in the context of the future EU enlargement? Are we risking losing Switzerland as an investment and jobs market partner in order to gain Turkey? Albania? and so on?
3. Will Swiss-imposed restrictions signal an alternative 'Third' way for countries currently finding themselves in a difficulty within the harmonized EU monetary and FX policies - e.g. Austria - for distancing themselves from the full EU membership into an Association-style treaty Swiss-style?

In an opposite, but widely anticipated move, Iceland is now swinging in favour of full EU membership - a dubious win for Brussels, considering the state of general economic collapse in that country.

A disclaimer: applicable to anything I write on the EU - I do not advocate any of the above measures. This post is simply about presenting an argument as to what might be possible.

Economics 10/05/2009: Next Budget and other business

Given the latest Exchequer results - i.e lack of any improvement in performance - and a combination of (anecdotally evident) acceleration of lay-offs in the financial, legal and accountancy services, recently on NewsTalk 106FM I predicted that we are going to see a July mini-Budget.

My logic was based on the following confluences of 'stars':

1. Local elections will be over;
2. H1 Exchequer returns will be in;
3. Tax and Spend an boards will have some papers on the table by then, so a host of new taxes will be ready to roll out, while a host of new measures to evade cutting public spending (i.e various buy-outs and hand-outs and 'fairness' proposals) will also be at hand.

Some internal sources (hat tip to B) are now indicating that this indeed is being considered - or 'lightly penciled in' as I was told. In other words, we are in the stage of contingency planning for another raid by Genghis Brian Khan. The problem is that all the indication I am getting is that our an board chainsaw/snip is coming back with a whimper: to the question "Can we save some dosh?" the snappers will answer Bob-the-Builder-like "Yes we can", but to the question "How much?" they will have a goldfish-like response "O*o*p*o*gh*ph" and a bubble of air emanating out of the fat lips. The reason for this is that An Board Snip-identified 'savings' are now rumored to amount to nothing more than cutting temp contracts, which have to be honoured until maturity. In other words, not much of saving is possible in 2009...

Of course, to save big one needs: political will to break the unions and a reform plan to break the hysteresis in spending. But who has that? Brian? The other Brian? of Mary? In the mean time, there will be plenty of small scratches - €1-5mln here and there, but with a hole of some €30bn to be plugged this year alone, you have to do something BIG.

Now comes another new rumor - that a birdie chirped at my windowsill: the Revenue are now starting to worry that smelling the (rotten) rat from the Upper Merrion Street, our wealthy (what's left of them) are moving assets off-shore faster than Brian can shout 'Tax!" There is a rumor now, allegedly at the Dublin Castle gates, that CGT might come in at or near zero in the nominal terms in H2 2009 and this might even imply - considering bookings on CGT losses for 2008 - a negative CGT return! Now, that would be a nice lesson for the Government and for the likes of Fintain O'Toole and Vincent Browne - tax liquid wealth and see it evaporate.

Here's how it might turn out to be: charts below show my projections for CGT and CAT heads under 3 scenarios.

Scenario 1 assumes that the rest of 2009 will see replay of the same changes as happened between 2007 and 2008. This is a clearly optimistic scenario for H1 2009 projections (remember, H1 2008 fall-off relative to H1 2007 was much smaller than what we are already seeing in Jan-April 2009 relative to Jan-April 2008), but it is probably pessimistic for the last 2 months of 2009. So it might be a wash then across the year.

Scenario 2 assumes that the 2007/2008 dynamics apply to the trend that was established in 2009 to date. This is more pessimistic for CAT, and the intermediate scenario on CGT.

Scenario 3 assumes the same as Scenario 1 except I also consider the possibility of zero monthly returns on CGT in October-December 2009. How can I justify this assumption? Well, in 2008 for the same period, the Revenue collected €626.4mln in CGT. Suppose that this year, by October 2008 some €3.13/2=€1.55bn of Irish capital were to be 'B&B'ed abroad, with owners declaring a loss on these, writing off some €311mln. This will drive the CGT revenue to zero, even if the last year's performance were to be repeated.

Now the two charts for the picture is worth a 1,000 words...
Of course, the problem could have been avoided should we chose to tax illiquid/immobile asset base - i.e land... in the long run, or should we have cut the idiocy of raising taxes in a recession... in the short run.

An interesting chart: destruction of wealth

Here is an interesting set of charts I came across in doing some work recently. All are for the US and all showing some very disturbing long run trends:

First chart: US CPITwo things are worth noticing here:

1. The absolutely scary rate of inflation since the end of WWII through today, and
2. The absolutely scary length of deflationary periods.

It is worth focusing in a bit more depth on the second point (the first one being obvious to all).

In general, there were 3 periods of persistent deflation since 1774. These are plotted in the chart below.
Guess what - all three lasted more than 14 years before bottoming out and two managed to last 29 and 32 years. Scary stuff, if you believe deflation is bad.
Now, consider the real cost of unskilled labour over time. Chart below plots the time series since 1774, showing that starting with the late stages of the Great Depression on through roughly early 1970s the real (CPI-deflated) cost of unskilled labour was rising at an unprecedented rate. This cost peaked in the early 1980s and fell into the early 1990s. Ironically, as President Clinton battled the harbinger of the 'Giant Sucking Sound from the South' - Ross Perot - in US Presidential elections, the unskilled labourers of America were about to get a boost in their wages. The cost of unskilled labour has risen since 1994 through 2003 - just as the US economy was evolving skills-intensive sectors (IT and finance) and expanding trade with Mexico. Irony has it - the period of active low-skilled jobs creation of 2003-2007 (construction boom) saw real wages of the same fall!

Looking at the raw (nominal) cost of unskilled labour, there is a clear pattern of correlation between the wages of the lowest earners and the CPI. Chart below illustrates. Again, really dramatic stuff is the rate of rise in the nominal cost of labour that takes place from the late 1960s through today.
Scatter plot below shows the same in more detail. There are 2 clear periods in the US history in the relationship between inflation and unskilled labourers real wages. The first period - 1774 through roughly 1969/1970 is the period of a positive relationship, with real wages rising at a faster rate than CPI. Of course, this is the age of industrial might of the US. Post 1970, the relationship is that of a gently declining real unskilled wages relative to CPI.
What about other measures of purchasing power? Taking the value of the standardized consumer bundle of goods, chart below plots the dollar cost of purchasing such a basket alongside the CPI. There is a close relationship between the two series, but in general, the value of consumer bundle underlies the CPI. Convergence of the two series is achieved in 1967-1972, to be broken down following the oil shocks of the 1970s, and then again since 2004.

The following chart highlights long-term trends in the co-movements between the cost of unskilled labour and the cost of the consumption bundle. As with real unskilled labour wages vs CPI, there are broadly speaking two distinct periods in the relationship between the wages and consumption costs. In the period prior to 1970 increases in wages outpaced the rise in the cost of consumer basket. Since 1970, however, the relationship reversed, with wages rising, while the cost of consumer basket falling.Hence, overall, although real wages have declined in the recent years, the average consumption basket cost has declined faster than the unskilled labour costs. This implies that while wage disparity between the skilled and unskilled labourers (the driver of the CPI) might have risen, the unskilled labourers are still better off today than ever before, thanks to the WalMart effect of driving down the cost of the average consumption bundle.

The chart below plots the awesome power of value destruction in the US dollar purchasing power.

These charts present an interesting evolution of the US economy, from my point of view. They also suggest that:

1. The current deflationary period might last much longer than many of us, including myself, anticipate, although there is an added component to the above equation - the role of the exchange rates. Should dollar appreciate from its currently relatively low levels, the international dimension of the US deflation will be erased.
2. The inflationary trend - measured either as a function of CPI, or a function of PPP, is unlikely to reverse from its long-run upward trend.