The Bank of Japan reminds us it is all about the banks

It is time for another part of our discovering Japan theme as we travel to Nagoya, where Governor Kuroda of the Bank of Japan was talking earlier today. Let us open with some good news.

The real GDP has been on an increasing trend, albeit with fluctuations, and the output gap — which shows the utilization of capital and labor — widened within positive territory from late 2016, for seven consecutive quarters through the April-June quarter of 2018 . Under such circumstances, the duration of the current
economic recovery phase, which began in December 2012, is likely to have reached 69 consecutive months this August. If this recovery continues, its duration in January next year will exceed the longest post-war recovery phase of 73 months.

So reasons to be cheerful part one, and below we get part two, but as you can see part three is a disappointment.

In the Outlook Report released last week, the real GDP growth rate for fiscal 2018 is projected to be 1.4 percent, and this is clearly above Japan’s potential growth rate, which is estimated to be in the range of 0.5-1.0 percent. As for fiscal 2019 and 2020, the real GDP growth rates are both projected to be 0.8 percent.

Economics gets called the dismal science but at the moment central bankers are trying to under perform that with the UK having a growth “speed limit” of 1.5% and the ECB saying something similar. The Bank of Japan is even more downbeat which is partly related to the demographics of both an ageing and declining population. This is partly because the previous foundation of their Ivory Towers called the output gap has failed so badly in the credit crunch era but the more eagle-eyed amongst you will have noted a reference to it above. How is that going?

The Output Gap

It is “boom,boom,boom” according to the Black-Eyed Peas and the emphasis is mine.

In the labor market, the active job openings-to-applicants ratio has been at a high level that exceeds the peak of the bubble period, and the unemployment rate has declined to around 2.5 percent. The number of employees has registered a year-on-year rate of increase of around 2 percent, and total cash earnings per employee have risen moderately but steadily.

As you can see the Japanese output gap is already struggling as we are apparently beyond bubbilicious in terms of demand but wage growth is only moderate. What about inflation?

The year-on-year rate of change in the consumer price index (CPI) has continued to show relatively weak developments compared to the economic expansion and the labor market tightening, and that excluding fresh food
and energy prices has been at around 0.5 percent.

In fact after deploying so much effort Governor Kuroda abandons his favourite measure for a higher one.

The year-on-year rate of increase in the CPI (all items less fresh food) has continued to accelerate, albeit with fluctuations. Although there is still a long way to go to achieve the price stability target of 2 percent, the year-on-year rate of change recently has risen to around 1 percent, which is about half the target .

Actually the state of play here is as  strong of a critique of the original claims about QE as we have as according to the central bankers it would raise inflation. Whilst it has created asset price inflation there has been a lack of consumer inflation except in places where currencies have fallen, and in Japan not even much of that. Indeed whilst I would welcome the development below Governor Kuroda will be crying into his glass of sake.

What lies behind this likely is that people’s tolerance of price rises has decreased.

 

Monetary Policy

We have found something which has given the Bank of Japan food for thought. Output gap failure? Rigging so many markets? Impact on individual Japanese? Of course not! It is worries about the banks.

The Bank fully recognizes that, by continuing such monetary easing, financial institutions’
strength will be cumulatively affected by low profitability, mainly through a decrease in
their lending margins, and that it could have an impact on financial system stability as well
as the functioning of financial intermediation.

This is a little mind-boggling as we note that policies which were instituted to help the banks are now being described as hurting them. This is because the banks did not have to change and pretty much carried on as before knowing that they are too big to be allowed to fail. Also I though central banks and regulators were on the case these days but apparently not.

That is, if financial institutions become more active in risk taking to secure profits amid the low interest rate environment and severe competition continuing, the financial system could destabilize should large negative shocks actually occur in the future.

This if we think about it is quite a confession of failure. We have already looked at how economic policy has been directed to suit the banks and in Japan’ case that has continued for nearly thirty years now. Next we seem to have a loss of faith in the new regulations which were supposed to fix this. Finally we have something of a confession that it could all happen again!

If we looked wider we do see some context for example in the way that the European bank stress tests were widely ignored over the weekend. I think that those interested have already voted via bank share prices in 2018, but we do see something rather familiar via @jeuasommenulle.

While everybody is having fun bashing EU banks and pointing out that market volatility on Italian govies will hurt bank capital… the US quietly removes rules that make market volatility impact capital in the 1st place 🤪

Yep back to mark to model rather than mark to market. Just like last time in fact, what could go wrong?

You and I get told what to do but the banks get a different message.

encourage them to take concrete actions as necessary.

The Tokyo Whale

The Bank of Japan has been living up to its reputation and moniker.

The Bank of Japan bought a monthly record of 870 billion yen ($7.68 billion) in exchange-traded funds in October, apparently aiming to support equities as investors turned bearish amid sell-offs in U.S. shares. ( Nikkei Asian Review)

Back on the 23rd of October I pointed about I was bemused by the Japanese owned Financial Times report on a “stealth taper”.

The central bank has become more flexible on its annual ETF purchase quota of around 6 trillion yen — a mark it will likely exceed by year-end at the current pace. ( NAR)

Another Japanese style development comes from this.

 But its large-scale purchases under Gov. Haruhiko Kuroda’s massive monetary easing program were criticized for propping up share prices for a limited range of companies and distorting the market.

To which the classically Japanese response is of course to rig even more of them.

This prompted the BOJ to decide this July to spread out buying more widely.

 

Comment

The comments about an interest-rate hike from Japan are mostly driven by this from today’s speech.

Japan’s economic activity and prices are no longer in a situation where decisively implementing a large-scale policy to overcome deflation was judged as the most appropriate policy conduct, as was the case before.

The problem with such rhetoric comes from the section about as we note that Bank of Japan bought a record amount of equities via ETFs in October. Also this summer it give a specific pronouncement on this subject which was repeated today.

Specifically, the Bank publicly made clear to “maintain the current extremely low levels of short- and long-term interest rates for an extended period of time, taking into account uncertainties regarding economic activity and prices including the effects of the consumption tax hike scheduled to take place in October 2019.”

Indeed he even hints at my “To Infinity! And Beyond!” theme.

it has become necessary to persistently continue with powerful monetary easing while considering both the positive effects and side effects if monetary policy in a balanced manner.

So they will continue the side effects but carry on regardless unless of course the side effects become an even bigger problem for the banks. The status quo continues to play out.

Whatever you want
Whatever you like
Whatever you say
You pay your money
You take your choice
Whatever you need
Whatever you use
Whatever you win
Whatever you lose.

Podcasts

I plan to begin a new series of weekly podcasts this Friday.If anyone has any thoughts or suggestions please let me know.

 

 

 

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Will real wage growth ever go back to “normal”?

A constant theme of the credit crunch era is the unwillingness of the establishment to accept that past economic theories need to be put as a minimum on the back burner. Two examples of that are the concepts of full employment and the related one of the output gap. If we start with the former that does not mean that everyone is employed as the “man from Mars” from Blondie’s song rapture might think. It involves allowing for what is not entirely pleasantly called frictional unemployment, for example of individuals temporarily between jobs. There is an obvious problem with measuring that but as we discover so often the Ivory Towers are seldom troubled by issues like that.

The output gap was something of a simple concept around comparing actual output with potential. However supporters were invariably in the group who argued there was a large amount of lost output from the credit crunch and this end gamed themselves as we are still well below that and may always be. The Bank of England Ivory Tower dropped that and instead kept telling us we had an output gap of circa 1.25% of GDP. In the end they decided to drop as it was always 1.25% or so and switched to employment as a measure. Why? Well in the UK like more than a few other places it boomed so they could shoehorn their theory into a different version of reality. Sadly for them they have made fools of themselves as their estimates began at 7% unemployment went very quickly to 6,5% and are now at 4.25%. Or if you prefer silly,sillier and so far at least silliest.

Reality

The problem for all of the above has been shown in Nihon or the land of the rising sun. There the unemployment rate has fallen as low as 2.2% this year and in August was 2.4% How can it be half the natural/full rate? Please address that question to Threadneedle Street. Whilst there are suspicions about the accuracy of unemployment rates there are also other signals of what in the past would have been called an overheating jobs market. From the Japan Times last week.

The percentage of working-age women with jobs in Japan reached a record high of 70 percent in August, government data showed Friday………The figure for women in work between ages 15 and 64 is at the highest level since comparable data became available in 1968 and compares with 83.9 percent for working-age men,

Other measures such as the job offers to applicant ratio going comfortably above 2 signal a very strong labour market and yet this morning we have seen this. From Reuters.

 Japanese workers’ inflation-adjusted real wages fell in August for the first time in four months……..The 0.6 percent decline in real wages in August from a year earlier followed a revised 0.5 percent annual increase in July, labor ministry data showed on Friday.

This is a rather awkward reality for those who have trumpeted a change in Japan in line with the two economic theories described above, and I note a lack of mentions on social media. If we look into the detail we see this.

Nominal cash earnings rose 0.9 percent year-on-year in August, slower than a revised 1.6 percent annual increase in July.

The average level of monthly earnings is 276,266 Yen or a bit under £1900. The highest paid industry was the utility sector at 438,025 Yen and the worst-paid was the hotel and restaurant sector at 123,405 Yen. The fall can be looked at  from two perspectives of which the first is a fall in bonuses of 7.4% and the next is that the numbers were pulled down by falls in the care sector (3.8%) and education (3.6%).

As to the surge ( real wages rose at an annual rate of 2.5% in June) it was as we believed.

Major Japanese firms typically pay bonuses twice a year, once during the summer and once near year’s end…….Summer bonuses boosted real wages in June.

This morning has also brought a confirmation of why this is good.

Japanese households increased their spending at the fastest rate in three years in August as consumers made more costly purchases, government data showed Friday.

Spending by households with two or more people rose 2.8 percent from a year earlier, after adjusting for inflation, to ¥292,481, the largest increase since August 2015, the Internal Affairs and Communications Ministry said. ( Japan Times)

But that will now rend to fade away after the welcome bonuses are spent. Sadly the output gap style theories are unlikely to fade away as reality is always “Tis but a scratch” along the lines of the Black Knight in Monty Python.

The UK

In the UK we keep being told that wage growth is just around the corner. From the REC this morning.

Starting salaries for people placed into permanent
jobs increased at the quickest pace since April 2015
during September. Hourly rates of pay for temp staff
also rose at a faster pace than in the preceding
month.

The strongest area was this.

IT & Computing remained the most in-demand
category for permanent staff in September.

Perhaps it is the banks finally waking up to the all the online outages and problems. But the problem is that a sustained rise keeps being just around the corner. In its desperation to justify its theories the Bank of England switched to private-sector regular pay in its attempt to find any reality fitting the work of its Ivory Tower. But if you pick a sub-section it has to eventually fire up the overall numbers to be significant and the picture there is that total wage growth has surged from 2.8% in January to 2.6% in July. Oh hang on…..

Or real wage growth is somewhere around 0% on the official inflation measures or negative on the “discredited” RPI which gives a higher reading.

The US

Today brings the labour market data for September but until then we are left with this.

In August, average hourly earnings for all employees on private nonfarm payrolls rose by 10 cents to $27.16. Over the year, average hourly earnings have increased by 77
cents, or 2.9 percent.

August was a good month but if we switch to the annual rate but we see that even in an economy that according to the GDP nowcasts is keeping up its 4% per annum growth rate wages are struggling to break 3%. The US economy has recovered better than most and is doing well now and yet wage growth has not followed much. Real wage growth is as you can see minimal.

Over the last 12 months, the all items
index rose 2.7 percent before seasonal adjustment.

According to the Financial Post it is a case of O Canada as well.

Over the three years he’s been in power, real wages have averaged annual gains of just 0.3 per cent, versus 1 per cent the previous decade.

Comment

A feature of the credit crunch era continues to be the attempt to ignore the more uncomfortable aspects of reality. There is welcome news in the way that employment levels recovered but the price of that seems to have been weak wage growth and especially real wage growth. This afternoon that number from the US Bureau of Labor Statistics will be poured over again for that reason. The big picture though comes from David Bowie.

Ch-ch-ch-ch-changes
Turn and face the strange
Ch-ch-changes
Where’s your shame?
You’ve left us up to our necks in it

 

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 wage and employment growth has been remarkably stable overall

Today brings new data on what is the most important economic number in the UK right now. This has been added to by the way that some Bank of England policymakers has plugged what some might call a bigly improvement in UK wage growth. Although of course you could say there is an element of deja vu all over again in that. But the issue did come up yesterday at the Treasury Select Committee interviews. This is the new policymaker Silvana Tenreyro quoted in the Guardian.

My position now is that if the data outturns are consistent with the picture i’ve just described, of an output gap going towards zero, then i would be minded to vote for a bank rate increase in the coming months.

The “output gap going towards zero” would be signalled by a sustained increase in wage growth. It used to be signalled also by the unemployment rate but the Bank of England has been in disarray on that subject since its Forward Guidance highlighted a 7% unemployment rate as significant. It is also very disappointing to see a policymaker continuing with the “output gap” theory which has failed so utterly in the credit crunch era but I guess that is simply a consequence of recruiting from an Ivory Tower. Also it seems that she knows better than the Bank of England’s own research on the subject of QE.

It’s far from evident that QE has contributed to higher inequality ( h/t Positive Money).

And whilst some loved it as it suited their particular views this was none too bright. Her words from the Financial Times about her suitability for the role.

I grew up in a developing country, subject to many crises

The pay squeeze

There is a nice chart showing the position from the Resolution Foundation albeit that it underplays the situation by being one of the few places that takes the CPIH ( H = Imputed Rents) inflation measure seriously.

There is the obvious issue that real wages have fallen according to the official data but there are two other consequences which pose problems for both the Bank of England and the Ivory Towers. Firstly as we have had nearly five years of economic growth the last shaded area should simply not exist as the claimed “output gap” seems to be operating both inversely and perversely. Also real wage growth did best in the period when inflation was low suggesting that it would be better to keep inflation low rather than aiming at a target of 2% annual growth in the Consumer Prices Index or CPI. Even worse of course the Bank of England helped to drive current inflation higher with its promises of “muscular” monetary easing post the EU leave vote which it acted upon in August 2016.

Self-employed

These do not matter for the official wages series as they are simply ignored as are smaller businesses. If I remember correctly the cut-off point is twenty employees. This has been an issue of increasing significance in the credit crunch era as the number of self-employed has risen especially as it approaches the same number as those who work in the public-sector.

self-employed people increased by 70,000 to 4.86 million (15.1% of all people in work)

There has been some potentially better news for self-employed earnings in the latest revisions to the UK economic data set. From Monday.

In 2016, the Blue Book 2017 dividends income from corporations is £61.7 billion, compared with £12.2 billion for households and NPISH as previously published

As this follows other revisions in this area we see two things. Firstly that we have no reliable up to date data on the subject and secondly we have just been through a spell where dividend income was massively underestimated. So the news for the self-employed may well have been better than it may have appeared to be. Of course such large revisions whilst signs of a welcome look into the issue also pose questions about the credibility of the data.

Today’s data

Quantity

The numbers here continue to be very good.

There were 32.10 million people in work, 94,000 more than for March to May 2017 and 317,000 more than for a year earlier……..The employment rate (the proportion of people aged from 16 to 64 who were in work) was 75.1%, up from 74.5% for a year earlier……..Between March to May 2017 and June to August 2017, total hours worked per week increased by 4.6 million to 1.03 billion.

This has had a consequence for those out of work too.

There were 1.44 million unemployed people (people not in work but seeking and available to work), 52,000 fewer than for March to May 2017 and 215,000 fewer than for a year earlier. The unemployment rate (the proportion of those in work plus those unemployed, that were unemployed) was 4.3%, down from 5.0% for a year earlier and the joint lowest since 1975.

So good news on this front with the only caveat being that we find out little about any issues with underemployment.

Average earnings or Quality

The Ivory Towers will be expecting a surge in wages as the “output gap” in the labour market continues its collapse. So let us take a look.

Between June to August 2016 and June to August 2017, in nominal terms, total pay increased by 2.2%, the same as the growth rate between May to July 2016 and May to July 2017.

So yet again they are disappointed. Actually as July was a weak month ( 1.4%) then August must have been better but I cannot say how much at this stage as the Office of National Statistics has forgotten to update the data set. Perhaps bonuses bounced back as we mull the (non)sense of monthly figures in this area.

If we move onto real wages we see this.

Comparing the three months to August 2017 with the same period in 2016, real AWE (total pay) fell by 0.3%, the same as the three months to July 2017. Nominal AWE (total pay) grew by 2.2% in the three months to August 2017, while the CPIH increased by 2.7% in the year to August 2017.

So we have seen yet another small decline in the official series for real wages with the caveat that the situation is worse if you use other inflation measures such as CPI and particularly the Retail Prices Index.

Comment

What we see yet again is quite remarkable stability in the UK labour market where employment rises but wage growth is weak considering that. For wages the summary of the Bank of England Agents continues to be accurate.

Growth in labour costs per employee had been subdued, with settlements clustered around 2% to 3%. Recruitment difficulties remained elevated, with conditions becoming very tight for some skills.

The Bank of England faces two problems here. Firstly its theoretical basis has all the stability of the Titanic and secondly there is the issue of its promised interest-rate rise. It is not the fact of one which is an issue it is the timing as why now and not before as not much has changed? On that road the monetary easing of August 2016 looks ever more a panic move.

Meanwhile the underlying picture for real wages continues on its not very merry way.

average total pay (including bonuses) for employees in Great Britain was £488 per week before tax and other deductions from pay, £34 lower than the pre-downturn peak of £522 per week recorded for February 2008

 

 

How will the Bank of England respond to fading wage growth?

Today we find ourselves waiting for and then perusing what is has become the most important piece of economic data in more than a few countries but particularly the UK. This is because whilst the quantity numbers for the labour market such as employment have recovered strongly from the impact of the credit crunch the quality one or wages has not. In fact we find ourselves considering a boom which has lasted for three years whilst mulling real wages still comfortably below the previous peak. Booms did not use to be like that.

Putting that into numbers the previous peak according to official data was in August 2007 when the real wages series hit 118 compared to 113.2 in February of this year. The Resolution Foundation put it another way having average hourly earnings at £11.66 in real terms in October 2007 compared to £10.70 last July. Such numbers remain something of a blot on the UK economic landscape and a reason why many think that we may not be “all in it together” as the recovery passes their pay packets by. Indeed there are two factors which hint at an even worse reality. The first is the ever more shameful exclusion of the self-employed from the average earnings data especially at a time when their number has been growing. The second is that the official real wages numbers use the CPI or Consumer Prices Index measure of inflation which is currently running at around 1% per annum lower than the RPI or Retail Price Index series.

This is a situation which has impacted on most economic models in the way that HAL-9000 responded to not being told the truth in the film 2001 A Space Odyssey. With employment at all time highs as shown below and unemployment at 5.1% rather than the 7% threshold of Bank of England Governor Mark Carney wages in those models would be going through the roof except they are not.

The employment rate (the proportion of people aged from 16 to 64 who were in work) was 74.1%, the joint highest since comparable records began in 1971.

Just to give you an idea of how wrong such models and the accompanying official forecasts have been let me give you the opening salvo from the Office of Budget Responsibility.

Wages and salaries growth rises gradually throughout the forecast, reaching 5½ percent in 2014.

Miles out well actually if you look at their “output gap” obsession and where they expected unemployment to be they would be giving us in the words of ELO “higher and higher it’s a living thing”.

so that the ILO unemployment rate falls to 6 per cent in 2015.

Wages growth of 6% or more? It is from an alternative universe and not this one. I would give you the Bank of England position but it is easier to say that they have been in a string of alternative universes!

Today’s numbers

They were a disappointment especially after the January data had shown an improvement.

Between the 3 months to February 2015 and the 3 months to February 2016, in nominal terms, total pay increased by 1.8%, lower than the growth rate between the 3 months to January 2015 and the 3 months to January 2016 (2.1%).

The cause was lower financial sector bonuses.

 

The lower growth rate was largely due to lower bonuses in the financial and business services sector in February 2016 compared with February 2015.

Sadly the overall trend seems pretty clear as the peak at 3.3% late last spring has been slip- sliding away since then leaving us with only 1.8% now. This means that growth in real or allowing for inflation pay has been drifting away as well. The peak of 3% in late summer last year looks well like a peak.

Comparing the 3 months to February 2016 with the same period in 2015, real AWE (total pay) grew by 1.6%, compared with 2.0% in the 3 months to January.

The latest wages numbers were dragged lower by a weak reading for February which at 1.1% was poor and worryingly last March was very strong at 4.4% so we advance with no a little trepidation. If we note that inflation is also beginning to flicker higher than real wages are in danger of being caught in something of a vice.

Bank of England Agents

They give us a cross check on the wages situation and this morning we were told this.

Labour cost growth had remained moderate overall and had eased a little in manufacturing reflecting the recent weakness in demand growth.

Putting it all together we have been told today that financial sector bonuses are down and that manufacturing wages are fading a bit which is not a surprise I guess when you look at its output numbers.

Unemployment rises

This had to come at some point as we mull whether we had reached a measure of full employment.

There were 1.70 million unemployed people (people not in work but seeking and available to work), 21,000 more than for September to November 2015 but 142,000 fewer than for a year earlier.

By full employment I mean for these times as opposed to the past reading of pretty much everyone having a job. Gains are now likely to be slowing in this area and we await the next turn of events. Care is needed with today’s rise as this was mostly caused by a high December number which will drop out of the series soon. But of course we have seen other signs of a slowing economy which this development reinforces.

The Bank of England

Yesterday Bank of England Governor Mark Carney gave testimony to Parliament and he will have known these numbers when he said this.

BoE’s Carney: Room to cut rates if needed, ( h/t @Livesquawk )

Is that Forward Guidance Mark 16? Also we got a reminder of the first rule of politics according to Jim Hacker. Never believe anything until it is officially denied!

We don’t have an appetite for negative interest-rates

Or indeed this reported by City-AM.

Mark Carmey told the House of Lords Economic Affairs Committee this afternoon that he was “not a believer” in the concept of helicopter drops saying the policy would erode faith in the Bank of England and store up problems for the future.

Indeed he went so far as to call it a “ponzi scheme”. Does such a strong denial make it nailed on for our future? After all the “economical with the truth” Governor of the Bank of Japan has denied it too earlier today. What should we call a proliferation of official denials of the same thing?

Comment

Sadly we are now seeing more than a few signs of a slow down in the UK economy. On the 24th of March I noted a weakening of the previously strong retail sales numbers and on the 8th of April it was production which was not only fading but also declining, Today’s news of weakening nominal and real wages backs up the retail sales data and with inflation picking-up posts a question for retail sales growth as spring turns to summer.The service-sector will have to do all the heavy lifting if we are to continue to grow.

Meanwhile for all the protestations of the reverse the mood music at the Bank of England must be shifting towards mulling a policy easing such as a Bank Rate cut. The rest of the world seems to have been adjusting to that already as Mark Carney was forced to admit yesterday.

UK short-term interest rates have fallen by around 60bps since November.

Sadly nobody present had the wit to point out how much egg was on Mark “Forward Guidance is for interest-rates to rise” Carney’s face, or to ask for him to apologise to those who took his advice and remortgaged?! Mind you what is it about Bank of England Governors and U-Turns?

From Mervyn King on February 4th on becoming a director

 I shall do my best to help the rebuilding of Aston Villa Football Club as together we return it to its position as one of the top clubs in the world.

From two days ago in his resignation statement.

The issues at the club are fundamental and the solutions are radical and do not lend themselves to compromise.