UK Real Wages have fallen by over 2% as the unemployment rate looks to have passed 5%

On Friday we got some insight into the state of play of UK output and GDP in April with the caveats I pointed out at the time. This morning has seen us receive the official figures on employment, unemployment and wages which shed with caveats further insight as to where we are. So let us take a look at the opening line.

Early indicators for May 2020 suggest that the number of employees in the UK on payrolls is down over 600,000 compared with March 2020. The Claimant Count has continued to rise, enhancements to Universal Credit as part of the UK government’s response to the coronavirus (COVID-19) mean an increase in the number of people eligible.

There is quite a bit going on in that paragraph and it is hard to avoid a wry smile at us being directed towards the Claimant Count that was first regarded as unreliable and manipulated back in the 1980s in the Yes Minister TV series,

Sir Humphrey: We didn’t raise it to enable them to learn more! We raised it to keep teenagers off the job market and hold down the unemployment figures.

There is also an episode where Jim Hacker tells us nobody actually believes the unemployment ( Claimant Count) numbers. The tweek to the Universal Credit system is welcome in helping people in trouble but does also add more smoke to the view.

Employment

We can dig deeper and let us start with a little more precision.

Experimental data of the number of payroll employees using HM Revenue and Customs’ (HMRC’s) Pay As You Earn Real Time Information figures show a fall in payroll employees in recent months. Early estimates for May 2020 from PAYE RTI indicate that the number of payroll employees fell by 2.1% (612,000) compared with March 2020.

Let me give our statisticians credit for looking at other sources of data to glean more information. But in this area there is an elephant in the room and it is a large one.

The International Labour Organization (ILO) definition of employment includes those who worked in a job for at least one hour and those temporarily absent from a job.

Regular readers of my work will be aware of this issue but there is more.

Workers furloughed under the Coronavirus Job Retention Scheme (CJRS), or who are self-employed but temporarily not in work, have a reasonable expectation of returning to their jobs after a temporary period of absence. Therefore, they are classified as employed under the ILO definition.

As the estimate for them is of the order of 6 million we find that our employment fall estimate could be out by a factor of ten! Breaking it down there are all sorts of categories from those who will be unemployed as soon as the scheme ends to those who have been working as well ( sometimes for the same employer) who may be getting an official knock on the door. Also the numbers keep rising as HM Treasury has pointed out today.

By midnight on 14 June there’s been a total of: 9.1m jobs furloughed £20.8bn claimed in total

So the best guide we have comes from this in my opinion.

Between February to April 2019 and February to April 2020, total actual weekly hours worked in the UK decreased by 94.2 million, or 8.9%, to 959.9 million hours. A decrease of 91.2 million or 8.7% was also seen on the quarter.

In terms of a graph we have quite a lurch.

I doubt many of you will be surprised to learn this bit.

The “accommodation and food service activities” industrial sector saw the biggest fall in average actual hours; down 6.9 hours to 21.2 hours per week.

With hotels shut and restaurants doing take out at best I am in fact surprised the numbers have not fallen further.

Unemployment

The conventional measures are simply not cutting it.

For February to April 2020: the estimated UK unemployment rate for all people was 3.9%; 0.1 percentage points higher than a year earlier but unchanged on the previous quarter.

We can apply the methodology I used for Italy on the 3rd of this month where we discovered that a flaw  meant that we found what we would regard as unemployed in the inactivity data.

The single-month estimate for the economic inactivity rate, for people aged 16 to 64 years in the UK, for April 2020, was 20.9%, the highest since August 2019. This represents an increase of 0.7 percentage points on the previous month (March 2020) and a record increase of 0.8 percentage points compared with three months ago (January 2020).

If we count the extra inactivity as unemployed we have some 349,000 more or if you prefer an unemployment rate of 5.1%. This begins to bring the numbers closer to reality although we are not allowing for those who will be unemployed as soon as the furlough scheme ends. Also we are not allowing for the scale of underemployment revealed by the hours worked figures.

Wages and Real Wages

I doubt anyone is going to be too surprised by the fall here.

Estimated annual growth in average weekly earnings for employees in Great Britain in the three months to April 2020 was 1.0% for total pay (including bonuses) and 1.7% for regular pay (excluding bonuses).

It is quite a drop on what we had before.

Annual growth has slowed sharply for both total and regular pay compared with the period prior to introduction of the corona virus lockdown measures (December to February 2020), when it was 2.9%.

We see that bonuses plunged if we throw a veil over the double negative below.

The difference between the two measures is because of subdued bonuses, which fell by an average negative 6.8% (in nominal terms) in the three months February to April 2020.

If we look at April alone we get an even grimmer picture.

Single month growth in average weekly earnings for April 2020 was negative 0.9% for total pay and 0% for regular pay.

Already real wages were in trouble.

The 1.0% growth in total pay in February to April 2020 translates to a fall of negative 0.4% in real terms (that is, total pay grew slower than inflation); in comparison, regular pay grew in real terms, by 0.4%, the difference being driven by subdued bonuses in recent months.

So even using the woeful official measure driven by Imputed Rents we see a real wages decline of 1.8% in April. A much more realistic measure is of course the Retail Prices Index or RPI which shows a 2.4% fall for real wages in April.

On this subject there has been some research from my alma mater the LSE giving more power to the RPI’s elbow.

Aggregate month-to-month inflation was 2.4% in the first month of lockdown, a rate over 10 times higher than in preceding months.

I will look at this more when we come to the UK inflation data but it is another nail on the coffin for official claims and if I may be so bold a slap on the back for my arguments.

 

Comment

Today’s journey shows that with a little thought and application we can do better than the official data. Our estimate of the unemployment rate of 5.1% is more realistic than the official 3.9% although the weakness is an inability to allow for what must be underemployment on a grand scale. Shifting to real wages we fear that they may have fallen by over 3% in April as opposed to the official headline of a 0.4% fall. So we get closer to reality even when it is an unattractive one.

Staying with wages the numbers are being influenced by this.

Pay estimates are based on all employees on company payrolls, including those who have been furloughed under the Coronavirus Job Retention Scheme (CJRS).

Also Is it rude to point out that we are guided towards the monthly GDP statistics but told that the monthly wages ones ( a much longer running series) are less reliable?. Someone at the UK Statistics Authority needs to get a grip and preferably soon .

 

 

 

 

Can US house prices bounce?

The US housing market is seeing two tsunami style forces at once but in opposite directions. The first is the economic impact of the Covid-19 virus pandemic on both wages (down) and unemployment (up). Unfortunately the official statistics released only last week are outright misleading as you can see below.

Real average hourly earnings increased 6.5 percent, seasonally adjusted, from May 2019 to May 2020.
The change in real average hourly earnings combined with an increase of 0.9 percent in the average
workweek resulted in 7.4-percent increase in real average weekly earnings over this period.

We got a better idea to the unemployment state of play on Thursday as we note the scale of the issue.

The advance unadjusted number for persons claiming UI benefits in state programs totaled 18,919,804, a decrease of 178,671 (or -0.9 percent) from the preceding week.

The only hopeful bit is the small decline. Anyway let us advance with our own view is that we will be seeing much higher unemployment in 2020 although hopefully falling and falling real wages.

The Policy Response

The other tsunami is the policy response to the pandemic.

FISCAL STIMULUS (FEDERAL) – The U.S. House of Representatives passed a $2.2 trillion aid package – the largest in history – on March 27 including a $500 billion fund to help hard-hit industries and a comparable amount for direct payments of up to $3,000 to millions of U.S. families.

That was the Reuters summary of the policy response which has been added to in the meantime. In essence it is a response to the job losses and an attempt to resist the fall in wages.

Next comes the US Federal Reserve which has charged in like the US Cavalry. Here are their words from the report made to Congress last week.

Specifically, at two meetings in March, the FOMC lowered the target range for the federal funds rate by a total of 1-1/2 percentage points, bringing it to the current range of 0 to 1/4 percent.

That meant that they have now in this area at least nearly fulfilled the wishes of President Trump. They also pumped up their balance sheet.

The Federal Reserve swiftly took a series of policy actions to address these developments. The FOMC announced it would purchase Treasury securities and agency MBS in the amounts needed to ensure smooth market functioning and the effective transmission of monetary policy to broader financial conditions. The Open Market Desk began offering large-scale overnight and term repurchase agreement operations. The Federal Reserve coordinated with other central banks to enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements and announced the establishment of temporary U.S. dollar liquidity arrangements (swap lines) with additional central banks.

Their explanation is below.

 Market functioning deteriorated in many markets in late February and much of March, including the critical Treasury and agency MBS markets.

Let me use my updated version of my financial lexicon for these times. Market function deteriorated means prices fell and yields rose and this happening in the area of government and mortgage borrowing made them panic buy in response.

Mortgage Rates

It seems hard to believe now but the US ten-year opened the year at 1.9%, Whereas now after the recent fall driven by the words of Federal Reserve Chair Jerome Powell it is 0.68%. Quite a move and it means that it has been another good year for bond market investors. The thirty-year yield is 1.41% as we note that there has been a large downwards push as we now look at mortgage rates.

Let me hand you over to CNBC from Thursday.

Mortgage rates set new record low, falling below 3%

How many times have I ended up reporting record lows for mortgage rates? Anyway we did get some more detail.

The average rate on the popular 30-year fixed mortgage hit 2.97% Thursday, according to Mortgage News Daily……..For top-tier borrowers, some lenders were quoting as low as 2.75%. Lower-tier borrowers would see higher rates.

Mortgage Amounts

CNBC noted some action here too.

Low rates have fueled a sharp and fast recovery in the housing market, especially for homebuilders. Mortgage applications to purchase a home were up 13% annually last week, according to the Mortgage Bankers Association.

According to Realtor.com the party is just getting started although I have helped out with a little emphasis.

Meanwhile, buyers who still have jobs have been descending on the market en masse, enticed by record-low mortgage interest rates. Rates fell below 3%, to hit an all-time low of 2.94% for 30-year fixed-rate loans on Thursday, according to Mortgage News Daily.

Mortgage demand is back on the rise according to them.

For the past three weeks, the number of buyers applying for purchase mortgages rose year over year, according to the Mortgage Bankers Association. Applications shot up 12.7% annually in the week ending June 5. They were also up 15% from the previous week.

Call me suspicious but I thought it best to check the supply figures as well.

Mortgage credit availability decreased in May according to the Mortgage Credit Availability Index (MCAI)………..The MCAI fell by 3.1 percent to 129.3 in May. A decline in the MCAI indicates that lending standards are tightening, while increases in the index are indicative of loosening credit.

So a decline but still a lot higher than when it was set at 100 in 2012. The recent peak at the end of last year was of the order of 185 and was plainly singing along to the Outhere Brothers.

Boom boom boom let me here you say way-ooh (way-ooh)
Me say boom boom boom now everybody say way-ooh (way-ooh)

What about prices?

As the summer home-buying season gets underway, median home prices are surging. They shot up 4.3% year over year as the number of homes for sale continued to dry up in the week ending June 6, according to a recent realtor.com® report. That’s correct: Prices are going up despite this week’s announcement that the U.S. officially entered a recession in February.

Comment

As Todd Terry sang.

Something’s goin’ on in your soul

The housing market is seeing some surprises although I counsel caution. As I read the pieces about I note that a 4.3% rise is described as “shot up” whereas this gives a better perspective.

While that’s below the typical 5% to 6% annual price appreciation this time of year, it’s nearly back to what it was before the coronavirus pandemic. Median prices were rising 4.5% in the first two weeks of March before the COVID-19 lockdowns began. Nationally, the median home list price was $330,000 in May, according to the most recent realtor.com data.

But as @mikealfred reports there is demand out there.

Did someone forget to tell residential real estate buyers about the recession? I’m helping my in-laws buy a house in Las Vegas right now. Nearly every house in their price range coming to market sees 40+ showings and 5+ offers in the first few days. Crazy demand.

Of course there is the issue as to at what price?

So there we have it. The Federal Reserve will be happy as it has created a demand to buy property. The catch is that it is like crack and if they are to keep house prices rising they will have to intervene on an ever larger scale. For the moment their policy is also being flattered by house supply being low and I doubt that will last. To me this house price rally feels like trying to levitate over the edge of a cliff.

Podcast

 

 

 

UK monthly GDP is a poor guide to where the economy stands

Today has opened with the media having a bit of a party over the economic news from the UK and they have been in such a rush they have ignored points one and two and dashed to point 3.

Monthly gross domestic product (GDP) fell by 20.4% in April 2020, the biggest monthly fall since the series began in 1997. ( Office for National Statistics)

Actually our official statisticians seem to have got themselves in a spin here which is highlighted by this bit.

Record falls were also seen across all sectors:

    • services – largest monthly fall since series began in 1997
    • production – largest monthly fall since series began in 1968
    • manufacturing – largest monthly fall since series began in 1968
    • construction – largest monthly fall since series began in 2010

As you can see they have jumped into a quagmire as suddenly we have numbers back to 1968 rather than 1997! What they originally meant was the largest number since we began monthly GDP about 18 months ago. The rest is back calculated which did not go that well when they tried it with inflation. Oh and let me put you at rest if you are worried we did not measure construction before 2010 as we did. Actually we probably measured it better than we do now as frankly the new system has been rather poor as regular readers will be aware.

Now I can post my usual warning that the monthly GDP series in the UK has been very unreliable and at times misleading even in more normal scenarios. Or as it is put officially.

The monthly growth rate for GDP is volatile. It should therefore be used with caution and alongside other measures, such as the three-month growth rate, when looking for an indicator of the longer-term trend of the economy.

So let us move on noting that the reality with data in both March and April hard to collect due to the virus pandemic is more like -15% to -25%. The 0.4% in the headline is beyond even spurious accuracy and let me remind you that I have consistently argued that the production of monthly GDP is a mistake.

Mind you it did produce quite an eye-catching chart.

Context

As we switch to a more normal quarterly perspective we are told this.

>GDP fell by 10.4% in the three months to April, as government restrictions on movement dramatically reduced economic activity

This in itself was something of a story of two halves as we went from weakness to a plunge as restrictions on movement began on the 23rd of March. There is also something of a curiosity in the detail.

The services sector fell by 9.9%, production by 9.5% and construction by 18.2%.

The one sector that did carry on to some extent in my area was construction as work on the Royal School of Art and the Curzon cinema in the King’s Road in Chelsea continued. So let us delve deeper.

Services

If we look at the lockdown effect we can see that it crippled some industries.

The dominant negative driver to monthly growth, wholesale and retail trade and repair of motor vehicles and motorcycles, contributed negative 3.5 percentage points, though falls were large and widespread throughout the services industries; notable falls occurred in air transport, which fell 92.8%, and travel and tourism, which fell 89.2%.

The annual comparison is below.

Services output decreased by 9.1% between the three months to April 2019 and the three months to April 2020, the largest contraction in three months compared with the same three months of the previous year since records began in January 1997.

Actually we get very little extra data here.

Wholesale and retail trade and repair of motor vehicles and motorcycles was the main driver of three-monthly growth, contributing negative 1.95 percentage points.

This brings me to a theme I have been pursuing for some years now. That is the fact that our knowledge about the area which represents some four-fifths of our economy is basic and limited. I did make this point to the official review led by Sir Charles Bean. But all that seems to have done is boosted his already very large retirement income, based on his RPI linked pension from the Bank of England.

Production

We follow manufacturing production carefully and it is one area where the numbers should be pretty accurate as you either produce a car or not for example.

The monthly decrease of 24.3% in manufacturing output was led by transport equipment, which fell by a record 50.2%, with motor vehicles, trailers and semi-trailers falling by a record 90.3%; of the 13 subsectors, 12 displayed downward contributions.

The annual comparison is grim especially when we note that there were already problems for manufacturing due to the ongoing trade war.

For the three months to April 2020, production output decreased by 11.9%, compared with the three months to April 2019; this was led by a fall in manufacturing of 14.0% where 12 of the 13 subsectors displayed downward contributions.

Construction

According to the official series my local experience is not a good guide.

Construction output fell by 40.1% in the month-on-month all work series in April 2020; this was driven by a 41.2% decrease in new work and a 38.1% decrease in repair and maintenance; all of these decreases were the largest monthly falls on record since the monthly records began in January 2010.

This gives us an even more dramatic chart so for those who like that sort of thing here it is.

The problem is that this series has been especially troubled as we have noted over the years. For newer readers they tried to fix it bu switching a large business from services to construction but that mostly only raised questions about how they define the difference? There was also trouble with the measure of inflation.

Anyway here is a different perspective.

Construction output fell by record 18.2% in the three months to April 2020, compared with the previous three-month period; this was driven by a 19.4% fall in new work and a 15.8% fall in repair and maintenance.

Comment

As we break down the numbers we find that they are a lot more uncertain than the headlines proclaiming a 20.4% decline or if you prefer a £30 billion fall suggest. Let me add another factor which is the inflation measure or deflator which will not only be wrong but very wrong too. The issue of using annual fixed weights to calculate an impact will be wrong and in the case of say air transport for example it would be hard for it to be more wrong in April. On the other side of the coin production of hand sanitiser and face masks would be travelling in the opposite direction.

We can switch to trying to look ahead with measures like this.

There was an average of 319 daily ship visits during the period 1 June to 7 June 2020, a slight fall compared with the previous week.

The nadir for this series was 215 on the 13th of April so we have picked up but are still below the previous 400+. . There was also a pick-up using VAT returns in May but again well below what we had come to regard as normal.

 There has been a small increase in the number of new VAT reporters between April 2020 and May 2020 from 15,250 to 16,460.

But I think the Office for National Statistics deserves credit for looking to innovate and for trying new methods here.

Meanwhile I think the Bank of England may be trying some pre weekend humour.

 

The Italian Job covers unemployment.zombie banks and industrial production

Sometimes economic news makes you think of a country via its past history.

LONDON/FRANKFURT (Reuters) – European Central Bank officials are drawing up a scheme to cope with potentially hundreds of billions of euros of unpaid loans in the wake of the coronavirus outbreak, two people familiar with the matter told Reuters.

After all the Italian banks have plenty of expertise, if I may put it like that, in this area. So perhaps a growth area for them in more ways than one.

The amount of debt in the euro zone that is considered unlikely to ever be fully repaid already stands at more than half a trillion euros, including credit cards, car loans and mortgages, according to official statistics.

There is a conceptual issue though as we mull why we always need “bad- banks” and whether the truth is that ordinary banks are bad? Also the Irish banking crisis taught us that the numbers are fed to us on a piece of string with notches and are driven by what they think we will accept rather than reality. So get ready for the half a trillion to expand and that may get a little awkward if this from Kathimerini proves true.

Enria said the ECB was studying how banks could cope were the crisis to worsen. He said banks had more than 600 billion euros ($680 billion) of capital and this would probably be enough, unless there were a second wave of infections.

If we focus now on the Italian banks there is of course the issue of the Veneto banks and Monte Paschi in particular. Let me take you back 3 days over 3 years.

Italian banks are considering assisting in a rescue of troubled lenders Popolare di Vicenza and Veneto Banca by pumping 1.2 billion euros (1.1 billion pounds) of private capital into the two regional banks, sources familiar with the matter said.

Good money after bad?

Italian banks, which have already pumped 3.4 billion euros into the two ailing rivals, had said until now that they would not stump up more money.

Back then I also pointed out the problems for the bailout vehicle called variously Atlante and Atlas. Looking at Monte dei Paschi the share price is 1.4 Euros which if we allow for the many rights issues and the like compares to a pre credit crunch peak of around 8740 Euros according to my chart.. Some quite spectacular value destruction as we again mull what “bad bank” means and recall that in 2016 Prime Minister Renzi told people it was a good investment. That is before we get to this from January 2012 on Mindful Money.

In October, Shaun Richards outlined a 13-step timeline for the collapse of a bank . He appeared on Sky News yesterday suggesting that Unicredit, Italy’s had now reached stage 3 of that process – i.e. “The Bank tries to raise more private capital in spite of it having no need for it”.

It was worth 19 Euros then and as it is worth 8.24 Euros now my description of it as a zombie bank was right, especially if we allow for all the aid packages and subsidies in the meantime.

Oh and in case we had any doubts about the story I see this from ForexLive.

European Commission says no formal work is underway for an EU ‘bad bank’

So they are informally looking at it then….

The Economy

This morning’s official release was always likely to be bad news.

In April 2020 the seasonally adjusted industrial production index decreased by 19.1% compared with the
previous month. The change of the average of the last three months with respect to the previous three
months was -23.2%.

The theme was unsurprisingly continued by the annual picture.

The calendar adjusted industrial production index decreased by 42.5% compared with April 2019 (calendar
working days being 21 versus 20 days in April 2019).
The unadjusted industrial production index decreased by 40.7% compared with April 2019.

If we compare to 2015 we see that the calendar adjusted index was at 58.4. The breakdown shows that pharmaceuticals were affected least ( -6.7%) and clothing and textiles the most ( -80.5%). The latter was a slight surprise as I though the manufacture of masks and other PPE might help but in fact it did even worse than the transport sector ( -74%).

On Monday Italy’s statisticians reminded us of our Girlfriend in a Coma theme.

At the end of 2019, the Italian economy was in stagnation with few recovery signals coming from industrial production and external trade at the very beginning of 2020.

Which was followed by this.

Eventually, the conventional economic indicators assessing the dramatic fall of GDP in the first quarter 2020 (-5.3% q-o-q) were published.

They point out it is difficult to collect data right now but were willing to have a go at a forecast.

Under these assumptions, we forecast a strong GDP contraction in 2020 (-8.3%) followed by a recovery in 2021 (+4.6%, Table 1). This year, the fall of GDP will be determined mainly by domestic demand net of inventories (-7.2 p.p.) due to the contraction of household and NPISH consumption (-8.7%) and of investments (-12.5%). Net exports and inventories will also contribute negatively to GDP growth (respectively -0.3 p.p. and -0.8 p.p.).

I wonder how much of what is called domestic demand reflects the fall in tourism as the summer is already well underway and it is a delightful country to visit? Here is the OECD version from earlier this week that highights the tourism issue.

GDP is projected to fall by 14% in 2020 before recovering by 5.3% in 2021 if there is another virus outbreak
later this year (the double-hit scenario). If further outbreaks are avoided (the single-hit scenario), GDP is
projected to fall by 11.3% in 2020 and to recover by 7.7% in 2021. While Italy’s industrial production may
restart quickly as confinement measures are lifted, tourism and many consumer-related services are
projected to recover more gradually, weighing on demand

As we know so little about what is happening right now the forecasts for 2021 are about as much use as a chocolate teapot in my opinion.

Switching back to Italy’s statisticians they seem to have doubts about their own unemployment numbers. perhaps they read my post on the third of this month.

The trend of unemployment rate will be different because it reflects the ricomposition between unemployed and inactive people and the fall in hours worked.

Anyway they have reported the unemployment rate at 6.3% and I think it is more like 11%.

Comment

Now we need to switch tack to one of the consequences of all this which relates to the fact that Italy already had a large national debt in both relative and absolute terms. If we use the OECD data as a framework we see that the debt to GDP ratio will be of the order of 160 to 170% at the end of this year which looks rather Greek like, Now we see the real reason for the forecasted bounce back in 2021 which reduces the number to 150% to 165%. The establishment assumption that we will see a “V-shaped” recovery has nothing to do with believing in it,rather it is to make the debt metrics look better. Again there are echoes of Greece here when Christine Lagarde was talking about “Shock and Awe” back in the day. Remember when we were guided to a debt to GDP ratio of 120%? That was to protect Italy ironically ( as well as Portugal).

That was then and this is now. The game-changed in the meantime has been the fall in bond yields due mostly to the policies and buying of the ECB. So a benchmark yield that rose to 7% in the last crisis is now 1.45% as I type this. Thus the previous concept of debt vigilante’s has been neutered and debt costs are low. The catch is that the debt burden will soar and that does seem to have an impact if we think of the issue of Japanification. Italy has already had its “lost decade” since it joined the Euro and the lack of economic growth has been the real issue here. For it to change I think we need reform of its structure and especially its zombie banks but instead we are being guided towards yet another bailout in what feels like a never-ended stream. Let me leave you with some humour on the issue of bad banks from GreatLakesForex.

They should correct that statement to the actual fact that they are desperate to create a Good bank in the Eurozone.

Where will all the extra US Money Supply end up?

Today brings both the US economy and monetary policy centre stage. The OECD has already weighed in on the subject this morning.

The COVID-19 outbreak has brought the longest economic expansion on record to a juddering halt. GDP
contracted by 5% in the first quarter at an annualised rate, and the unemployment rate has risen
precipitously. If there is another virus outbreak later in the year, GDP is expected to fall by over 8% in 2020
(the double-hit scenario). If, on the other hand, the virus outbreak subsides by the summer and further
lockdowns are avoided (the single-hit scenario), the impact on annual growth is estimated to be a percentage
point less.

Actually that is less than its view of many other countries. But of course we need to remind ourselves that the OECD is not a particularly good forecaster. Also we find that the official data has its quirks.

Total nonfarm payroll employment rose by 2.5 million in May, and the unemployment rate
declined to 13.3 percent, the U.S. Bureau of Labor Statistics reported today……In May, employment rose sharply in leisure and hospitality, construction, education and health services, and retail trade. By contrast, employment
in government continued to decline sharply……….The unemployment rate declined by 1.4 percentage points to 13.3 percent in May, and the number of unemployed persons fell by 2.1 million to 21.0 million.

Those figures not only completely wrong footed the forecasters they nutmegged them as well in one of the most spectacular examples of this genre I have seen. I forget now if they were expecting a rise in unemployment of eight or nine million but either way you get the gist. We do not know where we are let alone where we are going although the Bureau of Labor Statistics did try to add some clarity.

If the workers who were recorded as employed but absent from work due to “other  reasons” (over and above the number absent for other reasons in a typical May) had
been classified as unemployed on temporary layoff, the overall unemployment rate  would have been about 3 percentage points higher than reported (on a not seasonally  adjusted basis).

We learn more about the state of play from the New York Federal Reserve.

The New York Fed Staff Nowcast stands at -25.5% for 2020:Q2 and -12.0% for 2020:Q3. News from this week’s data releases increased the nowcast for 2020:Q2 by 10 percentage points and increased the nowcast for 2020:Q3 by 24.5 percentage points. Positive surprises from labor, survey, and international trade data drove most of the increase.

As you can see the labo(u)r market data blew their forecasts like a gale and leave us essentially with the view that there has been a large contraction but also a wide possible and indeed probable error range.

The Inflation Problem

We get the latest inflation data later after I publish this piece. But there is a problem with the mantra we are being told which is that there is no inflation. Something similar to the April reading of 0.3% is expected. So if we switch to the measure used by the US Federal Reserve which is based on Personal Consumption Expenditures the annual rate if we use our rule of thumb would in fact be slightly negative right now. On this basis Chair Powell and much of the media can say that all the monetary easing is justified.

But there are more than a few catches which change the picture. Let me start with the issues I raised concerning the Euro area yesterday where the numbers will be pushed downwards by a combination of the weights being (very) wrong, many prices being unavailable and the switch to online prices. It would seem that the ordinary person has been figuring this out for themselves.

The May 2020 Survey of Consumer Expectations shows small signs of improvement in households’ expectations compared to April. Median inflation expectations increased by 0.4 percentage point at the one-year horizon to 3.0 percent, and were unchanged at the three-year horizon at 2.6 percent. ( NY Fed Research from Monday)

It is revealing that they describe an increase in inflation that is already above target as an “improvement” is it not? But we see a complete shift as we leave the Ivory Towers and media palaces as the ordinary person surveyed expects a very different picture. Still the Ivory Towers can take some solace from the fact that inflation is in what they consider to be non-core areas.

Expected year-ahead changes in both food and gasoline prices displayed sharp increases for the second consecutive month and recorded series’ highs in May at 8.7% and 7.8%, respectively, in May.

Just for the avoidance of doubt I have turned my Irony meter beyond even the “turn up to 11” of the film Spinal Tap.

Central bankers will derive some cheer from the apparent improvement in perceptions about the housing market.

Median home price change expectations recovered slightly from its series’ low of 0% reached in April to 0.6% in May. The slight increase was driven by respondents who live in the West and Northeast Census regions.

Credit

More food for thought is provided in this area. If we switch to US Federal Reserve policy Chair Jerome Powell will tell us later that the taps are open and credit is flowing. But those surveyed have different ideas it would seem.

Perceptions of credit access compared to a year ago deteriorated for the third consecutive month, with 49.6% of respondents reporting credit to be harder to get today than a year ago (versus 32.1% in March and 48.0% in April). Expectations for year-ahead credit availability also worsened, with fewer respondents expecting credit will become easier to obtain.

Comment

I now want to shift to a subject which is not getting the attention it deserves. This is the growth in the money supply where the three monthly average for the narrow measure M1 has increased in annualised terms by 67.2% in the three months to the 25th of May. Putting that another way it has gone from a bit over US $4 trillion to over US $5 trillion over the past 3 months. That gives the monetary system quite a short-term shove the size of which we can put into context with this.

In April 2008, M1 was approximately $1.4 trillion, more than half of which consisted of currency.  ( NY Fed)

Contrary to what we keep being told about the decline of cash it has grown quite a bit over this period as there is presently a bit over US $1.8 trillion in circulation.

Moving to the wider measure M2 we see a similar picture where the most recent three months measured grew by 40.6% compared to its predecessor in annualised terms. Or if you prefer it has risen from US $15.6 billion to US $18.1 billion. Again here is the historical perspective from April 2008.

 M2 was approximately $7.7 trillion and largely consisted of savings deposits.

So here is a question for readers, where do you think all this money will go? Whilst you do so you might like to note this from the 2008 report I have quoted.

While as much as two-thirds of U.S. currency in circulation may be held outside the United States….

The Investing Channel

 

The Euro area has an inflation problem that the ECB ignores

Yesterday brought us up to date with the thoughts of ECB President Christine Lagarde as she gave evidence to the European Parliament, and grim reading and listening it made.

After a contraction in GDP of 3.8% in the first quarter of the year, our new staff projections see it shrinking by 13% in the second quarter. Despite being expected to bounce back later in the year and recover some of its lost ground, euro area real GDP is now projected to fall by 8.7% over the whole of 2020, followed by growth of 5.2% in 2021 and 3.3% in 2022.

The numbers for 2021 and 22 are pure fantasy of course an area where President Lagarde has quite a track record after her claims about Greece and Argentina. But the fundamental polnt here is of a large and in many ways unprecedented fall in this quarter.

Germany

We have received some hints this morning via the April trade figures for the Euro areas largest economy Germany.

WIESBADEN – Germany exported goods to the value of 75.7 billion euros and imported goods to the value of 72.2 billion euros in April 2020. Based on provisional data, the Federal Statistical Office (Destatis) also reports that exports decreased by 31.1% and imports by 21.6% in April 2020 year on year.

In a pandemic it is no surprise that trade is hit harder than economic output or GDP and the impact was severe.

That was the largest decline of exports in a month compared with the same month a year earlier since the introduction of foreign trade statistics in 1950. The last time German imports went down that much was in July 2009 during the financial crisis (-23.6%).

This meant that the German trade surplus which is essentially the Euro area one faded quite a bit.

The foreign trade balance showed a surplus of 3.5 billion euros in April 2020. That was the lowest export surplus shown for Germany since December 2000 (+1.7 billion euros). In April 2019, the surplus was 17.8 billion euros. In calendar and seasonally adjusted terms, the foreign trade balance recorded a surplus of 3.2 billion euros in April 2020.

In itself that is far from a crisis as both Germany and the Euro area have had plenty of surpluses in this area. But it will be a subtraction to GDP although some will be found elsewhere.

exports to the countries hit particularly hard by the corona virus pandemic dropped sharply from April 2019: France (-48.3%), Italy (-40.1%) and the United States (-35.8%).

So for the first 2 countries the falls will be gains although of course they will have their own losses.

There was a considerable decline in German imports from France (-37.3% to 3.5 billion euros) and Italy (-32.5% to 3.2 billion euros).

So we have a sharp impact on the economy although we need the caveat that these compete with retail sales to be the least reliable numbers we have.

Inflation

If we return to President Lagarde there was also this.

The sharp drop in economic activity is also leaving its mark on euro area inflation. Year-on-year HICP inflation declined further to 0.1% in May, mainly due to falling oil prices. Looking ahead, the inflation outlook has been revised downwards substantially over the entire projection horizon. In the baseline scenario, inflation is projected to average 0.3% in 2020, before rising slightly to 0.8% in 2021, and further to 1.3% in 2022.

There are serious problems with inflation measurement right now and let me explain them.

The HICP sub-indices are aggregated using weights reflecting the household consumption expenditure patterns of the previous year.

This is clearly an issue when expenditure patterns have changed so much. This is illustrated by the area highlighted by President Lagarde oil prices as we note automotive fuel demand was down 46.9% on a year ago. So she is being very misleading. Also I am regularly asked about imputed rent well it has plenty of company right now.

The second principle means that all sub-indices for the full ECOICOP structure will be compiled even when for some categories no products are available on the market. In such cases prices do not exist and they should be replaced with imputed prices.

So if you cannot get a price you make it up. You really could not er make it up…..

Also online quotes are used if necessary. That reflects reality but there is a catch as the prices are likely to be lower than store prices in more than a few cases.

What you might think are minor issues can turn into big ones as we saw last year from a rethink of the state of play concerning package holidays in Germany.

In the following years, the impact of the revision is smaller, between -0.2 and +0.3 p.p. Consequently, the euro area all-items annual rates are revised between 0.0 and +0.3 p.p. in 2015 and between -0.1 and +0.1 p.p. after.

Yes it did change the overall number for the Euro area which is I suppose a case f the mouse scaring and moving the elephant. This really matters when we are told this.

 the deteriorating inflation outlook threatening our medium-term price stability objective.

So we got this in response to a number which is dodgy to say the least.

The Governing Council last Thursday decided to increase the amount of the pandemic emergency purchase programme (PEPP) by an additional €600 billion to a total of €1,350 billion, to extend the net purchase horizon until at least the end of June 2021, and to reinvest maturing assets acquired under the programme until at least the end of 2022.

In context there is also this from Peter Schiff which raises a wry smile.

ECB Pres. Christine Lagarde claims that emergency action is necessary to protect Europeans from a mere 1.3% rise in their cost of living in the year 2022. Lagarde said such a small rise is inconsistent with the ECB’s goal of price stability. Prices must rise more to be stable.

George Orwell must wish he had put that in 1984, although to be fair his themes were spot on. He would have enjoyed how Christine Lagarde sets as her objective making people worse off.

The ECB measures will continue to be crucial in supporting the return of inflation towards our medium-term inflation aim after the worst of the crisis has passed and the euro area economy begins its journey to economic recovery.

Let’s face it even the (wo)man on Mars will probably be aware that these days wages do not necessarily grow faster than prices.

Comment

Let me now spin around to the real game in town for central bankers which is financial markets. Once they had helped the banks by letting them benefit from a -1% interest-rate which of course will in the end be paid by everyone else then boosting asset markets is the next game in town. I have already mentioned the large sums being invested to help governments borrow more cheaply with the 1.35 trillion. As a former finance minister Christine Lagarde can look forwards to being warmly welcomed at meetings with present finance ministers. After all Germany is being paid to borrow and even Italy only has a ten-year yield of 1.42% in spite of having debt metrics which are beginning to spiral.

Next comes equity markets where the Euro Stoxx 50 index was at one point yesterday some 1000 points higher than the 2386 of the 19th of March. The link from all the QE is of portfolio shifts as for example bonds providing less ( and in many cases negative income) make dividends from shares more attractive. As an aside this poses all sorts of risks from pensions investing in wrong areas.

But my main drive is that central banks can push asset prices higher but the problem is that the asset rich benefit but for everyone else there is them inflation. The inflation is conveniently ignored as those responsible for putting housing inflation in the numbers have been on a 20 year holiday. As even the ECB confesses that sector makes up a third of consumer spending you can see again how the numbers are misleading. Or to put it another way how the ordinary person is made worse off whilst the better off gain.

The Lebanon poses a problem for central banks and the belief they cannot fail

There is a lot going on in the Lebanon to say the least so let me open by offering my sympathy to those suffering there. My beat is economics where there is an enormous amount happening too and it links into the role of the new overlords of our time which is,of course, the central banking fraternity. They have intervened on an enormous scale and we are regularly told nothing can go wrong rather like in the way that The Titanic was supposed to be indestructible. If you like me watched Thunderbirds as a child you will know that there were few worse portents than being told nothing can go wrong.

The State of Play

The central bank summed things up in its 2019 review like this.

The Lebanese economy has moved into a state of recession in 2019 with GDP growth touching the negative territory. The International Monetary Fund projected Lebanon’s real GDP to shrink by 12% in 2020, a new double-digit contraction not seen in more than 30 years. In comparison, the IMF forecasted real GDP to contract by 3.3% in the MENA region and by 3% globally in 2020. Inflation in Lebanon recorded 2.9% in 2019, and it is expected to reach 17% in 2020, according to the IMF.

As you can see we have two double-digit measures as output falls by that as we note that the ordinary person will be hurt by double-digit inflation. This poses yet another question for output gap theory. I have to confess I am a little surprised to note that the IMF has not updated the forecasts unlike the government. From the Financial Times.

The government says the economy shrank by 6.9 per cent of GDP last year and expects a further contraction this year of 13.8 per cent — a full-blown depression with an estimated 48 per cent of people already below the poverty line.

The next feature is a currency peg to the US Dollar as we return to the Banque Du Liban.

At the monetary level, the year was marked by noticeable net conversions in favor of foreign currencies, a decline in deposit inflows, a shortage of US dollars and a lack of local currency liquidity. As a result, BDL’s assets in foreign currencies witnessed a contraction of 6% to reach $37.3 billion at end December 2019.

Troubling and a signal that if you control the price via a currency peg the risk is that you have a quantity problem which is always likely to be a shortage of US Dollars.

Well I need a dollar dollar, a dollar is what I need
Hey hey
And I said I need dollar dollar, a dollar is what I need
And if I share with you my story would you share your dollar with me ( Aloe Blacc)

This led to what Taylor Swift would call “trouble,trouble,trouble”

It is worth mentioning that in the last quarter of 2019, the Lebanese pound has plunged on a parallel market by nearly 50% versus an official rate of 1507.5 pounds to the dollar. The Central Bank is still maintaining the official peg in bank transactions and for critical imports such as medicine, fuel and wheat.

This leads to the sort of dual currency environment we have looked at elsewhere with Ukraine coming to mind particularly.

The present position is that the official peg is “Under Pressure” as Queen and David Bowie would say as it has been above 1500 for the whole of the last year. There was particular pressure on the 4th of May when it went to 1522. Switching to the unofficial exchange rate then Lira Rate have it at 3890/3940. I think that speaks for itself.

The official Repo rate is 10% and rise as we move away from overnight to 13.46% for three-year paper. Just as a reminder the United States has near zero interest-rates so this is another way of looking at pressure on the currency peg and invites all sorts of problems.For example the forward rate for the official Lebanese Pound will be around 10% lower for a year ahead due to the interest-rate gap. So more pressure on a rate which is from an alternative universe.

It looks like there has been some currency intervention as in the fortnight to the end of May foreign currency assets fell from 51.6 trillion Lebanese Pounds to 50.5 trillion.

Corruption

We start with the Financial Times bigging up the banking sector but even it cannot avoid the consequences of what has happened.

The banks, long the jewel in Lebanon’s economic crown, and the central bank, the Banque du Liban, are at the heart of this crisis. The banks long offered high interest rates to attract dollar deposits, especially from the far-flung Lebanese diaspora. But Riad Salameh, BdL governor since 1993, began from 2016 offering unsustainable interest returns to the banks to lend on these dollars to the government, through the central bank.

That has led to a type of economic dependency.

In sum, 70 per cent of total assets in the banking system were lent to an insolvent state. The recovery programme estimates bank losses at $83bn and “embedded losses” at the BdL at $44bn (subject to audit). Together that is well over twice the size of the shrinking economy.

One of the worst forms of corruption is where government and the banks get together. For them it is symbiotic and both have lived high on the hog but they have a parasitical relationship with the ordinary Lebanese who now find the price is inflation and an economic depression.

Bankers are protesting at government plans to force mergers and recapitalisation, through a mix of wiping out existing shareholdings; fresh capital investment for banks that wish to stay in business, especially by repatriating dividends and interest earnings; recovered illicit assets; and “haircuts” on wealthy depositors.

Or as Reuters put it.

But the banks were not responsible for the devastating waste, pillage and payroll padding in the public sector – about which this plan has little detailed to say.

Comment

We find that this sort of situation involves both war and corruption. Big business, the banks and government getting to close is another warning sign and one we see all around us. But as we review a parallel currency, an economic depression and upcoming high inflation there is also this.

The sources say the plan focuses overwhelmingly on the banks and the central bank, which together lent more than 70% of total deposits in the banking system to an insolvent state at increasingly inflated interest rates put in place by central bank governor Riad Salameh. ( Reuters)

Ordinarily we assume that a central bank cannot fold as the stereotype is of one backed by the national treasury to deal with losses. There is a nuance with the Euro area where the fact there are 19 national treasuries adds not only nuance but risk for the ECB. But in general if you control the currency you can just supply more to settle any debts.the catch is its overseas value or exchange rate as we note that Mr and Mrs Market have already voted on the Lebanese Pound. But there is more as I noted on Twitter last week.

Auditors are asking banks to take a provision of ~40% against exposure to its central bank. This has to be a first in history. ( @dan_azzi)

We have become used to that being the other way around. The next bit is rather mind boggling as we mull the moral hazard at play here.

Even funnier is that BDL is about to send a circular asking banks to take a 30% provision on their exposure to BDL.

Frankly both look too low which means for the ordinary person that there is a risk of bail ins.

Podcast

 

Christine Lagarde and the ECB have switched from monetary to fiscal policy

The Corona Virus pandemic has really rather caught the European Central Bank (ECB) on the hop. You see it was not supposed to be like this on several counts. Firstly the “Euro Boom” was supposed to continue but we now know via various revisions that things had turned down in Germany in early 2018 and then the Trumpian trade war hit as well. So the claims of former ECB President Mario Draghi that a combination of negative interest-rates and QE bond buying had boosted both Gross Domestic Product ( GDP) and inflation by around 1.5% morphed into this.

First, as regards the key ECB interest rates, we decided to lower the interest rate on the deposit facility by 10 basis points to -0.50%……..Second, the Governing Council decided to restart net purchases under its asset purchase programme (APP) at a monthly pace of €20 billion as from 1 November. We expect them to run for as long as necessary to reinforce the accommodative impact of our policy rates, and to end shortly before we start raising the key ECB interest rates.

As you can see the situation was quite problematic. For all the rhetoric who really believed that a cut in interest-rates of 0.1% would make a difference when much larger ones had not? Next comes the issue of having to restart sovereign bond purchases and QE only 9 months or so after stopping it. As a collective then there is the issue of what all the monetary easing has achieved? That leads to my critique that it is always a case of “More! More! More” or if you prefer QE to Infinity.

Next comes the issue of personnel. For all the talk about the ECB being independent the reclaiming of it by the political class was in process via the appointment of the former French Finance Minister Christine Lagarde as President. This of course added to the fact that the Vice President Luis de Guindos had been the Spanish Finance Minister. Combined with this comes the issue of competence as I recall Mario Draghi pointing out he would give Luis de Guindos a specific job when he found one he could do, thereby clearly implying he lacked the required knowledge and skill set. It is hard to know where to start with Christine Lagarde on this subject after her failures involving Greece and Argentina ( which sadly is in the mire again) and her conviction for negligence. Of course she has added to that more recently with her statement about “bond spreads” which saw the ten-year yield in Italy impersonate a Space-X rocket until somebody persuaded her to issue a correction. Although as the last press conference highlighted you never really escape a faux pas like that.

Do you now believe that it is the ECB’s role to control the spreads on government debt?

The Present Situation

This was supposed to be one where monetary policy had been set for the next year or so and President Lagarde could get her Hermes slippers under the table before having to do anything. Life sometimes comes at you quite fast though as this morning has already highlighted. From Eurostat.

In April 2020, the COVID-19 containment measures widely introduced by Member States again had a significant
impact on retail trade, as the seasonally adjusted volume of retail trade decreased by 11.7% in the euro area and
by 11.1% in the EU, compared with March 2020, according to estimates from Eurostat, the statistical office of
the European Union. In March 2020, the retail trade volume decreased by 11.1% in the euro area and by 10.1%
in the EU.
In April 2020 compared with April 2019, the calendar adjusted retail sales index decreased by 19.6% in the euro
area and by 18.0% in the EU.

As you can see Retail Sales have fallen by a fifth as far as we can tell ( normal measuring will be impossible right now and the numbers are erratic in normal times). Also there were large structural shifts with clothing and footwear down 63.5% on a year ago and online up 20.9%. Much of this is due to shops being closed and will be reversed but there is a loss for taxes and GDP which is an issue for ECB policy. Other news points out that May has its troubles as well.

Germany May New Car Registrations Total 168,148 -49.5% Y/Y – KBA ( @LiveSquawk)

Policy Response

For all the claims and rhetoric is that the ECB has prioritised the banks and government’s. So let us start with The Precious! The Precious!

Accordingly, the Governing Council decided today to further ease the conditions on our targeted longer-term refinancing operations (TLTRO III)……. Moreover, for counterparties whose eligible net lending reaches the lending performance threshold, the interest rate over the period from June 2020 to June 2021 will now be 50 basis points below the average deposit facility rate prevailing over the same period.

For newer readers this means that the banks will be facing what is both the lowest interest-rate seen so far anywhere at -1% and also a fix for the problems they have dealing with a -0.5% interest-rate more generally. It also means that whilst the bit below is not an outright lie it is also not true.

In addition, we decided to keep the key ECB interest rates unchanged.

In fact for those who regard the interest-rate for banks as key it is an untruth. Estimates for the gains to the banking sector from this are of the order of 3 billion Euros. Yet another subsidy or if you prefer we are getting the Vapors.

I’m turning Japanese, I think I’m turning Japanese, I really think so
Turning Japanese, I think I’m turning Japanese, I really think so

Fiscal Policy

This is what monetary policy has now morphed into. There is an irony here because one of the reasons the ECB has pursued such expansionary policy is the nature of fiscal policy in the Euro area. That has been highlighted in three main ways. the surpluses of Germany, the Stability and Growth Pact and the depressive policy applied to Greece. But that was then and this is now.

Chancellor Angela Merkel said Wednesday that Germany was set to plow 130 billion euros ($146 billion) into rebooting an economy severely hit by the coronavirus pandemic.

The measures include temporarily cutting value-added tax form 19% to 16%, providing families with an additional €300 per child and doubling a government-supported rebate on electric car purchases.

The package also establishes a €50 billion fund for addressing climate change, innovation and digitization within the German economy. ( dw.com )

Even Italy is being allowed to spend.

Fiat To Use State-Backed Loan To Pay Italy Staff, Suppliers ( @LiveSquawk)

This is the real reason for the QE and is highlighted below.

FRANKFURT (Reuters) – The European Central Bank scooped up all of Italy’s new debt in April and May but merely managed to keep borrowing costs for the indebted, virus-stricken country from rising, data showed on Tuesday.

The ECB bought 51.1 billion euros worth of Italian government bonds in the last two months compared with a net supply, as calculated by analysts at UniCredit, of 49 billion euros.

Comment

Thus President Lagarde will be mulling the words of Boz Scaggs.

(What can I do?)
Ooh, show me that I care
(What can I say?)
Hmmm, got to have your number baby
(What can I do?)

Plainly the ECB needs the flexibility of being able to expand its QE bond buying so that Euro area governments can borrow cheaply as highlighted by Italy or be paid to borrow like Germany. We could see the PEPP plan which is the latest emergency one expanded as it will run out in late September on present trends, also the German Constitutional Court has conveniently given it a bye. But she could do that next time. So finally we have a decision appropriate for a politician!

As to interest-rates we see that the banks have as usual been taken care of. That only leaves the rest of us so it is unlikely. We will only see another cut if they decide that like a First World War general that a futile gesture is needed.

The problems posed by mass unemployment

A sad consequence of the lock downs and the effective closure of some parts of the economy is lower employment and higher unemployment. That type of theme was in evidence very early today as we learnt that even the land “down under” looks like it is in recession after recording a 0.3% decline in the opening quarter of 2020. The first for nearly 30 years as even the commodities boom seen has been unable to resist the effects of the pandemic. This brings me to what Australia Statistics told us last month.

Employment decreased by 594,300 people (-4.6%) between March and April 2020, with full-time employment decreasing by 220,500 people and part-time employment decreasing by 373,800 people.Compared to a year ago, there were 123,000 less people employed full-time and 272,000 less people employed part-time. Thischange led to a decrease in the part-time share of employment over the past 12 months, from 31.5% to 30.3%.

I have opened with the employment data as we get a better guide from it in such times although to be fair it seems to be making a fist of the unemployment position.

The unemployment rate increased 1.0 points to 6.2%and was 1.0 points higher than in April 2019. The number of unemployed people increased by 104,500 in April 2020 to 823,300 people, and increased by 117,700 people from April 2019.

The underemployment rate increased by 4.9 pts to 13.7%, the highest on record, and was 5.2 pts higher than in April 2019.The number of underemployed people increased by 603,300 in April 2020 to 1,816,100 people, an increase of almost 50% (49.7%), and increased by 666,100 people since April 2019.

As you can see they have picked up a fair bit of the changes and it is nice to see an underemployment measure albeit not nice to see it rise so much. The signal for the Australian economy in the quarter just gone is rather grim though especially if we note this.

Monthly hours worked in all jobs decreased by 163.9 million hours (-9.2%) to 1,625.8 million hours in April 2020, larger than the decrease in employed people.

Italy

In line with our “Girlfriend in a coma” theme one fears the worst for Italy now especially as we note how hard it was hit by the virus pandemic. Even worse a mere headline perusal is actively misleading as I note this from Istat, and the emphasis is mine.

In April 2020, in comparison with the previous month, employment significantly decreased and unemployment sharply fell together with a relevant increase of inactivity.

The full detail is below.

In the last month, also the remarkable fall of the unemployed people (-23.9%, -484 thousand) was recorded for both men (-17.4%, -179 thousand) and women (-30.6%, -305 thousand). The unemployment rate dropped to 6.3% (-1.7 percentage points) and the youth rate fell to 20.3% (-6.2 p.p.).

Yes a number which ordinarily would be perceived as a triumph after all the struggles Italy has had with its economy and elevated unemployment is at best a mirage and at worst a complete fail for the methodology below.

Unemployed persons: comprise persons aged 15-74 who:
were actively seeking work, i.e. had carried out activities in the four week period ending with the reference week
to seek paid employment or self-employment and were available to start working before the end of the two
weeks following the reference week;

Some would not have bothered to look for work thinking it was hopeless and many of course would simply have been unable to. We do find them elsewhere in the data set.

In April the considerable growth of inactive people aged 15-64 (+5.4%, +746 thousand) was registered for
both men (+6.0%, +307 thousand) and women (+5.0%, +438 thousand), leading the inactivity rate to
38.1% (+2.0 percentage points).

If we look back we see that there was a similar issue with the March numbers so a published unemployment rate of 6.3% looks like one of over 11% if we make some sort of correction for the April and March issues.

We get a better guide to the state of play from the employment position which as we observe from time to time has become something of a leafing indicator.

On a monthly basis, the decline of employment (-1.2%, -274 thousand) concerned both men (-1.0%, -131 thousand) and women (-1.5%, -143 thousand), and brought the employment rate to 57.9% (-0.7 p. p.)…….With respect to the previous quarter, in the period February – April 2020, employment considerably decreased (-1.0%, -226 thousand) for both genders…….Compared to March 2019, employment showed a decrease in terms of figures (-2.1%, -497 thousand) and rate (-1.1 percentage points).

Oh and in the last sentence they mean April rather than March. But looking ahead we see a 1.2% fall for employment in April alone which has implications for GDP and of course it is before the furlough scheme.

 Italy has furloughed 7.2 million workers, equivalent to 31% of employment at end-2019; ( FitchRatings )

Germany

This morning has also brought news about the state of play in Germany.

WIESBADEN – Roughly 44.8 million persons resident in Germany (national concept) were in employment in April 2020 according to provisional calculations of the Federal Statistical Office (Destatis). Compared with April 2019, the number of persons in employment decreased by 0.5% (-210,000). This means that for the first time since March 2010 the number of persons in employment decreased year on year (-92,000; -0.2%). In March 2020, the year-on-year change rate had been +0.2%.

For our purposes we get a signal from this.

According to provisional results of the employment accounts, the number of persons in employment fell by 161,000 in April 2020 on the previous month. Normally, employment rises strongly in April as a result of the usual spring upturn, that is, by 143,000 in April on an average of the last five years.

Perhaps the headline read a lot better in German.

No spring upturn

Switching to unemployment the system seems less flawed than in Italy.

Results of the labour force survey show that 1.89 million people were unemployed in April 2020. That was an increase of 220,000, or 13.2%, on March 2020. Compared with April 2019, the number of unemployed persons increased by 515,000 or +38.0%. The unemployment rate was 4.3% in April 2020.

There is a clear conceptual issue here if we return to Fitch Ratings.

Germany has enrolled more than 10 million workers on its scheme, representing 22% of employment at the end-2019. This number ultimately may be lower because some firms that have registered employees as a precaution may decide not to participate.

Germany employed the Kurzarbeit to great effect during the global financial crisis when its implementation prevented the mass lay-offs that were seen elsewhere in Europe. While unemployment in Germany remained broadly unchanged in 2008-2009, other countries reported significant increases.

Comment

There are deep sociological and psychological impacts from these numbers and let me give my sympathies to those affected. Hopefully we can avoid what happened in the 1930s. Returning to the statistics there are a litany of issues some of which we have already looked at. Let me point out another via the German employment data.

After seasonal adjustment, that is, after the elimination of the usual seasonal fluctuations, the number of persons in employment decreased by 271,000 (-0.6%) in April 2020 compared with March 2020.

The usual pattern for seasonal fluctuations will be no guide this year and may even be worse than useless but it will still be used in the headline data. But there is more if we switch to Eurostat.

In April 2020, the second month after COVID-19 containment measures were implemented by most Member
States, the euro area seasonally-adjusted unemployment rate was 7.3%, up from 7.1% in March 2020. The EU
unemployment rate was 6.6% in April 2020, up from 6.4% in March 2020.

We have the issue of Italy recording a large rise as a fall but even in Germany there is an issue as I note an unemployment rate of 4.3%. Well after applying the usual rules Eurostat has published it at 3.5%. There is no great conspiracy here as the statisticians apply rules which are supposed to make things clearer but some extra thought is requited as we note they are in fact making the numbers pretty meaningless right now, or the opposite of their role.

The Investing Channel

 

 

 

 

UK consumer credit collapses as the money supply soars

As we peruse the data for the impact of all the Bank of England actions in this pandemic we have also been updated on its main priority. From the Nationwide Building Society.

“UK house prices fell by 1.7% over the month in May, after
taking account of seasonal effects – this is the largest
monthly fall since February 2009. As a result, the annual rate of house price growth slowed to 1.8%, from 3.7% in April.”

According to them things had been going really rather well before the May reverse.

“In the opening months of 2020, before the pandemic struck
the UK, the housing market had been steadily gathering
momentum. Activity levels and price growth were edging up thanks to continued robust labour market conditions, low borrowing costs and a more stable political backdrop
following the general election.”

Personally I am rather dubious about the April number but we do have a large fall for May and also something of a critique for the suspended official index from the Office for National Statistics.

Mortgage activity has also declined sharply. Nevertheless,
our ability to generate the house price index has not been
impacted to date, as sample sizes have remained sufficiently large (and representative) to generate robust results.

Rents

Perhaps such news is all too much for the boomers as I note the BBC reporting this today.

Lockdown break-ups, job losses and urgent relocations are thought to have led to a surge in the rental sector.

Demand for lettings in Great Britain is up by 22% compared to last year, according to property giant Rightmove.

Experts say the lifting of lockdown restrictions has released “two months of pent-up tension” in the market.

The supply of new rents is not keeping up with demand, however, prompting fears the surge will push up costs and leave some struggling to find homes.

The article tries to give the impression that rents are rising but provides no evidence for this at all, as the data set only has demand. It seems to lack a mention of the numbers in the data set which showed larger demand declines in the pandemic. We seem back to the get in now before rents boom message that is so familiar as the media parrots what the industry wants.

“I think we were lucky really because we got in there before demand boomed.”

On a personal level some people were viewing in my block yesterday. Fair play to the viewers who put on masks, but sadly the estate agent who is more likely to spread the virus did not bother with any PPE.

Consumer Credit

Even in the hot summer weather we are seeing the spine of the Monetary Policy Committee will have seen a sudden chill as these numbers came in.

New gross borrowing fell to £11.8 billion in April, roughly half its February level. Repayments on consumer borrowing have also fallen sharply, by 19% since February, reflecting payment holidays. On net, the larger fall in gross borrowing meant people repaid £7.4 billion of consumer credit in April, double the repayment in March, which itself was a record repayment (Chart 3). The extremely weak net flows of consumer credit meant that the annual growth rate fell below zero in April, to -0.4%, the weakest since August 2012.

What is happening here is that each month there is a large amount of new borrowing but also repayments and the usual situation is that we see net borrowing and in recent years lots of it. In April the amount of new borrowing fell and for once the use of the word collapse is appropriate whereas the level of repayments fell by much less. Thus the net amount swung by as much as I can ever recall.

In terms of the detail the main player was credit card borrowing.

The majority (£5.0 billion) of net consumer credit repayments were on credit cards, while £2.4 billion of other loans were also repaid in April. The annual growth rate of credit card lending was negative for the second month running, falling to -7.8%, compared with 3.5% in February before borrowing fell. Growth in other loans and advances remained positive, at 3.1%.

Mortgages

There was a similar pattern to be found here although in this instance it was not enough to turn the net figure negative. Also the bit I have emphasised is a signal of the financial distress I have both feared and expected.

Lending has also fallen sharply. Gross (new) mortgage borrowing fell to £14.4 billion, 38% lower than in February (Chart 5). Repayments on mortgage lending also fell sharply, to £13.9 billion, 26% lower than in February. This reflects a sharp fall in full repayments of loans, as well as the effect of payment holidays. The sharper fall in gross lending than repayments means that net mortgage borrowing fell, and was only £0.3 billion in April compared to an increase of £4.3 billion in February. This was the lowest net increase since December 2011.

One area that I do expect to pick up is this.

Approvals for remortgage (which include remortgaging with a different lender only) have fallen by less, to 34,400, 34% lower than in February.

With my indicator for fixed mortgage interest-rates ( the five-year Gilt yield) so low and effectively around 0% I expect some cheaper mortgage rates and hence more remortgaging, for those that can. As to mortgage rates they did this.

The effective interest rate paid on the stock of floating-rate mortgages fell 46 basis points, to 2.39%, the lowest rate since this series began in 2016; and the rate on new floating-rate loans fell 35 basis points to 1.48%.

They do not often tell us the mortgage rates but I guess they wanted to emphasise their own actions.

The rate paid by individuals on floating-rate mortgage borrowing fell a little further in April, however, as the MPC’s March Bank Rate cuts continued to pass through.

Business Lending

You might like to recall as you read the bit below that all of the credit easing since the summer of 2012 has been to boost small business lending.

Private sector businesses of all sizes borrowed little extra from banks in April. Small and medium sized businesses drew down an extra £0.3billion in loans from banks, on net, a similar amount as in March. The annual growth rate of borrowing by SMEs was 1.2%, in line with the growth rate since mid 2019.

For newer the readers the central banking game is to claim you are boosting lending to SMEs and then express surprise when it is mortgage lending and unsecured credit to consumers that rises and soars respectively.

The numbers below are mostly because many businesses have been desperate for cash.

But strength in borrowing by the public administration and defence industry meant total borrowing by large businesses was £12.9 billion in April. While this total is very strong by historical standards, it is down from £32.4 billion in March. The annual growth rate of borrowing by all large businesses increased to 15.4%, much stronger than the growth rate of around 5% in late 2019.

There will be quite a complicated mixture there as we no note lower and sometime zero sales colliding with many expenses continuing.

This is an ongoing problem where big businesses get help. As you can see they can access bank loans and the various Bank of England schemes are designed for them too.

 In April, firms raised £16.1 billion from financial markets, on net, the highest amount raised since June 2009 and significantly stronger than the previous six month average of £23 million. Within this, firms issued £7.7 billion of bonds, £7.0 billion of commercial paper (including funds raised through the Covid Corporate Financing Facility), and £1.4 billion of equity.

It is not easy as for obvious reasons a central bank can help a large business in ways that it cannot help a corner shop or one (wo)man band but the truth is that they also get a bit lazy and could try much harder.

Comment

I have held back the money supply data for this section and here it is.

These additional sterling deposit ‘flows’ by households, private non-financial businesses (PNFCs) and financial businesses (NIOFCs), known as M4ex, rose by £37.3 billion in April. The strength was driven by households and PNFCs. The increase was smaller than in March, when money increased by £67.3 billion.

An interesting decline in the monthly number but the main message here is the £104.6 billion in only two months which compares to a total of £2364.4 billion. So a bit short of 5% in only 2 months! The annual rate is now 9%. On terms of economic impact then that is supposed to give us a nominal GDP growth rate also of 9% in a couple of years. Because of where we are there are all sorts or problems with applying that rule but it is grounds for those who have inflation fears. Oh and as to how this is created well some £13.5 billion of QE a week sure helps.

One other factor will be that these aggregate numbers will hide very different individual and group impacts. For example some with mortgages will be in financial distress whereas others will be using lower rates to increase repayments. The same will be true of businesses with sadly as I have explained above smaller ones usually getting the thin end of the wedge. These breakdowns are as important as the aggregate data but often get ignored.