Are we measuring the wrong type of productivity?

Today gives us an opportunity to look at the latest data on what is the key economic number these days which is wages growth. After yesterday’s inflation data we will be able to look at both nominal and real or inflation adjusted wages growth. The reason it has become a key number is that in countries like the UK ( and US and Japan..) is that the employment situation is strong and recorded unemployment has improved considerably but wages growth has been weak. In the extreme case of Japan there has so often been no wages growth.

An associated influence on this has been problems with productivity as of course it has helped drive wages growth in the past. Whereas according to Bank of England Chief Economist Andy Haldane that happy situation has been replaced by this.

Productivity growth has consistently underperformed relative to expectations, since at least the global financial crisis. This tale of productivity disappointment, in forecasting and in performance, has been extensively debated and analysed over recent years. Some have called it the “productivity puzzle”.

Indeed we have been on something of a road to nowhere.

For the past decade, average productivity growth has been negative. This is unusual, if not unique, historically. You would have to go right back to the 18th century to see a similarly lengthy period of stagnant productivity.

In case you were wondering it compares to this.

there has been a near-monotonic rise in UK productivity. UK TFP growth since 1750 has averaged 0.8% per year. Since the Industrial Revolution, GDP per capita has doubled roughly every 65 years and productivity roughly every 85 years.

Actually some of Andy’s numbers are a little contradictory as he suddenly agrees with the theme on here that things were deteriorating even before the credit crunch.

From 1950 to 1970, median global productivity growth averaged 1.9% per year. Since 1980, it has averaged 0.3% per year.

I find that fascinating because is not that the same period where we saw the influence of increasing globalisation and internationalisation which were badged as bring significant economic benefits?

The United States

The international scale of the issue has been highlighted by the Financial Times today.

US productivity is set to grow this year at around a third of the pace prevailing before the financial crash………..
US labour productivity — a driver of the economy’s fortunes — is forecast to expand 1 per cent this year, an improvement on the 0.5 per cent recorded for 2016 but far shy of the 2.9 per cent growth seen from 1999 to 2006, according to Conference Board projections shared with the Financial Times.

This is true of others as well.

The EU will see 1 per cent growth in GDP per hour, an improvement on last year’s 0.8 per cent but short of the 1.9 per cent seen in 1999-2006.  Japan is on course for 1.1 per cent productivity growth, up sharply from 0.5 per cent in 2016 but still well shy of the 2.2 per cent pace seen before the crisis.

I cannot move on without pointing out that the pre credit crunch figures were inflated in many places by booming housing and banking sectors which then went bust.

the figures lag far behind the 4.9 per cent pace in 1999-2006.

Is it the service sector?

To my mind a large factor in the productivity puzzle has been the switch from actual things being produced to more intangible types of economic growth. If we look at it in a stereotypical sense we see output of cars replaced by output of haircuts or teaching or nursing. The latter is much harder to measure in productivity terms as who wants teachers to be more productive via larger class sizes? It is even worse for nurses as who would want to be in a hospital ward with fewer nurses? The problem here is we need a measure of quality of the output and we struggle to define and measure that. Even worse some areas of production face a future of possible enormous gains in labour productivity by the use of robotics and artificial intelligence but where does that leave the labour? Can we have too much of something that is usually considered to be good.

Looking forwards as Sarah O’Connor points out we are likely to see more growth in the service sector.

The undramatic truth is that many of the jobs of the future are also those of the present. Prime among them are jobs that involve humans looking after other humans. The US Bureau of Labor Statistics has predicted the top 30 fastest-growing occupations for the next 10 years; more than half are some variety of nurse, therapist, healthcare worker or carer. This feels like a safe bet — and not just in the US.

She also points out that this growth will be in jobs that we tend to not value.

Social care jobs, for example, are defined by economists everywhere as low-skilled or unskilled…….Personal care and home health aides in the US make roughly $23,000 a year on average. In Britain, a prolonged squeeze on public spending has had knock-on effects on care workers, many of whom work for private companies that rely on public sector contracts. In England last year, 43 per cent of care workers earned less than £7.50 an hour.

There are plenty of thought-provoking issues here as raising productivity here would involve paying them more as that is the only measure of output we have here. Indeed both GDP and productivity fail us when we cannot measure economic output. On this road no wonder both metrics have problems. If a service sector producer gets more efficient and reduces its price then as money is often the only measure we record lower productivity when in fact things have improved. In other words we are in a something of a mess of our own making.

Today’s data

Not the cheeriest I am afraid to say.

Output per hour – our main measure of labour productivity – fell by 0.5% in Quarter 1 (January to March) 2017. This compares with growth of 0.4% in Quarter 4 (October to December) 2016.

My explanation given above may well work though.

was a result of hours worked growing faster than output;

What about wages?

Growth has been pretty consistent at what seems to be something of a new normal.

Between January to March 2016 and January to March 2017, in nominal terms, total pay increased by 2.4%

It is in fact marginally higher but as we look for real wage growth and note that nominal growth in March was 2.4% we see that it was a mere 0.1% and should it remain the same in April then wage growth will be negative. Of course if we use the RPI then annual wage growth was negative again in March at -0.7%. Sadly such numbers come on the back of a credit crunch era decline.

The Resolution Foundation has a somewhat enduring if increasingly lonely faith in officialdom so it still takes the forecasts of the OBR seriously and has switched to the CPIH inflation measure. I think though like so many places today it was so revved up to say real wages were falling again that it has used the regular rather than total pay data.

Comment

There is much to consider here as we find yet another set of statistics that are failing us in the credit crunch era. Our outdated concept of productivity needs to change and it is being challenged at both ends of the spectrum. At one extreme we have the sort of situation covered by Skynet in the Terminator series of firms where robots rule and at the other we have what we might call 100% human occupations. Do we really want to say that one provides a sort of 100% productivity and the other 0% because that is where we are heading right now?

Let me add in another sector which is the self-employed which these days is 15% of our workforce or 4.78 million people. For those in the service sector our main measure of output and hence productivity will be their pay. The very pay numbers that are ignored by the official average earnings data. What could go wrong?

Number Crunching

Regular readers will be aware of my love for football. The numbers game at The Emirates where Arsenal were playing Sunderland had me intrigued. You see pictures of a ground that was a long way from full were all over social media and BBC 5 live reported it was at least a third empty, and yet.

the official number for Tuesday’s game was 59,510. ( ESPN)

Actually Arsene Wenger claimed it was “sold out” but of course he has a long history of eyesight problems and myopia so let’s pass on that. But could we one day see the first empty ground that is counted as sold out?

The Corporate Bond problem at the Bank of England

It is time to once again lift the lid on the engine of Quantitative Easing especially in the UK. As a I pointed out several weeks ago the ordinary version where sovereign bonds are purchased has reached its target of £435 billion ( to be precise £39 million below). However corporate bond purchases are continuing under this from the August 2016 MPC (Monetary Policy Committee ) Minutes.

the purchase of up to £10 billion of UK corporate bonds

This was to achieve the objectives shown below and the emphasis is mine.

Purchases of corporate bonds could provide somewhat more stimulus than the same amount of gilt purchases. In particular, given that corporate bonds are higher-yielding instruments than government bonds, investors selling corporate debt to the Bank could be more likely to invest the money received in other corporate assets than those selling gilts. In addition, by increasing demand in secondary markets, purchases by the Bank could reduce liquidity premia; and such purchases could stimulate issuance in sterling corporate bond markets.

Okay let me open with the generic issue of whether this is a better version of QE? This starts well if we look at the US Federal Reserve.

The FOMC directed the Desk to purchase $1.25 trillion of agency MBS ( Mortgage Backed Securities)……..The goal of the program was to provide support to mortgage and housing markets and to foster improved conditions in financial markets more generally.

Later it bought some more but here we see a case of a central bank buying assets from the market which was in distress which was a combination of housing and banking. We can see how this had a more direct impact than ordinary QE but applying that to the UK in 2016 has the problem of being years too late unless of course the Bank of England wanted to argue the UK economy was in distress whilst growing solidly in August 2016!

This is a clear change of course from Mark Carney as the previous Governor Baron King of Lothbury was not a fan and whilst the Bank of England had a plan for corporate bond QE in theory in practice it just kicked the ball around for a while and gave up. Why? Well as I have pointed out before the market is small because UK businesses are often international and issue in Euros and US Dollars so that the UK Pound market is reduced. This leads to the Bank of England finding itself having to purchase bonds from foreign companies and this week it is back offering to buy the bonds of the Danish shipping company Maersk.  No doubt it and Danish taxpayers are happy about this but I do hope one day we will get a Working Paper explaining how this boosts the UK economy more than ordinary QE.

The technical view

There are some suggested examples in the Financial Times today from Zoso Davies of Barclays.

Initially, this seemed to work. August and September 2016 witnessed a flurry of new deals in the sterling corporate markets despite the uncertainty created by the UK’s vote to leave the EU. Since then, however, companies’ interest in borrowing in sterling has fallen to levels similar to those seen in 2013 and 2014.

As you can see once the “new toy” effect wore off things seem to have returned to something of a status quo. The “new toy” effect was exacerbated because the borrowing was so cheap.

Borrowers have also benefited from somewhat better terms on their bonds. After the initial announcement, sterling credit spreads (the additional yield risk borrowers must pay relative to the UK government to borrow in sterling) came down sharply.

If we look back we see that not only did the UK ten-year Gilt yield drop towards 0.5% but the spread above it corporate bond issuers had to pay fell, so there was a clear incentive to borrow. The catch is that if we recall the “lost decade(s)” experience of Japan the link between that and productivity activity tends to fail. One rather revealing fact is that the article does not mention real economy benefits at all instead we get this.

Our analysis, based on the limited data available for corporate bond markets, suggests that trading activity has not picked up across the sterling market as a whole, implying that the Bank of England has been crowding out other market participants. That said, the evidence is far from convincing in either direction.

The price effect did not last either.

Since then, however, the sterling market has hardly moved, indicating that most of the market impact came from the announcement rather than their execution. And that lack of movement has been a marked underperformance versus dollar and euro credit markets, to the extent that sterling has returned to being a relatively expensive bond market in which to raise financing.

Of course we have a tangled web here because one of the factors at play is the the 208 billion Euro corporate bond purchases of the ECB have allowed some companies to be paid to borrow, or if you prefer issue at negative yields. This is from Bloomberg in January.

Henkel AG’s two-year note issued at a negative yield

Also its activities make us again wonder who benefits? From Credit Market Daily.

A big theme in 2015-16 was the amount US domiciled corporates funded in the euro-denominated debt markets. As shown in the chart above, it was a record 26% of the total volume in 2015 and 22% in 2016. Low rates everywhere, but lower in Europe along with low spreads made it attractive for US corporates to borrow in euros (even when swapped back to dollars)

So the Bank of England is supporting European corporates and the ECB US ones? Time for Kylie.

I’m spinning around
Move out of my way

The article ends with some points that pose all sorts of moral hazards.

If sterling corporate bond issuance collapses and secondary market volumes plummet, it will be clear that the Bank’s newest tool has been propping up this small corner of the fixed-income universe over the past six months. Conversely, the more graceful the exit from corporate bond buying, the less clear it will be that the CBPS has been much more than a placebo for markets.

So if borrowers want to borrow cheaply just go on an issuers strike? Also what if the lower yields have sent other buyers away and crowded them out? That would have created quite a mess.

Comment

There are a lot of issues here. Lets us look at the real economy where are the arguments that it has benefited? Whereas on the other side of the coin we can see that subsidising larger companies both ossifies the economy and would help stop what is called “creative destruction”. Whilst the productivity problem began before this program started is it yet another brick in the wall for it via the routes just described? As the Bank Underground blog puts it.

Since 2008, aggregate productivity performance in the UK has been substantially worse than in the preceding eight years.

Also whilst the Federal Reserve purchases of MBSs seems to have been a relatively successful version of QE we have to add “so far”. This is in the gap between the word “stop” and “end” as whilst it stopped new purchases it maintains its holdings at US $1.75 trillion. How can it sell these and what if there are losses which could easily be large? Will the Bank of England end up in the same quicksand? Frankly I think it is already in it.

Yes equity markets are higher but the one area in the UK that has surged in response to this extra monetary easing has been unsecured rather than business credit.

 

 

 

The unemployment rate in France continues to signal trouble

It is time for us to nip across the Channel or perhaps I should say La Manche and take a look at what is going on in the French economy. This morning has brought news which reminds us of a clear difference between the UK and French economy so let us get straight to the French statistics office.

In Q4 2016, the average ILO unemployment rate in metropolitan France and overseas departments stood at 10.0% of active population, after 10.1% in Q3 2016.

Thus we note immediately that the unemployment rate is still in double-digits albeit only just. Here is some more detail.

In metropolitan France only, the number of unemployed decreased by 31,000 to 2.8 million people unemployed; thus, the unemployment rate decreased by 0.1 percentage points q-o-q, standing at 9.7% of active population. It decreased among youths and persons aged 50 and over, whereas it increased for those aged 25 to 49. Over a year, the unemployment rate fell by 0.2 percentage points.

So unemployment is falling but very slowly and it is higher in the overseas departments. It is also rising in what you might call the peak working group of 25 to 49 year olds. It was only yesterday we noted that the UK unemployment rate was much lower and in fact less than half of that above.

the unemployment rate for people was 4.8%; it has not been lower since July to September 2005

Thus if we were looking for the key to French economic problems it is the continuing high level of unemployment. If we look back to pre credit crunch times we see that it was a little over 7% it then rose to 9.5% but later got pushed as high as 10.5% by the consequences of the Euro area crisis and has only fallen since to 10% if we use the overall rate. Thus we see that there has only been a small recovery which means that another factor is at play here which is time. A lot of people will have been unemployed for long periods with it would appear not a lot of hope of relief or ch-ch-changes for the better.

Among unemployed, 1.2 million were seeking a job for at least one year. The long-term unemployed rate stood at 4.2% of active population in Q4 2016. It decreased by 0.1 percentage points compared to Q3 2016 and Q4 2015.

The long-term unemployment rate is not far off what the total UK unemployment rate was for December (4.6%) which provides a clear difference between the two economies. Here is the UK rate for comparison.

404,000 people who had been unemployed for over 12 months, 86,000 fewer than for a year earlier

It is not so easy to get wages data but the non-farm private-sector rise was 1.2% in the year to the third quarter. So there was some real wage growth but I also note the rate of growth was slowing gently since the peak of 2.3% at the end of 2011 and of course inflation is picking up pretty much everywhere as the US “surprise” yesterday reminded pretty much everyone, well apart from us. Unless French wage growth picks up it like the UK will be facing real wage falls in 2017.

Productivity

There is an obvious consequence of the UK producing a broadly similar output to France with a lower unemployment rate if we note that productivity these days is in fact labour productivity. There are always caveats in the numbers but the UK Office for National Statistics took a look a year ago.

below that of Italy and France by 14 and 15 percentage points respectively ( Final estimates for 2014 show that UK output per worker was:)

My worry about these numbers has always been Japan which for its faults is a strong exporter and yet its productivity is even worse than the already poor UK.

above that of Japan by 14 percentage points

Economic growth

This remains poor albeit with a flicker of hope at the end of 2016.

In Q4 2016, GDP in volume terms* accelerated: +0.4%, after +0.2% in Q3. On average over the year, GDP kept rising, practically at the same pace: +1.1% after +1.2% in 2015. Without working day adjustment, GDP growth amounts to +1.2 % in 2016, after +1.3 % in 2015.

However the pattern is for these flickers of hope but unlike the UK where economic growth has been fairly steady France sees quite wide swings. For example GDP rose by 0.6% in Q1 so the economy pretty much flatlined in Q2 and Q3 combined. Whether this is a measurement issue or the way it is unclear. We do know however that it seems to come to a fair extent from foreign trade.

All in all, foreign trade balance contributed slightly to GDP growth: +0.1 points after −0.7 points. ( in the last quarter of 2016).

But as we look for perspective we do see an issue as for example 2016 should have seen two major benefits which is the impact of the lower oil price continuing and the extraordinary stimulus of the ECB ( European Central Bank). Yet economic growth in 2015 and 2016 were both weak and show little signs of any great impact. If we switch to the Euro then its trade weighted value peaked at 113.6 in November 2009 and has fallen since with ebbs and flows to 93.5 now so that should have helped overall. In the shorter term the Euro has rotated around its current level.

Production

With its more dirigiste approach you might expect the French economy to have done better here but as I have pointed out before that is not really so. If we look at manufacturing France saw growth in 2016 but we see a hint of trouble in the index for it being 103 at the end of 2016 on an index based at 100 in 2010. So overall rather weak and poor growth. Well it is all rather British as we note the previous peak was 118.5 in April 2008. Actually with its 13% decline that is a lot worse than the UK.

manufacturing (was) 4.7% lower when compared with the pre-downturn peak in February 2008.

Of course there are also links as the proposed purchase of Opel ( Vauxhall in the UK) by Peugeot reminds us.

Oh and those mulling the de-industrialisation of the West might want to note that the French manufacturing index was 120.9 back in December 2000.

Debt and deficits

This has received some publicity as Presidential candidate Fillon said this only yesterday. From Bloomberg.

Reviving a statement he made after becoming prime minister in 2007, Fillon said France is essentially bankrupt and warned that it can face situations comparable to those of Greece, Portugal and Italy. “You think it can’t happen here but it can,” he said.

As to the figures the fiscal deficit at 3.5% of GDP is better than the UK but of course does fall foul of the Euro area 3% limit. The national debt to GDP ratio is 97.5% and has been rising. On the 7th of this month I pointed out that France could still borrow very cheaply due to the ECB QE program but that relative to its peers it was slipping. That has been reinforced this week as for the first time for quite a while the Irish ten-year yield fell to French levels.  It may seem odd to point this out on a day when France has been paid to issue some short-tern debt but the situation has gone from ultra cheap to very cheap overall and there is a cost there.

Comment

I pointed out back on the 2nd of November last year that there were more similarities between the UK and French economies than we are often told but that there are some clear differences. We have looked at the labour market today in detail but there is also this.

There is much to consider here as we note that for France the new economic growth norm seems to be 1% rather than the 2% we somewhat disappointedly recognise for ourselves. Over time if that persists the power of compounding will make it a big deal.

Oh and of course house prices if we look at the UK boom which began in the middle of 2013 we see that France has in fact seen house prices stagnate since then as the index was 103.03 ( Q2 2013) back then compared to 102.82 in the third quarter of 2016

The big problem that is little productivity growth in the western world

It was only yesterday that we found ourselves looking at an apparent productivity miracle in China, or perhaps if official statistics are true! Yet in the western world we find ourselves wondering what has happened to it? I recall the Bank of England publishing a paper looking at an 18% productivity gap. Some care ( as ever ) is needed with their work as it assumed that we could carry on as we did before the credit crunch whereas some industries like banking were clearly misleading us. But the truth is that it does look like there has been a change even if we discount the projection of past performance forwards.

In some places it exists

This caught my eye as I was doing some research on the subject.

Welcome to 2017! The future is here. Workers at Fukoku Mutual Life Insurance are being replaced with an artificial intelligence system. ( @izzyroberts )

So we can see changes in service industries as well where 34 employees are to be replaced by an AI ( artificial intelligence) system . This of course will boost productivity especially the labour measure but may end up with us worrying about unemployment. The more conventional view is the use of robots and automation in the manufacturing and industrial sector.

The apparent problem

This has been highlighted by John Fernald of the US Federal Reserve and here is a summary from the Wall Street Journal.

His research found that the information technology boom of the 1990s helped businesses become more efficient until about 2003. But that boost began fading by 2004, and now the benefits of tech innovation flow more to leisure activities, such as social media and smartphone apps……..Total factor productivity grew an average 1.8% a year from the end of 1995 through 2004, but growth has slowed since then to an average 0.5% annually.

This type of view changes things and is a critique of the Bank of England projecting the past forwards work but the immediate impact is to move productivity falls from a consequence of the credit crunch to one of the causes of it. Also as we look forwards it has its own consequence which is something we have discussed many times here.

He puts the new normal for U.S. economic growth at 1.5% to 1.75% a year—roughly half the typical range of 3% to 4% from the end of World War II to 2005.

Again care is needed as a clear challenge here is how we measure productivity. There is clearly a large amount of technical innovation going on right now but it has shifted into areas that do not feature in conventional productivity analysis. These days most of the gains come for leisure rather than business.

Today’s UK data

Firstly let is have some good news which is that we have some productivity growth.

UK labour productivity, as measured by output per hour, is estimated to have grown by 0.4% from Quarter 2 (Apr to June) 2016 to Quarter 3 (July to Sept) 2016;

Although it has been driven not by what might be expected.

Productivity grew in the services industries but not in the manufacturing industries; services productivity is estimated to have grown by 0.3% on the previous quarter, while manufacturing productivity is estimated to have fallen by 0.2% on the previous quarter.

So heartening in itself although an old problem may be resurfacing as you see this from an accompanying release.

Tower Hamlets (79% above the UK average) was the local area with the highest labour productivity in 2015

Welcome back the City of London, let us hope the gains are genuine and not just an illusion this time around.

As to the overall issue the UK ONS seems as keen as the Bank of England to try to assume that the credit crunch was some form of blip.

Productivity in Quarter 3 2016, as measured by output per hour, stood 15.5% below its pre-downturn trend – or, equivalently, productivity would have been 18.4% higher had it followed this pre-downturn trend.

This is what is called the “productivity puzzle” but a bit like the Bitcoin price moves over the past 24 hours or so we can again consider the genius of the simple “It’s Gone” from South Park on the banking crisis. For those who have not followed it the bull market surge in Bitcoin was followed by a plunge in an hour which put it in a bear market, then a rebound then another drop. Of course I need to add so far to that……

Does the type of innovation in these alternative electronic currencies show up anywhere in the productivity data?

Andy Haldane

The Bank of England’s Chief Economist had some thoughts on productivity yesterday. Of course he has his own issues as he confessed to past mistakes – although not yet about his “Sledgehammer” which will hit many people in 2017 – yet again. If we measured his own productivity it would be very negative but let us move onto his analysis.

He blamed decades of education policies – that had left numeracy levels in England only just above Albania – for holding back improvements in productivity. He said the lack of numeracy skills was stark in comparison with other countries, which placed more emphasis on workers having more than a basic level of maths……….He added that the UK’s lack of numeracy skills across more than half the working population was a key reason for its lack of productivity growth since the financial crisis.

This raises a wry smile with me because I feature fairly regularly in the business live section of the Guardian and the original contact point was my pointing out that an article was innumerate. Perhaps it made a change from people pointing our spelling errors! In broad terms I welcome this issue although we need to decide in this technological era what level of numeracy people actually need. I remember reading a report from the 1860s where we were unhappy with our education system though and we did not do too bad back then.

Sadly the Bank of England has not provided a speech but we do have his past views which in their bi-modal, bifurcated day are a sort of tale of two cities. From 2014.

The upper peak of the labour market is clearly thriving in both employment and wage terms. The mid-tier is languishing in both employment and real wage terms. And for the lower skilled, employment is up at the cost of lower real wages for the group as a whole. This has been a jobs-rich, but pay-poor, recovery.

Productivity as well? It is hard to avoid that thought.

A feature of our times

I will simply ask you to look at the time period here and will leave you to draw your own conclusions.

 

Comment

There is much to consider here. But it is clear to me that the problem for us in what we like to call the first world began well before the credit crunch. Secondly as so often we find ourselves with data simply unfit for the task. We can look at that several ways of which the technical one is that if we do not bother to put the earnings of the self-employed into the average earnings numbers then we are likely to be clueless about their productivity. More hopefully we need to include the technological changes in the area of leisure in some form as other wise we are likely in the future to get another “surprise” when a big move happens in the business world as a result.

Meanwhile if we return to Andy Haldane the media have failed to point out that he has been directly responsible for a fall in productivity. I do not mean the reduction in annual Bank of England meetings from 12 to 8 as that was the “improvement” driven by its dedicated follower of fashion Mark Carney. What I mean is the way that zombie companies have been propped up by his Sledgehammer QE and even worse corporate bond QE which also props up foreign companies. This contributes to situations like this having a particular dark side.

Despite having fallen by almost 10% since the crisis, real wages among the top 10% are still over 20% higher than in 1997. But wages for the bottom 20% have fallen by almost 20% since 2007 and are essentially back to where they were in 1997.

What about the 0.1%?

 

 

 

 

Of UK wages, robotics and the gig economy

Today we advance on the UK wages data knowing that the pick-up in inflation we have been expecting is now coming to fruition. Albeit that today’s wages numbers only bring us up to date of the 3 months to October so we will be experiencing lagged data. Yesterday also reminded us of two things. Firstly how poor the economics profession has become at predicting inflation and that there is invariably an “Early Wire” of them in currency markets as some find themselves being more equal than others. Interestingly the economist Douglas McWilliams has put up a defence this morning.

….and most people think Cebr forecasts are usually right!

Our Doug seems to be a passionate supporter of one of the new forms of measuring GDP or Gross Domestic Product if this from Business Insider in March 2015 is any guide.

Douglas McWilliams, one of the world’s leading economists and a former advisor to UK Chancellor George Osborne and London Mayor Boris Johnson, was allegedly filmed smoking crack in a drugs den in Britain’s capital city.

He is also is facing trial for allegedly assaulting a prostitute on New Year’s Eve after she refused to take crack with him.

Sometimes you really could not make it up.

Meanwhile we see two things from the world of football. Firstly that price inflation is rampant and secondly that capital controls in China may not being doing so well. From BBC Sport.

Chelsea have reportedly accepted a bid of £60m for Oscar – he’ll leave for China in January.

The war on cash

This seems to have developed a new front in what might be called the South China Territories but has been immortalised in song as a land down under. From news.com.au

Speaking to ABC radio on Wednesday, Revenue and Financial Services Minister Kelly O’Dwyer flagged a review of the $100 note and cash payments over certain limits as the government looks to recoup billions in unpaid tax……“The whole point of this crackdown on the black economy is to make sure we close down any potential loopholes,” she said. Despite the broad use of electronic forms of payment, Ms O’Dwyer warned there are three times as many $100 notes in circulation than $5 notes.

What could go wrong? Well there are echoes of the disaster that demonetisation has become in India here.

There are currently 300 million $100 notes in circulation, and 92 per cent of all currency by value is in $50 and $100 notes.

Also there is the issue that this is also presented as a boost to banks and savers will then have to put more money with them as another move favours the “precious”. Oh and I would wager that the unofficial economy in Australia is a lot more than 1.5% of GDP.

Robotics

As we look to the future of wages growth it is hard not to wonder about the effect of improved robots on the situation. Just over a year ago Bank of England Chief Economist Andy Haldane offered this view.

For the UK, that would suggest up to 15 million jobs could be at risk of automation.  In the US, the corresponding figure would be 80 million jobs.

For some jobs this will depress wages although of course it may well boost others. There is a cautionary note which is that Andy has a very poor forecasting record which I am sure any respectable AI style robot could improve. The Resolution Foundation has also considered possible benefits from this general trend and theme.

Given high employment, terrible productivity performance and low investment, the UK arguably needs more automation, not less.

Today’s UK numbers

There was in fact some good news from the wages series.

Between August to October 2015 and August to October 2016, in nominal terms, total pay increased by 2.5%, slightly higher than the growth rate between July to September 2015 and July to September 2016 (2.4%).

So both a higher number and an upwards past revision. This was driven by the fact that wages rose by 2.8% in the month of October alone driven by an 8.6% rise in construction wages and a 4.4% rise in the wholesale sector ( retail and hotels). This meant that real pay would have risen in October as inflation also dipped slightly but the more general pattern is stationary.

Over the same 3-month period, real AWE (regular pay) grew by 1.7%, the same as the growth seen in the 3 months to September

Of course the wages numbers look much worse if we use the RPI or Retail Price Index as our inflation measure where we find ourselves knocking around 1% off the numbers above.

The next number can be seen in two ways.

Total hours worked per week were 1.01 billion for August to October 2016. This was 5.0 million fewer than for May to July 2016 but 7.3 million more than for a year earlier.

Some are reporting this as a post EU vote hiring freeze. It does show a possible change in our previously booming employment position but of course with GDP growing does in fact show a rise in likely productivity.

Whilst the unemployment rate remained at 4.8% there was in fact a small but welcome fall in unemployment.

There were 1.62 million unemployed people (people not in work but seeking and available to work), 16,000 fewer than for May to July 2016 and 103,000 fewer than for a year earlier.

However the claimant count or registered unemployment did rise by 2400 in November which may be a sign of something but this number is not only experimental it comes from a series which no-one has any great faith in.

Comment

There is much to consider in all of this and the undercut to another pretty good set of UK labour market is those who are excluded such as the self-employed who do not appear in the average earnings numbers. Some insight into conditions in the gig industry have been provided by Izzy from FT Alphaville as shown below.

The interviewer stressed I would be earning a standard rate of £7 per hour plus a £1 per delivery bonus for every order completed, but frequently emphasised that I would probably be taking home as much as £12 per hour because of surge incentives. …………In total I did five shifts, and earned an average of £8.10 per hour. The London living wage is supposed to be £9.75, according to London authorities. The national required living wage is £7.20 but goes to £7.50 in April next year.

There were various other issues such as compulsory weekend shifts and Izzy’s view that to get surge wages you had to be available 24/7. As to efficiency the app drained her phone battery quickly and there was also this.

Outside of the office lay heaps of bikes atop of each other, most of them cast loosely aside the building. There appeared to be absolutely nowhere to secure a bike properly — which I thought strange for a cycling courier service.

Actually this resonated with me but from a different industry as my brother has worked as a driving instructor on as franchise basis where companies produce earnings forecasts which are somewhere between misleading and outright fantasy in practice. Both have a type of fixed cost as Deliveroo requires the rider to but branded corporate clothing and driving instructors have a period to which they must commit to pay the weekly franchise fee.

If we return to the official picture then the Resolution Foundation has provided some perspective with this.

 

 

 

 

 

Of Bond Yields and Productivity without forgetting Brexit day songs

Hello and welcome to the day the UK finally votes on European Union membership or Brexit. In London the weather was on the case as we have had what Freddie Mercury called “thunder and lightning, very very frightening” overnight and more of the same is expected later. Please do not be put off by what has been a nasty campaign – the kinder campaign promised last week seemed to have a shorter life than a Mayfly – and vote whatever your leaning as it is a right people have fought and died for.  The currency markets with the UK Pound £ at US $1.48 and Euro 1.30 have placed some one-way bets but of course if markets were always right life would be a lot easier than it is! Anyway let us move onto today’s subject except as you might expect there will be a song list for Brexit referendum day.

Bond yields and productivity

This is an issue raised by the former IMF Chief Economist Olivier Blanchard at the Pieterson Institute. But first we are reminded of something important which is that the rules that apply to us plebs do not apply to the establishment. Monsieur Blanchard was responsible for the policies applied to Greece on his watch as I note this from his Ten Commandments in June 2010.

Fiscal adjustment is key to high private investment and long-term growth.

Of course the fantasies about a Greek economic recovery were produced on his watch too. Then there is this.

You shall target a long-term decline in the public debt-to-GDP ratio, not just its stabilization at post-crisis levels.

As well as Greece which also needed a default ( PSI ) in 2012 we have Portugal to consider here. Of course Olivier had a mea culpa later on which is welcome but if an airplane designer had seen the results of his work crash and burn like what happened to Greece who would fly on his/her next plane? Anyway Olivier has carried on pretty much regardless.

The Economics

Olivier opens with something of a strawman argument.

Long-run productivity growth appears likely to be low, and productivity growth and interest rates move largely together, so one should expect long rates to be low as well.

We have very little idea of where interest-rates as in bond yields would be without all the intervention as I note that today we have learned that the Bank of Japan now owns 34% of the Japanese Government Bond Market. Olivier is not keen on that argument for different reasons though.

Yes, measured productivity growth has decreased, and seemingly not due to measurement error (Byrne et al. 2016, Syverson 2016).

I have highlighted the bit with which I can only disagree completely. As I look ever more deeply into the UK data on the subject I realise that we know much less than we think and that we could and probably are making large mistakes. Actually Olivier behaves like a stereotypical economist here.

Expect lower productivity growth, but be ready to be surprised.

The bit that I note is like my “something wonderful” ( 2001 A Space Odyssey ) thought.

But when one listens to Silicon Valley, one cannot help but expect a substantial probability of a much larger role for robots and artificial intelligence in general, and by implication, much higher productivity gains.

That seems a likely future but missed by Olivier is the implication of that. Will it be a science fiction Star Trek style world where the benefits of capitalism are shared around? A  time of leisure and ease for all. Or will it be a type of Marxist world where capitalists overlords amass great wealth paid for by their robots whilst the ordinary person sees harder times. In science fiction terms that makes me think of the Harkonnen’s in the novel Dune. It makes me shudder a bit.

We move onto an area where Olivier appears for a while to be influenced by the early work of Oasis.

that people live forever, or act as if they lived forever, and that people are willing to defer consumption if the interest rate is higher.

The latter part of that has seemed to be true in the past but we know in our new world of negative interest-rates that people are willing to defer consumption as well if the interest-rate is not only lower but pretty much zero. I have written recently about the Swedish propensity to save continuing well the Germans seem rather keen on it as well.

I am not so sure that the Germans are that peculiar as I note that the Euro area without them has not seen that much of a fall in savings once we allow for the fact that some of it has hard a very hard credit crunch. Only yesterday the Swedes took some time off from the football and cheering the last international for the Zlatan to let us know this.

Households’ net deposits were at a record level of SEK 35 billion, mainly in regular savings accounts in banks and at the Swedish Tax Agency during the first quarter of 2016.

What is the conclusion?

Well we are told this.

Forecasts of long-term growth, and the general commentary in newspapers, are gloomy. I believe that this bad news about the future largely explains the relative weakness of demand today. Put in more academic terms, bad news about the future supply side is leading to a Keynesian slowdown, or at least a weaker recovery today.

Olivier skirts over the disaster that has been official “Forward Guidance” so his first factor is an ever weakening influence as people listen less and less to people like him. However he misses important points which explain why we are where we are and again sometimes he is simply wrong.

Banks are no longer deleveraging, and credit supply is abundant and cheap.

As to banks no longer deleveraging that is not what I have been hearing and seeing. We see a regular flow of job losses on the news wires and occasional large retrenchments such as Barclays announcing plans to pull out of Africa. That is before we get to the share prices of banks around the world. If we move to credit supply it is abundant and cheap in many places for consumer borrowing but if the UK is any guide much less so for companies and businesses.

Comment

There are things to consider here and deeper issues that Olivier’s it might stay depressed or it might improve analysis. Let me remind you again of another issue he has dodged which is that one of his variables interest-rates ( I am including bond yields here) has been driven by what he might call “people like us”. This has changed the world as the idea of a market driven interest-rate seems an anachronism from a distant past and investors spend their time trying to front-run central banks. What could go wrong? Tucked in there might be an explanation of why people are saving for no apparent return at these levels of interest-rates.

Also our world has seen apparent expansionary policy have contractionary influences. The impact of QE in the UK helped reduce real wages in 2011/12 for example from which they have yet to fully recover. Also there is the issue of long-term saving and pensions how does that work in our supposedly brave new world? People may think they need to save more whilst around the world we see businesses being told they need to put more into pension funds which is another contractionary effect of our QE world. Oh and all the can-kicking has left people afraid not unreasonably in my view that it could all happen again. In fact it seems more likely and not less in more than a few places.

Songs for Brexit Day

Should I Stay or Should I Go Now by The Clash

The Final Countdown by Europe

Making Your Mind Up by Bucks Fizz

For Remain

Stay by Jackson Browne

Stay by Eternal

Don’t Leave Me This Way by The Communards

Please Don’t Go by KC and the Sunshine Band

It’s The End Of The World As We Know It by REM

Come Together by The Beatles

For Leave

D-I-V-O-R-C-E by Tammy Winette

Fifty Ways To Leave Your Lover by Paul Simon

Go Now by The Moody Blues

Another Brick In The Wall by Pink Floyd

Burning Down The House by Talking Heads

I Want To Break Free by Queen

Go Your Own Way by Fleetwood Mac

Should we get another vote

Coming Around Again by Carly Simon

Europe Endless by Kraftwerk

Complete Control by The Clash

 

Thanks for the suggestions I have already received.

 

 

 

 

Explaining the problem that is UK productivity growth

A regular feature of economic analysis in the credit crunch era has been where has the productivity growth gone? The knee-jerk reaction from establishment economists was as usual to assume that reality was wrong and their models correct and so they assumed that it would rise even faster in the future to make up the gap. For example back in June 2010 the hapless UK Office for Budget Responsibility forecast that UK productivity growth would have recovered such that wage growth would have been  be running at above 4% since 2013/14. Problem solved! Except that only in their Ivory Towers did such a solution work as below the clouds the situation changed little if at all.

To my mind it is the last 3 years or so that have really illustrated the issue as we have seen the official measure of economic growth rise on a sustained basis. On that measure the recovery has become mature and one would therefore have hoped that productivity growth would have picked up and risen noticeably. So it is especially troubling that we find ourselves wondering what happened to it right now. Even worse if this week’s Markit business surveys indicate a new trend of slowing economic growth.

The establishment could not ignore it for ever

Half way through 2014 someone at the Bank of England must have decided that enough was enough and that maybe something had changed.

Since the onset of the 2007–08 financial crisis, labour productivity in the United Kingdom has been exceptionally weak. Despite some modest improvements in 2013, whole-economy output per hour remains around 16% below the level implied by its pre-crisis trend………This shortfall is sometimes referred to as the ‘UK productivity puzzle’,

Indeed the comparison with past recessions was stark.

Even six years after the initial downturn, the level of productivity lies around 4% below its pre-crisis peak, in contrast to the level of output, which has broadly recovered to its pre-crisis level.

However the response of the establishment followed a disappointing theme as another hapless body gave us Forward Guidance on productivity.

A key judgement in the May 2014 Inflation Report is for productivity growth to pick up.

We can skip the cyclical arguments presented back then as we have cycled on so to speak but there were issues raised then partially dismissed which do apply.

Growth rates in output per hour  have been persistently weaker than GDP, reflecting strong employment growth over the past few years.

This reflects two factors in my view. Firstly ( and the Bank of England either forgot or redacted this) is that for years and indeed decades economists in the UK had wanted us to be more like Germany and keep more workers employed when a recession hits. The other has been an increase in supply of labour as more people have moved to the UK to find work. This is a politicaly charged issue and the Bank of England tip-toed around it.

In addition, it may be that the financial crisis led to an increase in labour supply in the United Kingdom.

But they have to face up to some of the consequences.

The crisis is likely to have reduced both current real incomes and expected future labour incomes, which may have encouraged more people to seek work and participate in the labour market.

In other words the labour supply curve shifted downwards as labour became cheaper and more of it was used. On that road there was less pressure to improve productivity as wages were lower. You may also note that right up to now we have been discussing weak wage growth and the establishment continues to expect a turn higher at every turn.

Output per individual

The Bank of England tried to shuffle past this issue but I think it matters a lot because there are strong hints of an issue from the GDP per head numbers.

GDP is now 7.3% above its pre-downturn peak and has been growing for 13 consecutive quarters.

We know that the population has grown however so that GDP per head is lower. If we look at the boom phase since 2013 then this has continued with GDP growth being 8.3% but per head only 5.2%.

Sectoral Issues

The Office for National Statistics has been listening to this debate and offered some views on Wednesday and today.

Administrative and support service activities has grown by the largest amount, with a growth rate of 22.3% for the 4 year period, closely followed by professional, scientific and technical activities at 19.1%.

Okay so they have been the leaders so who are the laggards?

production industries made up 3 of the 5 slowest growing industries. One production industry – electricity, gas, steam and air conditioning supply – was one of only two industries to experience negative growth across the four-year period.

I think that the recent mild winter may be a factor in the energy supply industry as it has high fixed costs but it is revealing that it is another area where production has been struggling. Shakespeare was ahead of the game with his point that troubles like this come in “battalions” rather than “single spies”.

Oh and I wonder if those calculating the numbers have overrepresented their own productivity!

However, administration and support service activities features toward the top end of both distributions,

It has had another go this morning and confined itself to the market-sector of the economy.

These estimates also suggest that lower capital service per hour worked and weaker than normal improvements in labour quality held back productivity growth in 2014.

So 2014 was a bit better but still below past experience. I was pleased that such numbers exclude matters such as imputed rent and see that as a success for my arguments and campaigns.

The Services Problem

This is the issue of how we measure this and it is twofold. Firstly there is the problem that many services are intangible and thus output measures are problematic. The other is that some gains here are from products which are in effect free but GDP measurements need a price (that is not zero). For example it is only anecdotal but a friend told me last week that Linkedin and Facebook were very useful for his business but he only used the free versions. So his productivity was in his opinion higher but our national accounts cannot measure it.

Back in 2014 an effort was made but it was vague. At least Price Waterhouse had a go.

Total revenues for the five most prominent sharing economy sectors – peer-to-peer (P2P) finance, online staffing, P2P accommodation, car sharing and music/video streaming – could rise to around £9 billion in the UK by 2025, up from just £0.5 billion today, according to new analysis by PwC.

Professor Diane Coyle has been looking into this and suggested some numbers to give us an idea of scale.

it is highly likely that more than a million people are providing services via these platforms. This is equivalent to about 3% of the workforce, although many or most of them probably do not regard this as employment in the conventional sense.

We wonder what is employment quite regularly on here of course. But it is missed also by the productivity numbers.

The debate about the UK’s productivity performance should take account of the fact that the sharing economy acts as a kind of technological progress, equivalent to increasing the amount of capital available in the economy. But this effect is not recorded in the measured statistics and productivity.

Actually as she points out it may even reduce it as things which are measured are replaced by things which are not measured.

Comment

At times of large structural change there are always going to be issues for official statistics. We have seen and indeed are seeing three large moves at one. The credit crunch blitzed some sectors and sent the whole economy into reverse. The official response has been to try to pump up sectors such as housing and banking. Meanwhile there has been enormous change in technology and the virtual world which we are often missed by the old ways of measurement.

Thus we need ch-ch-changes but the initial problem is the way that we have become wedded to GDP as a measure. Or to be more precise it would as a beginning be helpful if the UK returned to publishing more openly the three different GDP measures adding Income and Expenditure to Output. Why? Well the income figures from the US have added value but when I tried to get similar data for the UK I was told that Nigel Lawson scrapped much of it as I guess it “frightened the horses” to coin a phrase. Yet as Diane Coyle points out something seems to be happening.

In the past, the statistical discrepancy was of the order of £1bn, and more recently £2-3bn.. In 2014 it reached an extraordinary £9bn.

We can do much more to get data from the online world using so-called big data and web scraping. This will not give us a complete answer but it will be better and I believe there will be more cheer in it than the official data we get now. As the sun is out let’s have a little optimism and hope it will wean our establishment off pumping up the housing market.

Ch-ch-ch-ch-changes
Turn and face the strange
Ch-ch-changes
Oh, look out you rock ‘n’ rollers
Ch-ch-ch-ch-changes
Turn and face the strange (David Bowie)