What Is Normal Inflation?

 Popular Economics Weekly

FREDcpi

The financial markets were shocked, yes shocked, when the May Consumer Price Index for retail prices jumped 4.9 percent year-over-year. Just kidding. No one was really surprised because one year ago it wasn’t rising at all (well, just 0.22 percent), and it was predicted to rise substantially with the $4 trillion plus in government aid already being injected into companies and individuals.

It has averaged around two percent since the 1990s, per the above St. Louis Fed graph that dates back to 1950. Every business economist would know this, and expect such fluctuations that rather quickly return to the longer-term average with today’s just-in-time, global supply chains that have tamed prices.

In fact, CPI inflation was rising as high as 5.5 percent annually in July 2008 during the Great Recession, before another jaw-dropping plunge to -0.32 percent in 2009. You get the drift. So who is worrying about these temporary ‘blips’ in inflation?

The financial markets, of course. They love to use other peoples’ (borrowed) money to finance their stock, bond and commodity market transactions, if possible. And interest rates have been at rock bottom over the past year; close to zero for short-term rates, and the 10-year benchmark treasury yield below one percent for much of the time. It is still in a daily trading range of 1.5-1.6 percent, per the below FRED graph.

FRED10yr

This is one reason market indexes have been at record highs, and why they gyrate so wildly on almost a daily basis, as traders try to guess what the Fed will do next in its almost daily pronouncements on when they might allow short-term interest rates to rise.

Consumers don’t have to worry so much, because it has been extremely difficult for the Federal Reserve, or anyone else, to keep CPI inflation above two percent, especially during this once in a 100-year coronavirus pandemic. Inflation below that range has invariably meant there is too little aggregate demand—consumers aren’t buying, investors aren’t investing, and banks aren’t lending.

CEPR’s Dean Baker just remarked on what has boosted inflation of late. It’s gasoline prices and insurance rates spiking because of the sudden surge in travel, as consumer bust out of their prolonged at home hibernation.

“Overall, the story this month is overwhelmingly that bounce back inflation was 100 percent predictable, coupled with soaring car prices (both new and used) due to temporary shortages. There’s not much here to get excited about,” he said.

“The overall CPI was up 0.6 percent (monthly), the core rose 0.7 percent. New and used cars were major factors, rising 1.6 percent and 7.3 percent, respectively. The jump in used and new car prices added 0.3 percentage points to the inflation rate for the month.”

And, he continues:

• · Even though it’s hard to get good help, restaurant prices outpaced food prices by just 0.1 percentage points over the last three months, 1.0 percent to 0.9 percent.
• · The medical care index fell 0.1 percent in May, up just 0.9 percent over last year. Drug prices were flat, down 1.9 percent over last year.
• · Rent indexes: rent proper increase just 0.2 percent; owner equivalent rent rose 0.3 percent in May.
• · Apparel prices jumped 1.2 percent in May, car insurance 0.7 percent, and air fares 7.0 percent. The indexes are respectively 2.2 percent, 0.2 percent, and 6.3 percent below the February 2020 level.

It is also why the housing market is booming. Interest rates are this low because bond traders see very little danger of longer-term inflation, and the Fed promising to hold short-term rates close to zero for at least one more year.

Harlan Green © 2021

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

When the Return to Normal?

 Financial FAQs

Calculated Risk

When will most American workers return to work, and the U.S. economy return to normal? The Calculated Risk-FRED graph since 1992 tells us that retail sales have historically never varied substantially from a 5 percent annual increase, except during the blue bar recession periods indicated in the graph, and consumers and businesses have spent most of their pandemic aid. It could take another year.

The U.S. Census Bureau reported “Advance estimates of U.S. retail and food services sales for May 2021, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $620.2 billion, a decrease of 1.3% from the previous month, but 28.1% above May 2020.”

Altogether, the number of people reportedly still receiving jobless benefits from eight separate state and federal programs totaled 14.8 million as of May 29, reports MarketWatch’s Greg Robb. It is down about 560,000 from the prior week. Last year, 30 million Americans were receiving these extra benefits, while the historical range receiving claims is in the mid-200,000s, so one can see why it might take another year for economic activity to return to normal.

Retail sales began to rebound last April with the first aid checks, and really took off this January with the additional recovery dollars going to individuals. Clothing and accessory sales are up 200 percent from May 2020, while food service and drinking places surged 71 percent and electronic and appliance stores gained 91 percent.

This sudden prosperity is creating many bottlenecks, raising all prices and shrinking the housing supply, with builders struggling to meet the increased demand.

Privately‐owned housing starts in May were at a seasonally adjusted annual rate of 1,572,000. This is 50.3 percent above the May 2020 rate of 1,046,000, but is not enough construction to satisfy the soaring demand for more housing—new or used.

NAR chief economist Lawrence Yun commented on the May starts: “Despite the month-to-month trend, or even year-to-year changes, America is facing a massive housing shortage due to multiple years of underproduction in relation to population growth. We estimate around 5.5 to 6.8 million additional housing units need to be built. America is on track for only 1.6 million and 1.7 million new housing units this year and next, respectively. That would represent the best two-year performance in 15 years, yet it would still be inadequate. Therefore, expect both rents and home prices to outpace overall consumer price inflation in the upcoming years."

Calculated Risk

Where is this housing supply to come from? Estimates of population growth, demographic change, and demolitions suggest about 1.3 million households will form annually for the next few years, Goldman Sachs analysts said in a May note cited by Business Insider.

“Millennials are just reaching peak homebuying age and set to keep demand strong for the foreseeable future. Elevated lumber prices and lot shortages will continue to drag on construction even as starts accelerate. And while mortgage rates have risen from their pandemic-era floor, they still sit at historically low levels and should keep demand robust, the bank said.”

In 2021, the Mortgage Bankers Association (MBA) forecasts single-family housing starts to be around 1.134 million. And that could just be the beginning, as projections going forward are even rosier: 1.165 million single-family homes in 2022 and 1.210 million in 2023.

And we should see more entry-level homes under construction in 2021, says Joel Kan, associate vice president economic and industry forecasting at the MBA. That could help a potential pinch point, as too many entry-level buyers are helping to push up prices, making those homes unaffordable for that very group.

“We’ll see more affordable homes come onto the market as builders try to meet demand for these homes,” Kan says.

“Some 5.16 million people who have exhausted state compensation were also getting extra $300 a week in federal benefits as of May 29, down about 75,000 from the prior week,” says Robb. “The federal program ends in September and more than two dozen states are going to end the program early starting in the middle of this month.”

We know that will slow down the return to normal growth in those 25 states that are coercing their lower-paid workers to return to jobs they might not like. And that is on top of the need to find adequate housing.

Harlan Green © 2021

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

There Are More Jobs Than Ever!

 Financial FAQs

Calculated Risk

The number of job openings reached a series high of 9.3 million on the last business day of April, the U.S. Bureau of Labor Statistics reported last Tuesday. Hires were little changed at 6.1 million. Total separations increased to 5.8 million. Within separations, the quits rate reached a series high of 2.7 percent while the layoffs and discharges rate decreased to a series low of 1.0 percent.

American workers are finally in a position to pick and choose from what is a record number of job openings. As proof, the number of quits jumped to a new all-time high of 4.0 million, versus 3.6 million last month.  These are voluntary exits from one job to a presumably better job.

This is panicking 25 red state governors into terminating the additional $300 per week in unemployment benefits early, believe it or not. They seem to be afraid that their workers might take the time to shop for a job with better pay and benefits, which anecdotal evidence already indicates.

The blue line in Calculated Risk’s graph tells us that hiring has actually returned to a more normal level, but sudden opening of the economy has orders pouring in for goods and services, which is more demand that can be satisfied at the moment, and this is boosting workers’ wages.

Reuters said “Higher worker mobility undoubtedly contributed to the surge in hourly earnings in the past two employment reports, as employers must not only pay higher wages to attract new workers but may feel more pressure to raise compensation to retain their existing employees.”

There are still too many unvaccinated employees that don’t feel safe returning to work, and most schools are still out or having only partial re-openings for many women to return to work.

Treasury Secretary Janet Yellen also claimed data does not support the argument that increased unemployment benefits are leading to a workforce shortage. She said when they looked at states and sectors where supplemental benefits were high, there weren't lower job finding rates as the argument would suggest, and in fact it was the "exact opposite."

 Equitablegrowth.org

The simple truth is that Republican governors en masse that suppress additional aid for their workers is in keeping with their small government principles. Why else give up $26 billion that will flow to them if they allow their workers to keep the additional benefits?

Sadly, research is showing that this hurts those states, report a number of researchers. A report cited by The Center For Equitable Growth concludes that workers salaries increased as much as five percent when their unemployment benefits were extended to 99 weeks in 2010-11 following the Great Recession.

And as of May’s jobs report released last Friday, the country is still down 7.6 million jobs from before the pandemic, reports The Hill. The May jobs report also indicated that there are 9.3 million people who are officially unemployed — meaning they are actively looking for work and unable to find it. In most industries, the number of jobseekers still exceeds the number of job openings.

We are in a different world with COVID-19 that is killing more than all the world wars, a time  much like the Great Depression and New Deal when a small government ideology makes no sense.

Harlan Green © 2021

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Who Lost Their Jobs?

 Popular Economics Weekly

MarketWatch.com

This would be a good jobs report at any other time. Total nonfarm payroll employment rose by 559,000 in May, from a revised 278,000 jobs in May, and the unemployment rate declined by 0.3 percentage point to 5.8 percent, the U.S. Bureau of Labor Statistics reported today. Notable job gains occurred in leisure and hospitality, in public and private education, and in health care and social assistance.

Employers are crying labor shortage because they were surprised by the sudden 6.4 percent Q1 GDP growth pickup, so they were hoping for more new hires in the May report.

But maybe there is another reason for some workers not taking new jobs as quickly as employers would like—the businesses that employed them may be permanently closed, hence the large number still receiving unemployment benefits.

The WSJ reported that the pandemic resulted in the permanent closure of roughly 200,000 U.S. establishments above historical levels during the first year of the viral outbreak, according to a study released Thursday by economists at the Fed. In recent years, about 600,000 establishments have permanently closed per year, or about 8.5 percent, according to the study, so the total number could be upwards of 800,000 businesses permanently closed during the first pandemic year.

Then why would those losing permanent jobs, permanently, want to return to work quickly? Why shouldn’t they be given time to get over their loss? Have sociologists and psychologists even studied such traumas in detail?

We know something about the hurt from permanent job losses in the Rust Belt—soaring drug use and suicide rates in studies by Nobelist Angus Deaton and Anne Case.

The Federal Reserve gives a preliminary estimate of jobs permanently lost, and as of May it was 3.234 million from 3.529 million permanently lost in April. The calculated Risk graph shows the percentage losses over all recessions since WWII, and the time it took to return to normal levels; 5 years in 2001 (light blue line), 8 years in 2007 Great Recession (dark blue line) and is still below par just 15 months from the current pandemic (red line).

Calculated Risk

Individual companies account for about two-thirds—or roughly 130,000—of the extra business closures if historical patterns hold, according to the Fed economists who examined businesses with employees, cited by WSJ. Other closed establishments are units of major companies—say, a Gap or Pizza Hut—that closed some locations while remaining in businesses.

The service sector was hardest hit and is roaring back with 292,000 jobs in Leisure and hospital, followed by Education and health, and government. More women will return to the workforce, particularly mothers when schools are fully open in the fall. Other service-oriented businesses such as hotels, museums, parks and entertainment venues also added a flush of new jobs.

And many work sites are relaxing restrictions on masks or customer occupancy with coronavirus cases falling to the lowest levels since the first month of the crisis. 

MarketWatch’s Jeffry Bartash reports the global tally for the coronavirus-borne illness climbed above 172 million on Friday, while the death toll rose to 3.7 million, according to data aggregated by Johns Hopkins University. The U.S. remained in the lead globally in cases with 33.3 million and deaths with 596,434, JHUniv data show, but the seven-day average for cases has fallen 48 percent from two weeks ago, according to a New York Times tracker, for deaths has dropped 28 percent and for hospitalizations has declined 22 percent as vaccinations continue to increase.

This all points to labor participation rates continuing to rise in the fall, though it could depend in part on those workers that lost permanent jobs working through the debilitating effects of their losses.

Who is willing to help them, other than the Biden administration that is extending jobless benefits through September, and the 25 states that have not cut off their benefits too early?

Harlan Green © 2021

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

President Biden’s New Deal Budget Helps All of US

 Financial FAQs

President Biden’s $6 trillion 2021-22 budget proposal would rebuild America’s infrastructure and social safety net, supporting those essential workers that need it the most.

“It also represents the most substantial expansion of the federal government’s spending powers since World War II and a direct rebuttal of the small-government principles of his Republican, and even many Democratic, predecessors,” reports VOX.

Then why are 24 states terminating the additional $300 per month payments early that Biden’s American Rescue Plan has extended until September, reports NY Times Binyamin Appelbaum?

The simple truth is that red states are suppressing any additional aid for their workers as much as possible in keeping with their small government principles. Why else give up $26 billion that will flow to them if they allow their workers to keep the additional benefits?

It is also a sign that Republicans will oppose President Biden’s new budget, which is really his ‘new’ New Deal that scares the daylights out of conservatives because it will show that government can work for all Americans, not just the wealthiest as it has over the past 40 years.

Biden’s budget proposal includes the $2 trillion American Jobs Plan — which would embrace an expansive definition of infrastructure, not only to modernize America’s road and bridges, but to invest in broadband and elder care — and a $1.8 trillion American Families Plan, which would establish free higher education and expand child care, health care, and tax benefits for needy families.

“As proposed, the budget would reinvest in infrastructure and education, raise taxes on the wealthy and corporations, and meet many — but not all — of Biden’s campaign promises,” says VOX.

AtlantaFed.org

This is happening while Federal Reserve and private banks are predicting and even bigger growth spurt ahead in coming quarters.

The Atlanta Fed has just updated their second quarter growth prediction, for starters:

“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2021 is 10.3 percent on June 1, up from 9.3 percent on May 28. After this morning's Manufacturing ISM Report On Business from the Institute for Supply Management and the construction spending report from the U.S. Census Bureau, the nowcasts of second-quarter real personal consumption expenditures growth and second-quarter real gross private domestic investment growth increased from 8.6 percent and 20.7 percent, respectively, to 9.5 percent and 22.0 percent, respectively,” said the Atlanta Fed.

Goldman Sachs estimates 9.5 percent Q2 GDP growth while the New York Fed posts a much more conservative 4.5 percent spurt.

In fact, manufacturing activity is surging with the Institute for Supply Management reporting that The May Manufacturing PMI® registered 61.2 percent, an increase of 0.5 percentage point from the April reading of 60.7 percent. This figure indicates expansion in the overall economy for the 12th month in a row after contraction in April 2020.

President Biden’s budget, if enacted, would give a boost to GDP growth for the rest of this year because it targets working people that generate most economic activity, including essential workers that provide health care, police and fire protection, because they spend the largest percentage of their incomes.

And that is just a few of its elements, says VOX. “It also proposes universal pre-K, affordable childcare, and paid leave. It also puts the climate crisis front and center, with proposals dedicated to reducing US emissions, creating jobs in the clean energy sector, and funding climate research.”

Focusing on those folks that most need the support, this budget will give a huge boost to economic growth. The Federal Budget has supported the wrong segments of society for too long by cutting taxes and social services, when just the opposite is needed to end this coronavirus pandemic and be ready for whatever comes next that could damage economic growth—maybe our changing climate, or another pandemic?

Harlan Green © 2021

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Some Workers Reluctant to Return to Jobs

 Financial FAQs

CNBC.com

“In the week ending May 15, the advance figure for seasonally adjusted initial (jobless) claims was 444,000, a decrease of 34,000 from the previous week's revised level. This is the lowest level for initial claims since March 14, 2020 when it was 256,000,” says the US Bureau of Economic Analysis.

Most of the decline came from a decrease in those getting benefits through pandemic-related emergency programs. States showing the largest declines included Georgia (-8,216), Kentucky (-7,175) and Texas (-4,828), according to unadjusted data. New Jersey showed the biggest gain, with 4,384.

Along with the steady slide in the headline number, the total of those receiving various government benefits tumbled by nearly 900,000 to just shy of 16 million, according to BEA data through May 1.

The high number still receiving benefits has caused 23 states to back out of the $300 weekly federal bonus checks as soon as June, with Florida being the latest state to announce it is canceling extended federal unemployment benefits. That'll cut off more than 3.6 million people from getting enhanced benefits related to the pandemic that Congress has authorized to expire in September..

State governors claim that this unemployment coverage discourages workers from taking jobs, citing labor shortages. Some economists and analysts disagree, noting that several factors are preventing people from finding suitable work, including lack of child care and fear of contracting COVID-19.

The 2 million person gap between Job Openings and actual Hires in the government’s latest JOLTS report is growing evidence that there is a red-hot demand for workers after what I call the pandemic recession, even with the high number out of work and still receiving benefits.

Why the record number of job openings at the same time so many are still receiving benefits? It will take time for workers to find suitable jobs, while employers need to raise their minimum wages for essential workers in the service sector (that are the lowest paid) to attract them back to work.

Service sector employers such as Amazon say they are raising their minimum wage to $15 per hour, while Bank of America is raising the minimum wage from $20 to $25 per hour for its clerical workers.

It is perhaps why a record number of small businesses said they could not fill open jobs in April, adding to a growing national controversy over whether extra unemployment benefits are keeping scores of people from re-entering the labor force.

Some 44 percent of small businesses reported job openings went unfilled, according to the National Federation of Independent Business. The NFIB is the nation’s largest small-business lobbying group.

It is less understandable why the red states are the first to terminate extra aid to their own lowest-paid workers before September, maintaining that it is keeping them from working in jobs that probably pay less than the weekly benefits (aid that is also free $$ to the states), as I said.

It not such a good idea because cutting off the additional benefits is exacerbating the income inequality that has been a major cause of record drug use and suicide rate among high school-educated white males that have lost formerly high-paying jobs in the rust belt.

It also tells us that red states governors, (such as Arkansas Governor Asa Hutchinson in a recent NPR interview), think little of the plight of Arkansas’ own essential workers that fill most of the lower-paying jobs after having weathered one year of pandemic hell.

The good news is that workers are now getting to pick and choose what jobs they would prefer. That is just one of the changes we are seeing as the 2020’s economy begins to roar.

Harlan Green © 2021

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Why So Much Inequality?

Answering Kennedy’s Call

Epi.org

There aren’t many economists that still debate the origins of our record income inequality, the worse in the developed world, and even in some of the developing world.

A loss of $10/hour in the typical worker’s compensation is the result of employers’ successful efforts to keep wage growth down over the past 40 years, according to a new paper by EPI distinguished fellow Larry Mishel and EPI director of research Josh Bivens.

Mishel and Bivens maintain that while productivity increased 69.6 percent from 1979-2018, employees’ compensation increased just 11.6 percent, per the EPI graph.

How did this happen? The obvious reasons are the growing strength of corporations and loss of labor union bargaining power that has allowed states to pass anti-labor laws and American corporations to ship many high-paying jobs overseas with little government regulation that would mitigate the job losses of domestic workers.

But it goes deeper. It goes back to the origins of the so-called economic sciences and the economic theories that politicians utilize to rationalize their policies.

They really derive from political economics, the original pseudo-science that attempted to understand human’s financial behavior, which is not that difficult to understand when we are talking about dollars and sense.

The owners of companies and the capital that controlled them wanted few regulations and lower taxes. So from 1980 onward Republican administrations and Big Business began to deregulation whole industries, and the labor lows and practices that guaranteed employees their fair share of the profits under what have been called Laissez Faire or free market economic theories.

Less government oversight and lower taxation, for instance, was based on the supposition that it encouraged greater growth, since corporations would create more jobs to produce more goods and services.

Industries have become more productive, but the increased profits were kept by the owners and chief executives of those companies rather than passed on to their employees; so much so that the gap has widened between employee’s hourly compensation and productivity that doesn’t guarantee the majority of service workers a livable wage.

That justified lower trade barriers in turn, so that consumers with their reduced incomes could afford the cheaper goods now made made overseas.

Even the Supreme Court got into the act by allowing public employees to avoid paying any fees if they so choose, even though receiving all the benefits of union membership—higher wages, pensions, worker safety, the list goes on and on.

The Supreme Court issued a sweeping ruling in 2018 that dramatically undermined unions for teachers, firefighters, police officers, and other public employees throughout the United States.

The case, Janus v. AFSCME, involved a challenge to the practice of public sector unions charging “agency fees” to employees who decline to join the union but who still benefit from the deals it bargains.

And twenty-eight states have ridden the free market banner that have “right to work” laws banning agency fees. Such laws create a free-rider problem: People don’t have to join unions or pay agency fees to get the unions’ benefits, so the unions lose members and political influence.

There is an ongoing dispute over how much of the economic pie should be going to workers vs. the owners of capital, but not the fact that it has happened. Our badly degraded infrastructure and a warming planet tell us that public works have been badly neglected that would prepare US for future catastrophes as well.

The ongoing political and economic debate is how to right the fact that most of the rewards of higher productivity have not increased the public good, but diminished it. Mishel and Bivens are helping us to see that labor must have a greater voice in that debate.

Harlan Green © 2021

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen