The Italian economy looks to be heading south again

Today has opened with what is more disappointing economic news for the land of la dolce vita. From the Italian Statistics Office or Istat.

In July 2018 the seasonally adjusted industrial production index decreased by 1.8% compared with the previous month. The percentage change of the average of the last three months with respect to the previous three months was -0.2.
The calendar adjusted industrial production index decreased by 1.3% compared with July 2017 (calendar working days being 22 versus 21 days in July 2017);

As you can see output was down both on the preceding month and on a year ago. This is especially disappointing as the year had started with some decent momentum as shown by the year to date numbers.

 in the period January-July 2018 the percentage change was +2.0 compared with the same period of 2017.

However if we look back we see that the push higher in output came in the last three months of 2017 and this year has seen more monthly declines on a seasonally adjusted basis ( 4) than rises (3). Looking ahead we see that things may even get worse as the Markit PMI business survey for manufacturing tells us this.

Italy’s manufacturing sector eased towards
stagnation during August. Both output and new
orders were lower, undermined by weak domestic
demand, whilst employment increased to the
weakest degree since September 2016……..Expectations were at their lowest for over five years.

This seems set to impact on the wider economic position.

At current levels, the PMI data suggest industry
may well provide a net negative contribution to
wider GDP levels in the third quarter of the year.

With Italy’s ongoing struggle concerning economic growth that is yet another problem to face. But it is something with which it has become increasingly familiar as the industrial production sector is still in a severe depression. What I mean by that is the peak for this series was 133.3 in August of 2007 and the benchmarking at 100 for eight years later (2015) shows what Taylor Swift would call “trouble,trouble,trouble” . The initial fall was sharp and peaked at an annual rate of 26% but there was a recovery however, in that lies the rub. In 2011 Italy saw a bounce back in production to 111.9 at the peak but then the Euro area crisis saw it plunge the depths again. It did respond to the “Euroboom” in 2016 and 17 but looks like it is falling again and an index of 105.2 in July tells its own story.

So all these years later it is still 21% lower than the previous peak. We worry in the UK about a production number which is 6.1% lower but as you can see we at least have some hope of regaining it unlike Italy.

The wider outlook

Italy’s economy is heavily influenced by its Euro area colleagues and they seem to be noting a slow down as well. From @stewhampton

The ECB committee that oversees the compilation of the forecasts now sees the risks to economic growth as tilted to the downside.

Perhaps they have suddenly noted their own money supply data! At which point they are some time behind us.  Also in the language of central bankers this is significant as they do not switch from “broadly balanced” to “tilted to the downside” lightly, and especially not when they are winding down a stimulus program.

So we see that the Italian economy will not be getting much of a boost from its neighbours and colleagues into the end of 2018.

Employment

Yet again this morning’s official release poses a question about the economic situation in July?

In the most recent monthly data (July 2018), net of seasonality, the number of employees showed a slight decrease compared to June 2018 (-0.1%) and the employment rate remained stable.

This modifies the previous picture which had been good.

The year-on-year trend showed a growth of 387 thousand employees (+1.7% in one year), concentrated among temporary employees against the decline of those permanent (+390 thousand and -33 thousand, respectively) and the growth of the self-employed (+30 thousand).

So more people were in work which is very welcome in a country where a high level of unemployment has persisted. We keep being told that the unemployment rate in Italy has fallen below 11% ( in this instance to 10.7%) but then later it gets revised back up again. Of course even 10.7% is high. I would imagine many of you have already spotted that the employment growth is entirely one of temporary jobs which does not augur well if things continue to slow down.

Some better news

Italy is a delightful country so let us note what some might regard as a triumph for the “internal competitivesness” policies of the Euro area.

Italy’s current account position is one of the country’s most improved economic fundamentals since the financial crisis. As the above chart shows, it improved by 6.2 percentage points to a sizable surplus of 2.8% of gross domestic product (GDP) last year—the highest level since 1997—from a deficit of 3.4% of GDP in 2010.

That is from DBRS research who in this section will have the champagne glasses clinking at the European Commission/

external cost competitiveness gains related to relatively slower domestic wage growth.

The Italian worker who has been forced to shoulder this will not be anything like as pleased as we note that some of the gain comes directly from this.

In response to the recession, nominal imports of goods declined significantly by around 5% a year between 2012 and
2013.

Also Italy has benefited from lower oil prices.

Since then, lower energy prices further contributed to the improvement in the current account, and Italy’s imported energy bill bottomed out at 1.6% of GDP in 2016, down from a peak of 3.9% of GDP in 2012.

Not quite the export-led growth of the economics textbooks is it? Still maybe there will be a boost from tourism.

Why everyone is suddenly going to Milan on vacation ( Wall Street Journal)

According to the WSJ Milan has  “been hiding in plain sight for decades ” which must be news to all of those who have been there which include yours truly.

Comment

The downbeat economic news has arrived just as things seemed to have got calmer regarding the new coalition government. Or as DBRS research puts it.

More recently, the leaders have reaffirmed their commitment to adhere to the European Union (EU) framework. In DBRS’s view, this is a positive development.

This has meant that the ten-year bond yield which had risen above 3.2% is now 2.75%. So congratulations to anyone who has been long Italian bonds over the past ten days or so and should you choose you will be able to afford to join the WSJ in Milan as a reward. However bond yields have shifted higher if we return to the bigger picture so this will continue to be a factor.

In DBRS’s view, total interest expenditure as a share of gross domestic product (GDP) may slightly narrow this year compared with the 3.8% of GDP recorded in
2017.

As new issuance has got more expensive than in 2017 I am not sure about the narrowing point.

Also there is the ongoing sage about the Italian banks which has become something of a never-ending story. Officially Unicredit has been the success story here and yet if it is such a success why were rumours like these circulating yesterday?

The other rumour was a merger with Societe Generale of France. Anyway the current share price of around 13 Euros is a long way short of the previous peak of 370 or so. This reminds us of the news stories surrounding the fall of Lehman Bros. a decade ago as it has been a dreadful decade for both Unicredit and Italy as we note the economy is still 5% smaller than the previous peak.

 

 

 

 

 

 

 

 

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Has UK employment peaked and if so why aren’t wages rising faster?

After yesterday’s generally good economic news from the UK we turn to the labour market today. This has been if we switch to a football analogy a story of two halves. The first half continues an optimistic theme as we note how the quantity numbers such as employment and unemployment have developed. Indeed it was the rally in employment that signaled the  turn in the UK economy at the opening of 2012 and set the trend some time before the output numbers caught up. If we take a broad sweep the number of people employed in the UK has risen from 29.4 million to 32.4 million. That is not a perfect guide due to problems with how the numbers are measured and the concept of underemployment, but if we switch to hours worked we see they have risen from 935 million per week to 1032 million per week over the same time period.

But the ying to that yang has come from the price of labour or wage growth which has consistently struggled. This has been associated with what has come to be called the “productivity puzzle”. These are issues which are spread far wider than the UK as for example whilst the rise in US wage growth seen on Friday was welcome the reality was that it was to 2.9%. Or to put it another way the same as the July CPI inflation number. That sets a first world context where growth is not what it used to be as I looked at only on Friday. The truth is that it was fading even before the credit crunch and it gave it a further push downwards.

Unfortunately whilst we face the reality of something of a lost decade for wage growth the establishment has not caught up. It continues to believe that a change is just around the corner. For example the Ivory Tower at the Bank of England has forecast year after year that wage growth will pick up in a rinse, fail and repeat style. This is based on the “output gap” theory that has been so regularly debunked by reality over the past decade.

The MPC continues to judge that the UK economy currently has a very limited degree of slack. ( August Minutes)

This has been its position for some years now with the original starting position being that the “slack” was of the order of 1% to 1.5%. In that world wages would be on their way to the 5 1/2% growth rate predicted by the Office for Budget Responsibility back in the summer of 2010.

Does this really matter? I think it does. This is because when an official body becomes something of a haven for fantasies it allows it to avoid facing up to reality especially if that reality is an uncomfortable one. A particular uncomfortable reality for the establishment is the fact that the decline in wage growth has accompanied the era of low and negative interest-rates and the QE era. If you try to take credit for employment growth ( I recall Governor Carney claiming that he had “saved” 250.000 jobs with his post EU leave vote actions) then you also have to face the possibility that you have helped to reduce wage growth. Propping up larger businesses and especially banks means that the “creative destruction” of capitalism barely gets a look in these days.

Today’s data

Wages

Looked at in isolation we got some better news this morning.

Between May to July 2017 and May to July 2018, in nominal terms: regular pay increased by 2.9%, higher than the growth rate between April to June 2017 and April to June 2018 (2.7%)……..total pay increased by 2.6%, higher than the growth rate between April to June 2017 and April to June 2018 (2.4%).

Should you wish to cherry pick in the manner of the Bank of England then your focus would turn to the 3% growth of private-sector regular pay and perhaps to its 3.2% growth in July alone. Indeed you could go further and emphasise the 3.5% growth in regular pay in the wholesale retail and hotel/restaurant category which was driven by 4.4% growth in July.

But the problem for the many cherry pickers comes from the widest number which cover everyone surveyed and also includes bonuses. You see it started 2018 at 2.8% as opposed to the 2.6% in the three months to July. Also if we look back we see that weekly total wages fell in July of 2017 from £509 to £504 so the 3.1% increase in July is compared to a low base. Thus even after what is six years now of employment gains we find ourselves facing this situation.

Please take their numbers as a broad brush. It is welcome that they provide historical context,  but also disappointing that they use the CPIH inflation measure which via its use of imputed or fantasy rents is an inappropriate measure for this purpose. Pretty much any other inflation measure would overall show a worse situation.

Employment

The long sequence of gains may now be fading.

Estimates from the Labour Force Survey show that, between February to April 2018 and May to July 2018, the number of people in work was little changed………..There were 32.40 million people in work, little changed compared with February to April 2018 but 261,000 more than for a year earlier.

On the surface it looks like the composition of employment at least was favourable.

Figure 4 shows that the annual increase in the number of people in employment (261,000) was entirely due to more people in full-time employment (263,000).

Due to the way full-time employment is officially counted (for newer readers rather than being defined it is a matter of choice/opinion) we need confirmation from the hours worked numbers.

Between February to April 2018 and May to July 2018, total hours worked increased (by 4.0 million) to 1.03 billion. This increase in total hours worked reflected an increase in average weekly hours worked by full-time workers, particularly women.

Work until you drop?

There has been a quite noticeable change in one section of the workforce.

The number of people aged 65 years and older who were in employment more than doubled between January 2006 and July 2018, from 607,000 to 1.26 million. The same age group had an employment rate of 6.6% in 2006 and this increased to 10.7% in the three months to July 2018.

We get some suggested reasons for why this might be so.

the improved health of the older population, which increases older workers’ desire to continue working for reasons of status, identity and economic well-being.

 

changes to the state pensionable age for both men and women.

 

changes to employment laws that prohibit discrimination based on age.

 

older people’s desire for financial independence and social interaction.

To my mind that list misses out those who continue to work because they feel they have to. Either to make ends meet or to help younger members of their family.

Comment

There is a fair bit to consider today and this time around it concerns employment itself. At some point the growth had to tail off and that has perhaps arrived and it has come with something else.

The level of inactivity in the UK went up by 108,000 to 8.76 million in the three months to July 2018, resulting in an inactivity rate of 21.2%. Inactivity increased by 16,000 on the year.

That is an odd change when the employment situation looks so strong and I will be watching it as the rest of 2018 unfolds.

Moving to wages we find ourselves yet again at the mercy of the poor quality of the data. The exclusion of the self-employed, smaller businesses and the armed forces means that they tell us a lot less than they should. Also the use of a broad average means that the numbers are affected by changes in the composition of the workforce. For example if many of the new jobs created are at lower wages which seems likely that pulls the rate of growth lower when they go into the overall number. So it would be good to know what those who have remained in work have got. Otherwise we are in danger of a two or more classes of growth and also wondering why so many in work need some form of income support.

 

 

 

 

 

 

 

 

UK real wage growth continues to disappoint

Today brings us back to the domestic beat and in fact the heartbeat of the UK economy which is its labour market. This has in recent years seen two main developments. The first is a welcome rise in employment which has seen the unemployment rate plunge. But the second has been that wage growth has decoupled from this leaving the Ivory Towers of the establishment building what might be called castles in the sky.  In that fantasy world wage growth would now be around 5% except it is not and in fact it is nowhere near it.

Oh tell me why
Do we build castles in the sky?
Oh tell me why
Are the castles way up high? ( Ian Van Dahl)

Or if we look at the Bank of England Inflation Report from earlier this month.

A tightening labour market and lower unemployment is typically associated with higher pay growth  as it becomes more difficult for firms to recruit and retain staff.

This is another way of expressing the “output gap” theory which keeps needing revision as it keeps being wrong. As this from Geoff Tily shows that has been a consistent feature of Governor Carney’s term at the Bank of England.

In 2014, Bank of England Governor Mark Carney told the TUC Congress that wages should start rising in real terms “around the middle of next year” and “accelerate” afterwards” .

They did rise in the first half of 2015, but then decelerated afterwards.

Actually the Inflation Report does address the issue but only with what George Benson described as “hindsight is 20/20 vision”.

During the financial crisis, output fell and unemployment rose, as companies reduced hiring and increased redundancies. The number of additional hours people wanted to work also rose, perhaps in response to a squeeze in their real incomes. Taken together, these factors led to a substantial degree of spare capacity opening up in the labour market over this period. This, in turn, was a significant factor behind subdued wage growth during 2009–15.

It is a shame they did not figure that out at the time and looking forwards seems to be stuck on repeat.

Pay growth has risen over the past year  and tightness in the labour market is expected to push up pay growth slightly further in coming years.

At least there has been a slight winding back here but something rather familiar in concept pops up albeit that the specific number keeps changing.

This was broadly in line with the MPC’s judgement of the equilibrium rate of unemployment of 4¼%, suggesting little scope for unemployment to fall further without generating excess wage pressure.

The problem here is that an unemployment rate of 7% was supposed to be significant when Forward Guidance began although it went wrong so quickly that we then had a 6.5% equilibrium rate then 5.5% then 4.5%. The February Inflation Report gave us  “a statistical filtering model” which seems to have simply chased the actual unemployment rate lower. Along the way I spotted this.

The relationship between wage growth and
unemployment is assumed to be linear

You basically need to have lived the last decade under a stone to think that! Or of course be in an Ivory Tower.

Today’s data

This brought some excellent news so let’s get straight to it.

The unemployment rate (the number of unemployed people as a proportion of all employed and unemployed people) was 4.0%; it has not been lower since December 1974 to February 1975.

This of course has an implication for the Bank of England which has signaled an equilibrium rate of 4.25% as discussed above. Thus we can move on knowing that its improved models ( we know they are improved because they keep telling us so) will be predicting increased wage growth.

Returning to the quantity or employment situation we see that it looks good.

There were 32.39 million people in work, 42,000 more than for January to March 2018 and 313,000 more than for a year earlier.The employment rate (the proportion of people aged from 16 to 64 years who were in work) was 75.6%, unchanged compared with January to March 2018 but higher than for a year earlier (75.1%).

This is good news but needs to come with some caveats. The first is that the rate of improvement looks to be slowing which is maybe not a surprise at these levels. The next issue is more theoretical which is the issue of how we record employment and the concept of underemployment where people have work but less than they want. We do get some flashes of this and this morning’s release did give a hint of some better news.

There were 780,000 people (not seasonally adjusted) in employment on “zero-hours contracts” in their main job, 104,000 fewer than for a year earlier.

But if we switch back to the unemployment rate we know from looking at Japan that it can drop to 2.2% which means that we cannot rule out that ours will go lower and maybe a fair bit lower. So there could be a fair bit of underemployment out there still which is backed up by the attempts to measure it.

By this measurement, the number of underemployed people in the three months to June 2018 stood at 2.39 million, down 121,000 when compared with the previous quarter.

This compares to under 2 million pre credit crunch although I am not clear why these numbers consider the working week to be 48 hours?

Wages

This should be a case of “the only way is up” if we look at the Bank of England analysis.

regular pay increased by 2.7%, slightly lower than the growth rate between March to May 2017 and March to May 2018 (2.8%)……total pay increased by 2.4%, slightly lower than the growth rate between March to May 2017 and March to May 2018 (2.5%)

There is an initial feeling of deja vu as we were told this last month so the past has seen an upwards revision but there is little or no sign of the “output gap” pulling it higher. In fact bonuses fell by 6.6% on a year ago in June meaning that total pay growth fell to 2.1%. This means that in the first half of 2018 the rate of total pay growth has gone from 2.8% to 2.1% via 2.6% (twice) and 2.5% (twice). Unless you live in an Ivory Tower that is lower and not higher.

The Bank of England response mirrors their response when inflation was a particular problem for them which is to keep breaking the numbers down until you find one that does work. In this instance it takes two steps moving first to the private-sector to eliminate the public-sector pay caps and then to regular pay eliminating the bonus weakness. On that road you can point out a 2.9% increase although attempts to say it is rising have the issue of it being 3% in February and 3.2% in March. If they want more they could point us to regular pay in construction which is rising at an annual rate of 5.6% ( which of course begs a question about the official output statistics there).

Comment

The credit crunch era has been one where we have found ourselves ripping whole chapters out of economics 101 textbooks. By contrast both the establishment and the Ivory Towers have clung  to them like a life raft in spite of the evidence to the contrary. Of course one day their persistent lottery ticker buying will likely bear fruit but there is little sign of it so far. Instead they have the Average White Band on repeat.

Let’s go ’round again
Maybe we’ll turn back the hands of time
Let’s go ’round again
One more time (One more time)
One more time (One more time)

For the rest of us we see that there is more work but that wage growth seems to get stuck in the 2% zone. Even at the extraordinary low-level of unemployment seen in Japan the wage position remains Definitely Maybe after plenty of real wage falls. I am not sure that the productivity data helps as much as it used to as we have switched towards services where it is much harder to measure and somewhere along the way capital productivity got abandoned and now it is just labour. Of course all of this simply ignores the self-employed as they are not in the earnings figures and nor are smaller businesses.

 

 

The economy of Italy returns to its former coma status

We are in a spell where there has been a burst of economic news about Italy and the headline brings back memories of my main theme. So let us take a look at why the idea of it being like a “girlfriend in a coma” is back.

In the second quarter of 2018 the seasonally and calendar adjusted, chained volume measure of Gross
Domestic Product (GDP) increased by 0.2 per cent with respect to the first quarter of 2018 and by 1.1 per
cent in comparison with the second quarter of 2017. ( ISTAT)

Along the way I note that the statement below from only last week of European Central Bank President Mario Draghi does not seem to apply that well to his home country.

 the euro area economy is proceeding along a solid and broad-based growth path.

For newer readers my “girlfriend in a coma” theme comes from the fact that for quite some time now Italy has struggled to grow its economy at more than 1% per annum. So a fall to 1.1% reminds us of that especially as we note that annual growth only got as high as 1.7% in the “Euroboom” and since then has gone 1.6%,1.4% and now 1.1%. If we switch to the quarterly numbers then the trend is clearly not our friend as the peak of 0.5% at the end of 2016 was held in the opening quarter of 2017 but has since gone 0.4%, 0.3%,0.3%,0.3% and now 0.2%. Indeed there has also been a downgrade of the past as we had two 0.4% previously.

Perspective

The tweet below sums up the overall theme where Italy is not only still well below its pre credit crunch peak but has grown so little this century or if you prefer in the Euro era.

Also Italy has seen a fair bit of population growth meaning that the numbers on an individual or per capita basis are even worse and I have been waiting for them to rise back to where they were at the beginning of this century. Unfortunately growth has slowed to a crawl but they should be somewhere around them now.

Labour Market

We have seen in the credit crunch era that employment trends can be a leading indicator for an economy but get little solace here either.

In June 2018, 23.320 million persons were employed, -0.2% over May

The picture had been improving as the 330000 jobs gain over the past year illustrates but now the picture is not so clear. If we switch to unemployment we see that the sense of unease increases.

Unemployed were 2.866 million, +2.1% over the previous month.

This meant that the annual picture here was of only a fall of 8000 in the ranks of the unemployed. Also I have pointed out before that the unemployment rate falls below 11% to media cheers and then climbs back up to it as if it is on repeat. Well it has not yet gone back to 11% but not far off it.

unemployment rate was 10.9%, +0.2 percentage points over May 2018

The disappointing picture continues when we look at the bugbear which is youth unemployment.

Youth unemployment rate (aged 15-24) was 32.6%, +0.5 percentage points over the previous month and
youth unemployment ratio in the same age group was 8.6%, +0.2 percentage points over May 2018.

Inflation

If we switch to the other component of what used to be called the Misery Index ( where the annual rate of inflation was added to the unemployment rate) we see this.

In July 2018, according to preliminary estimates, the Italian harmonised index of consumer prices (HICP) decreased by 1.4% compared with the previous month and increased by 1.9% with respect to July 2017 (from +1.4% in June).

So the Misery Index rose to 12.8% if we use the latest figures albeit that unemployment is for June and not July. Just for clarity the HICP above is the measure we use in the UK as Italy kept the CPI moniker for its own measure. Some of the inflation rise was due to the summer sales starting a week later than in 2017.

Wages

There was better news here but it comes with a bit of a kicker. So let us start with the good news.

In June 2018 the hourly index and the per employee index increased by 0.9 per cent from last month.

Compared with June 2017 both indices increased by 2.0 per cent.

That was something of a burst and meant that there was some real wage growth and the numbers cover a lot of the economy.

At the end of June 2018 the coverage rate (share of national collective agreements in force for the wage setting aspects) was 86.8 per cent in terms of employees and 87.4 per cent in terms of the total amount of wages.

In fact wage growth for most changed very little but it rose to an annual rate of 4% in the public administration sector driven by a 6.4% rise for the military and 6.1% for the police. Well I suppose that is one way of boosting defence spending to please President Trump! But returning to the economics we see that whilst higher wages in that sector should boost areas such as retail sales the ordinary Italian taxpayer may be nervous of higher taxes to pay for it. Also is it ominous that the government is seemingly getting the police and military onside?

Looking Ahead

This mornings private-sector survey or PMI for the manufacturing sector did not start well.

Manufacturing growth eases in July to lowest since October 2016

The detail in fact questioned whether there was any growth at all.

Growth rates of both output and new orders
weakened during July to near standstills amid
reports of an ongoing slowdown in underlying
market activity. There were reports that both
domestic and external market conditions were
faltering. Indeed, new export orders rose to the
weakest degree since August 2016 according to the
latest data.

Indeed the conclusion was downbeat when we try to add this report to the overall picture.

Based on the latest set of PMI survey data, and
with worries mounting over any escalation of global
trade tensions on export trade, Italy’s industrial
base may well struggle to meaningfully contribute to
wider economic growth in the second half of 2018

Comment

There is a familiar drumbeat about all of this as we see Italy slipping back into what is normal for it. For a start there is the still very expansionary monetary policy of the ECB with its -0.4% deposit rate although the monthly QE purchases are reducing which drives the thought that even at its height Italy gained only a little. Economic growth since the beginning of 2014 totals a mere 4.5%.

Next comes the issue of Italy’s high national debt which has risen above 2.3 trillion Euros and of course now faces higher bond yields  (ten-year is 2.76%) as it looks to refinance maturing debt and raise new finance. The essential issue here has not been one of overspending but much more one of lack of economic growth.

Italy is in many ways a delightful country so let us end with something more positive which I note from the purchase of Ronaldo by the grand old club Juventus. Like all football transfers it starts not so well as it the fee is an import and subtracts from GDP but more positively the hope is that he provides a boost via Champions League success. But I spotted something else. From CNBC.

Ronaldo fans can purchase children’s jerseys with his name for €84.95 ($98.90), women’s jerseys for €94.95 ($110.60), men’s jerseys for €104.95 ($122.20) and an authentic replica of the gear worn by Juventus playersfor €137.45 ($160.10).

There is a lot of poor analysis on this sort of thing as much of the money goes nowhere near Juve but my point is there must be money in Italy if Juve can charge that much for a football shirt. Of course there will be international fans buying but also plenty of Italian ones.

 

 

 

 

UK employment looks strong but wage growth less so

Today brings us a consequence of yesterday;s discussion as we analyse the latest wages numbers which are entwined with the productivity situation. These days the causality is invariably assumed to be from productivity to wages but there is this about Henry Ford from National Public Radio in the US.

 $5 a day, for eight hours of work in a bustling factory.

That was more than double the average factory wage at that time, and for U.S. workers it was one of the defining moments of the 20th century.

Which led to this.

”It was an absolute, total success,” Kreipke says. “In fact, it was better than anybody had even thought.”

The benefits were almost immediate. Productivity surged, and the Ford Motor Co. doubled its profits in less than two years. Ford ended up calling it the best cost-cutting move he ever made.

Some combination of positive and lateral thinking led Henry Ford to quite a triumph as we mull whether anyone would have that courage today. Perhaps some do but they are on a smaller scale and get missed.

Also there is the issue that some advances take us backwards in some respects as research from Princeton in the US quoted by regis told us this.

In their aggressive scenario, the world stock of robots will quadruple by 2025. This would correspond to 5.25 more robots per thousand workers in the United States, and with our estimates, it would lead to a 0.94-1.76 percentage
points lower employment to population ratio and 1.3-2.6 percent lower wage growth between 2015 and 2025.

This type of analysis is usually nose to the grindstone stuff however or if you like a type of micro economics where the measured effects are likely to look bad as robots replace people and the loss of usually skilled jobs leads to lower average wages. PWC have given a more macro style analysis a go. From the Guardian.

Artificial intelligence is set to create more than 7m new UK jobs in healthcare, science and education by 2037, more than making up for the jobs lost in manufacturing and other sectors through automation, according to a report.

A report from PricewaterhouseCoopers argued that AI would create slightly more jobs (7.2m) than it displaced (7m) by boosting economic growth. The firm estimated about 20% of jobs would be automated over the next 20 years and no sector would be unaffected.

In essence it comes down to this assumption.

as real incomes rise

Some may be wondering if “as society becomes richer” necessarily leads to that especially after a period where policies like QE have led to wealth rising via higher asset prices but real incomes have struggled in many places and real wages in the UK have fallen. The truth is that we are unsure and analysis on both sides mostly depends on the assumptions behind it. You pretty much get the answer you looked for.

What are wages doing?

Actually UK wage growth has been if we allow for the margin of error looks to have been pretty stable so far in 2018.

Between March to May 2017 and March to May 2018, in nominal terms, regular pay increased by 2.7%, slightly lower than the growth rate between February to April 2017 and February to April 2018 (2.8%).

Between March to May 2017 and March to May 2018, in nominal terms, total pay increased by 2.5%, slightly lower than the growth rate between February to April 2017 and February to April 2018 (2.6%).

Whilst there is a small fall on this basis we see that from February to May total pay growth has gone 2.6%, 2.5%, 2.6% and now 2.5%. By the standards of these numbers that is remarkably stable. This poses a question for the Bank of England as there is not much of a sign of annual wage growth there.

If we move to real wages we find that most of the change we have seen has come from falling inflation.

Between March to May 2017 and March to May 2018, in real terms (that is, adjusted for consumer price inflation), regular pay for employees in Great Britain increased by 0.4% and total pay for employees in Great Britain increased by 0.2%.

Actually they are being a little disingenuous there as people might think that this refers to the CPI inflation measure whereas later they explain that it is CPIH ( H=Housing) with its fantasy imputed rents. This flatters the numbers as the latter keeps giving lower inflation readings and this is before we get to the Retail Price Index or RPI which would have real pay still falling.

The output gap

Today’s quantity numbers for the UK labour market were good again.

There were 32.40 million people in work, 137,000 more than for December 2017 to February 2018 and 388,000 more than for a year earlier…….The employment rate (the proportion of people aged from 16 to 64 years who were in work) was 75.7%, higher than for a year earlier (74.9%) and the highest since comparable records began in 1971.

Also whilst we do not have a formal measure of underemployment like the U-6 measure in the United States it looks as though it is improving too as Chris Dillow points out.

Big drop in the wider measure of joblessness in Mar-May (unemp+part-timers wanting f-t work + inactive wanting a job) – down from 4.51m to 4.35m

Yet the continuing good news does not seem to be doing much for wages. We get surveys telling us they are picking up but the official data is either missing it or it is not happening. If we go through that logically then is wage growth is taking place it must be in the ranks of the self-employed or smaller companies ( the various official surveys only go to companies with a minimum of ten or in some cases 20 employees).

Productivity

This looks to have improved because the economy was growing through this period albeit nor very fast but hours worked did this.

the number of people in employment increased by 137,000  but total hours worked fell slightly (by 0.3 million) to 1.03 billion. This small fall in total hours worked reflected a fall in average weekly hours worked by full-time workers.

An odd combination in some ways as why take on more staff whilst reducing hours? But the optimistic view is that employers were expecting a rise in demand and were getting ready for it. Whatever the reason recorded productivity looks to have risen.

Comment

There is quite a bit to consider here. If we look back to 2007 we see total pay growth fluctuating around 5% and making a heady 7.3% in February. But before that there were plenty of 4% numbers. Now we occasionally break the 3% barrier but the last time if we use the three-month average was in the summer of 2015. So much for “output gap” style analysis so beloved by the Ivory Towers and the Bank of England.

As to the possible Bank of England move in August today’s numbers are unlikely to change your mind. Those arguing for a rise will look at the strong employment situation and those against will note the slight fading of wage growth. Which will an unreliable boyfriend go for?

What we need are better data sources and let me ask for two clear changes. We need wages data which at least tries to cover the self-employed and smaller businesses. We also need to be much clearer about what full-time employment is. As we stand we are in danger of failing the Yes Minister critique.

Sir Humphrey Appleby: If local authorities don’t send us the statistics that we ask for, then government figures will be a nonsense.

James Hacker: Why?

Sir Humphrey Appleby: They will be incomplete.

James Hacker: But government figures are a nonsense anyway.

Bernard Woolley: I think Sir Humphrey want to ensure they are a complete nonsense. ( The skeleton in the cupboard via IMDb)

 

 

 

 

UK real wages resume their fall

This morning brings us to the UK labour market data and if it feels early you are right. You see the UK statistics bodies decided that our Members of Parliament needed more time to digest the numbers before Prime Ministers Questions on a Wednesday lunchtime. It is not that big a deal except perhaps for confidence in the mathematical ability of our MPs.

In terms of expectations the mood music for wages has been positive with the latest survey from Markit/REC leading the way.

Strong demand for staff and low candidate
availability underpinned further increases in starting salaries and temp pay. Notably, salaries awarded to successfully placed permanent workers rose at the
steepest rate for three years.

This was driven by this.

Growth of demand for staff strengthened to a sixmonth
high in May, with sharp increases in both
permanent and temporary roles signalled by the
latest data.

So according to them there was more demand for staff which ran into shortages.

Overall, candidate availability declined at a sharper
rate midway through the second quarter. Permanent
candidate numbers fell at the fastest rate for four
months, while short-term staff availability
deteriorated at the quickest pace since last
November

Hence the higher pay albeit that beating the last 3 years is not spectacular but it is an improvement. Of course after yesterday’s data we are likely to be more sceptical about surveys from Markit as I note that it contradicts that release in a coupe of ways. Firstly this.

Although growth of demand for both permanent and
temporary staff in the private sector edged down
slightly since April,

It seems unlikely that manufacturers were looking for extra staff in April after the decline in production but let us be optimistic for now and hope that there was a surge in May leading to this.

Engineering was the best performing sector in the
demand for permanent staff league table during May.

Retail

Even the Markit/REC report pointed out the signs of trouble here.

with the exception of Retail, which registered a further
decline.

Indeed this seemed to be on the march again only yesterday.

Discount retailer Poundworld has appointed administrators, putting 5,100 jobs at risk.

The move came after talks with a potential buyer, R Capital, collapsed leaving Poundworld with no option other than administration. ( BBC)

This morning brought news of a major factor driving this as the high street New Look fashion store had very weak figures and the online Boohoo very good ones. But even if we add in the job gains as for example Amazon announcing 2500 new jobs recently to deliver all this online business this is a sector with falling employment overall.

Today’s data

Let us start with wages.

Between February to April 2017 and February to April 2018, in nominal terms, total pay increased by 2.5%, slightly lower than the growth rate between January to March 2017 and January to March 2018 (2.6%).

That is not inspiring for the survey we looked at earlier although there is some better news if we look into the detail. This is because total wage growth was revised up to 2.5% in March which April matched. So the numbers are now holding on a monthly basis at a higher level than we though last month but they are not rising.

As ever many prefer to cherry pick the data as for example the BBC is using a sub set of the numbers.

Between February to April 2017 and February to April 2018, in nominal terms, regular pay increased by 2.8%, slightly lower than the growth rate between January to March 2017 and January to March 2018 (2.9%).

This poses a problem as bonus pay matters to many so why does it get ignored? For example if you get the number quoted for average regular pay of £484 per week would you ignore the £32 of bonuses? At a time of pressure on real wages surely bonuses are more important.

If we stick with cherry pickers it was a dreadful month for the Bank of England as it has guided us towards private-sector regular wages which rose by 3.2% in March and 2.5% in April! Ooops and time for that to be redacted and replaced by a new measure like the unemployment rate was in the first phase of Forward Guidance. On a 3 monthly comparison it only falls from 3% to 2.9% but the catch is that April will be in the next two versions of that.

Moving to real wages we see sadly yet more cherry-picking. From the official release.

Between February to April 2017 and February to April 2018, in real terms (that is, adjusted for consumer price inflation), regular pay for employees in Great Britain increased by 0.4% and total pay for employees in Great Britain increased by 0.1%.

They use the woeful CPIH for this which assumes that owner occupiers rent their property to themselves when they do not. Whereas if they used the CPI for example as the casual reader might assume then real wages fell by 0.1% if compared to total pay. Fan of the Retail Price Index or RPI will continue to see falling real wages.

This is a familiar issue and seems to be something of a never-ending story.

Employment and Unemployment

The number below continues to be rather stellar.

There were 32.39 million people in work, 146,000 more than for November 2017 to January 2018 and 440,000 more than for a year earlier.

This does confirm at least part of the recruiters survey above. Let me just point out for newer readers that this is a quantity measure not a quality one and we have already had an issue with the quality number called wages. As another example the definition of full-time employment is of the chocolate teapot variety in my opinion. We may be getting a hint of an issue here from this alternative measure.

but total hours worked decreased by 4.1 million to 1.03 billion. (the number of people in employment increased by 146,000)

Maybe this was an impact of the cold snap we got in February/March but it is a rare sign of weakness in these section of data as hours worked per full-time employee fell.

Meanwhile there was more good news on unemployment

There were 1.42 million unemployed people (people not in work but seeking and available to work), 38,000 fewer than for November 2017 to January 2018 and 115,000 fewer than for a year earlier.

We have had loads of forecasts that unemployment will rise in the UK and even sectoral examples of it ( Retail) but overall it continues to fall even though it includes the recent weaker period if we look at the GDP numbers.

Also I get asked on here from time to time about the residual sector in these numbers which has been improving too.

The inactivity rate (the proportion of people aged from 16 to 64 years who were economically inactive) was 21.0%, lower than for a year earlier (21.5%) and the joint lowest since comparable records began in 1971.

Comment

Let me open with  piece of good news which is that it looks like UK productivity is currently improving as we may not have had much economic growth in 2018 but it is divided by a falling number of hours worked.

That is something although if we switch to the Ivory Towers things are going from bad to worse. After all the Office for Budget Responsibility switched about 9 months ago to projecting weaker productivity growth. That is before we get to the output gap theories it and the Bank of England hold so dear. As unemployment falls below what the Bank of England considers to be the equilibrium rate wages should be soaring except when you climb out of its dark,dank and dusty bunker they are not growing at the 5% per annum suggested by the OBR back in the day.  Forward Guidance and all that.

Let me finish by pointing out that rather shamefully the self-employed are excluded from the average earnings data. The numbers need some Coldpaly.

Lights will guide you home
And ignite your bones
And I will try to fix you

 

 

 

Japan is a land of high employment but still no real wage growth

Some days quite a few of our themes come naturally together and this morning quite a few strands have been pulled together by the news from Nihon the land of the rising sun. Here is NHK News on the subject.

Workers in Japan are continuing to take home bigger paychecks. A government survey says monthly wages rose year-on-year for the 9th-straight month in April.

Preliminary results show that pay for the month averaged about 277,000 yen, or roughly 2,500 dollars. That includes overtime and bonuses.

The number is an increase of 0.8 percent in yen terms from a year earlier. But when adjusted for inflation, the figure came in flat.

Nonetheless, labor ministry officials say that wages are continuing on a trend of moderate gains.

As you can see this is rather familiar where there is some wage growth in Japan but once we allow for inflation that fades away and often disappears. This is a particular disappointment after the better numbers for March which were themselves revised down as Reuters explains below.

That follows a downwardly revised 0.7 percent annual increase in real wages in March, which suggests that the government’s repeated efforts to encourage private-sector wage gains have fallen flat.

Growth in March was the first in four months, which had fueled optimism that a gradual rise in workers’ salaries would stimulate consumer spending in Japan.

Actually Reuters then comes up with what might be one of the understatements of 2018 so far.

The data could be discouraging for the Bank of Japan as it struggles to accelerate inflation to its 2 percent price target.

Let us now step back and take a deeper perspective and review this century. According to Japan Macro Advisers real wages began this century at 114.1 in January 2000 and you already get an idea of this part of the “lost decade” problem by noting that it is based at 100 some fifteen years later in 2015. As of the latest data it is at 100.5 so it has been on a road to nowhere.

Abenomics

One of the features of the Abenomics programme which began in December 2012 was supposed to be a boost to wages. The Bank of Japan has launched ever more QE ( which it calls QQE in the same way that the leaky Windscale nuclear reprocessing plant became the leak-free Sellafield) as shown below. From July 2016.

The Bank will purchase Japanese government bonds (JGBs) so that their amount outstanding will increase at an annual pace of about 80 trillion yen.

This is the main effort although as I have noted in my articles on the Tokyo Whale it has acquired quite an appetite for equities as well.

The Bank will purchase ETFs so that their amount outstanding will increase at an annual
pace of about 6 trillion yen(almost double the previous pace of about 3.3 trillion yen)

As it likes to buy on dips the recent Italian crisis will have seen it buying again and as of the end of March the Nikkei Asian Review was reporting this.

The central bank’s ETF holdings have reached an estimated 23 trillion yen based on current market value — equivalent to more than 3% of the total market capitalization of the Tokyo Stock Exchange’s first section — raising concerns about pricing distortions.

So not the reduction some were telling us was on the way but my main point today was that all of this “strong monetary easing” was supposed to achieve this and it hasn’t.

The Bank will continue with “QQE with a Negative Interest Rate,” aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner.

The clear implication was that wages would rise faster than that. It is often forgotten that the advocates of QE thought that as prices rose in response to it then wages would rise faster. But that Ivory Tower world did not turn up as the inflation went into asset prices such as bonds,equities and houses meaning that wages were not in the cycle. Or as Bank of Japan Governor Kuroda put it at the end of last month.

Despite these improvements in the real economy, prices and wages have remained sluggish. This phenomenon has recently been labeled the “missing inflation” or “missing wage inflation” puzzle………. It is urgent that we explore the mechanism behind the changes in price and wage dynamics especially in advanced economies.

Most people would think it sensible to do the research before you launch at and in financial markets in such a kamikaze fashion.

The economy

There are different ways of looking at this. Here is the economic output position.

The economy shrank by 0.6 percent on an annualized basis, a much more severe contraction than the median estimate for an annualized 0.2 percent.

Fourth quarter growth was revised to an annualized 0.6 percent, down from the 1.6 percent estimated earlier. ( Reuters)

Imagine if that had been the UK we would have seen social media implode! As we note that over the past 6 months there has been no growth at all. In case you are wondering about the large revision those are a feature of the official GDP statistics in Japan which reverse the stereotype about Japan by being especially unreliable.

If we move to the labour market we get a different view. Here we see an extraordinary low-level of unemployment with the rate being a mere 2.5% and the job situation is summed up by this from Japan Macro Advisers.

In March 2018, New job offers to applicant ratio, a key indicator in Japan to measure the tightness of the labor demand/supply was 2.41 in March, signifying that there are 2.41 new job postings for each new job seeker. The ratio of 2.41 is the highest in the statistical history since it begun in 1963.

So the picture is confused to say the least.

Comment

There is a fair bit to consider here but let us start with the reality that whilst there are occasional flickers of growth so far the overall pattern in Japan is for no real wage growth. Only yesterday we were looking at yet another Bank of England policymaker telling us that wage growth was just around the corner based on a Phillips Curve style analysis. We know that the Bank of England Ivory Tower has an unemployment rate of 4,25% as the natural one so that the 2.5% of Japan would see Silvana Tenreyro confidently predicting a wages surge. Except reality is very different. If we stick to the UK perspective we often see reports we are near the bottom of the real wage pack but some cherry picking of dates when in fact Japan is  worse.

Moving back to Japan there was a paper on the subject of low unemployment in 1988 from Uwe Vollmer which told us this.

Even more important, the division of annual labour income
into basic wages, overtime premiums and bonuses
allows companies to adjust wages flexibly to changes in
macroeconomic supply and demand conditions,
resulting in low rigidities of both nominal and real wages.

On the downside yes on the upside no as we mull the idea that in the lost decade period Japan has priced itself into work? If so the Abenomics policy of a lower exchange-rate may help with that but any consequent rise in inflation will make the Japanese worker and consumer worse off if wages continue their upwards rigidity.

Meanwhile as we note a year where the Yen was 110 or so a year ago and 110 now there is this from an alternative universe.

The Bank of Japan’s next policy move may be to raise its bond-yield target to keep the yen from weakening too much, according to a BOJ adviser and longtime associate of Gov. Haruhiko Kuroda.

Or maybe not.

With its inflation target still far away, the BOJ must continue its current monetary stimulus for now, Kawai said

Also in his land of confusion is a confession that my critique has been correct all along.

While a weak yen helps the BOJ’s efforts to stoke inflation — and has been an unspoken policy objective — too much weakness can hurt businesses that import raw materials, while some consumers would feel the pain of higher prices for imports.

He seems lost somewhere in the Pacific as in terms of the economics the economy has seen a weak patch and you are as far away as ever from your inflation target yet you do less? Still the inflation target will be helped by a higher oil price except as I often point out Japan is a large energy importer so this is a negative even before we get to the fact that it makes workers and consumers poorer.