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

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

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

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

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

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

Employment

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

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

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

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

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

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

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

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

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

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

In terms of a graph we have quite a lurch.

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

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

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

Unemployment

The conventional measures are simply not cutting it.

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

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

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

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

Wages and Real Wages

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

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

It is quite a drop on what we had before.

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

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

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

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

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

Already real wages were in trouble.

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

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

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

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

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

 

Comment

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

Staying with wages the numbers are being influenced by this.

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

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

 

 

 

 

The UK government plans to rip us all off

This morning has seen the publishing of some news which feels like it has come from another world.

The all items CPI annual rate is 1.7%, down from 1.8% in January…….The all items RPI annual rate is 2.5%, down from 2.7% last month.

Previously we would have been noting the good news and suggesting that more is to come as we look up the price chain.

The headline rate of output inflation for goods leaving the factory gate was 0.4% on the year to February 2020, down from 1.0% in January 2020. The price for materials and fuels used in the manufacturing process displayed negative growth of 0.5% on the year to February 2020, down from positive growth of 1.6% in January 2020.

There is something that remains relevant however as I note this piece of detail.

Petroleum products made the largest downward contribution to the change in the annual rate of output inflation. Crude oil provided the largest downward contribution to the change in the annual rate of input inflation.

That is something which is set to continue because if we look back to February the base for the oil price ( Brent Crude) was US $50 whereas as I type this it is US $27.50. So as you can see input and output costs are going to fall further. This will be offset a bit by the lower UK Pound £ but I will address it later. In terms of consumer inflation the February figures used are for diesel at 128.2 pence per litre whereas the latest weekly number is for 123.4 pence which is some 7.7% lower than a year ago. So there will be a downwards pull on inflation from this source.

There is a bit of an irony here because the Russo/Saudi turf war which began the oil price fall on the supply side has been overtaken by the large falls in demand we are seeing as economies slow. According to The Guardian we may run out of spaces to put it.

Analysts at Rystad estimate that the world has about 7.2bn barrels of crude and products in storage, including 1.3bn to 1.4bn barrels onboard oil tankers at sea.

In theory, it would take nine months to fill the world’s remaining oil stores, but constraints at many facilities will shorten this window to only a few months.

The Rip-Off

The plan hatched by a combination of HM Treasury and its independent puppets the UK Statistics Authority and the Office for National Statistics is to impose a type of stealth tax of 1% per annum. How?

In drawing up his advice, the National Statistician considered the views of the Stakeholder Advisory Panel on Consumer Prices (APCP-S). The Board accepted his advice and that was the basis of the proposals we put to the Chancellor to cease publication of RPI and in the short term to bring the methods of CPIH into RPI.The Chancellor responded that he was not minded to promote legislation to end RPI, but that the Government intended to consult on whether to bring the methods in CPIH into RPI between 2025 and 2030, effectively aligning the measures.

The emphasis is mine and the plan is to put the fantasy Imputed Rents that are used in the widely ignored CPIH into the RPI. There is good reason that the CPIH has been ignored so let me explain why. In the UK the housing market is a big deal and so you might think what owner-occupiers pay would be a considerable influence on inflation. But in 2002 a decision was made to completely ignore it in the new UK inflation measure called CPI ( Consumer Prices Index).

Putting it in was supposed to be on its way but plans took a decade and the saga took a turn in 2012 when the first effort to use Imputed Rents began. It got strong support from the Financial Times economics editor Chris Giles at the time. He stepped back from that when it emerged that there had been a discontinuity in the numbers, which in statistical terms is a disaster. So the fantasy numbers ( owner-occupiers do not pay rent) are based on an unproven rental series.

Why would you put a 737 Max style system when you have a reliable airplane? You would not, as most sensible people would be debating between the use of the things that are paid such as house prices and mortgage payments. That is what is planned in the new inflation measure which has been variously called HII and HCI. You may not be surprised to learn that there have been desperate official efforts to neuter this. Firstly by planning to only produce it annually and more latterly by trying to water down any house price influence.

At a time like this you may not think it is important but when things return to normal losing around 1% per year every year will make you poorer as decisions are made on it. Also it will allow government’s to claim GDP and real wages are higher than they really are.

Gold

There is a lot going on here as it has seen its own market discontinuity which I will cover in a moment. But we know money is in the offing as I note this from the Financial Times.

Gold continued to push higher on Tuesday as a recent wave of selling dried up and Goldman Sachs told its clients the time had come to buy the “currency of last resort”. Like other asset classes, gold was hit hard in the recent scramble for US dollars, falling more than 12 per cent from its early March peak of around $1,700 a troy ounce to $1,460 last week.  The yellow metal started to see a resurgence on Monday, rising by more than 4 per cent after the Federal Reserve said it would buy unlimited amounts of government bonds and the US dollar fell.

So we know that the blood funnel of the Vampire Squid is up and sniffing. On its view of ordinary clients being “Muppets” one might reasonably conclude it has some gold to sell.

Also there have been problems in the gold markets as I was contacted yesterday on social media asking about the gold price. I was quoting the price of the April futures contact ( you can take the boy out of the futures market but you cannot etc….) which as I type this is US $1653. Seeing as it was below US $1500 that is quite a rally except the spot market was of the order of US $50 below that. There are a lot of rumours about problems with the ability of some to deliver the gold that they owe which of course sets alight the fire of many conspiracy theories we have noted. This further went into suggestions that some banks have singed their fingers in this area and are considering withdrawing from the market.

Ole Hansen of Saxo Bank thinks the virus is to blame.

Having seen 100’s of anti-bank and anti-paper #gold tweets the last couple of days I think I will give the metal a rest while everyone calm down. We have a temporary break down in logistics not being helped by CME’s stringent delivery rules of 100oz bars only.

So we will wait and see.

Ah, California girls are the greatest in the world
Each one a song in the making
Singin’ rock to me I can hear the melody
The story is there for the takin’
Drivin’ over Kanan, singin’ to my soul
There’s people out there turnin’ music into gold ( John Stewart )

 

Comment

Quite a few systems are creaking right now as we see the gold market hit the problems seen by bond markets where prices are inconsistent. Ironically the central banks tactics are to help with that but their strategy is fatally flawed because if you buy a market on an enormous scale to create what is a fake price ( lower bond yields) then liquidity will dry up. I have written before about ruining bond sellers ( Italy) and buyers will disappear up here. Please remember that when the central banks tell us it is nothing to do with them and could not possibly have been predicted. Meanwhile the US Federal Reserve will undertake another US $125 billion of QE bond purchases today and the Bank of England some £3 billion. The ECB gives fewer details but will be buying on average between 5 and 6 billion Euros per day.

Next we have the UK deep state in operation as they try to impose a stealth tax via the miss measurement of inflation. Because they have lost the various consultations so far and CPIH has remained widely ignored the new consultation is only about when and not if.

The Authority’s consultation, which will be undertaken jointly with that of HM Treasury, will begin on 11 March. It will be open to responses for six weeks, closing on 22 April. HM Treasury will consult on the appropriate timing for the proposed changes to the RPI, while the Authority will consult on the technical method of making that change to the RPI.

Meanwhile for those of you who like some number crunching here is how a 123.4 pence for the price of oil gets broken down. I have done some minor rounding so the numbers add up.

Oil  44.9 pence

Duty 58 pence

VAT 20.5 pence

The plan to castrate the Retail Prices Index brings shame on UK statistics credibility

The Retail Prices Index or RPI has come in for quite a bit of official criticism over the past decade sometimes around the issue of what is called the Formula Effect and more rarely about the way it deals with the housing sector. The latter is more rare because many of the critics are not well informed enough to realise that house prices are in it as they are implicit via the use of depreciation. However to my mind this has been something of a sham and the real reason was highlighted in yesterday’s post.

UK real regular pay is now above its pre-crisis peak! If you like the CPIH measure of consumer prices. For CPI enthusiasts, it’s -1.8% below. For the RPI crew, it’s -7% below, for the RPIX hardcore, it’s -10.4%.

As you can see the RPI consistently gives a higher inflation reading hence using it real wages are lower. That is why official bodies such as the UK Statistics Authority with the dead hand of HM Treasury behind them keep trying to eliminate it. Let me illustrate by using the measures they have recommended RPI, then CPI and then CPIH as you can see from the quote above they keep recommending lower numbers. What a coincidence! This flatters real wages and GDP as consumer inflation is around 24% of the inflation measure used there so yes UK GDP has been inflated too. In fact by up to 0.5% a year,by the changes according to the calculations of  Dr.Mark Courtney.

They are back as this from the Chair of the UK Statistics Authority Sir (hoping to be Lord) David Norgrove shows.

We have been clear for a long time that RPI is not a good measure of inflation and its use should be discouraged. The proposals we put to the Chancellor are consistent with this longheld view.

That is very revealing as we have had several consultations and they have lost each one. In fact my view has gained more support over time because if you look at the facts putting a fantasy number as 17% of your inflation index as is done by putting Imputed Rents in CPIH is laughable when you can use an actual number like house prices. This is how they explain they lost. It does allow me to update my financial lexicon for these times where “wide range of views” equals “we keep losing”

There has since then been extensive consultation
and discussion about inflation measurement. All the statistical issues have been well aired. A
notable feature of these discussions was the wide range of opinions

They have lost so badly that this time around they have taken the possibility of losing out of the new plan.

The Authority’s consultation, which will
be undertaken jointly with that of HM Treasury, will begin on 11 March. It will be open to responses for six weeks, closing on 22 April. HM Treasury will consult on the appropriate timing for the proposed changes to the RPI, while the Authority will consult on the technical method of making that change to the RPI.

As you can see it is about how and when it will be done rather than what should be done. The plan is to put Imputed Rents in the RPI so it also records lower numbers. Regular readers may have noted Andrew Baldwin asking me to support his effort to stop a change to the inflation numbers calculated, which I did. You see that change will stop people like him and me being able to calculate what the impact of changing the RPI will be. You see at this point how the deep state operates. Along the way it exterminates an inflation measure which Andrew has supported after I may note the UK statistics establishment presented it ( RPIJ) as the next best thing to sliced bread. Before behaving like a spoilt child and taking their football home with them so no-one else can play.

Let me also address the Formula Effect issue. I have just explained above how suddenly they do not want people to be able to calculate it. Suspicious eh? But it is worse than that because all of the official propaganda ignores the fact that a lot of it is due to clothing prices and fashion clothing. We could find out as the statistician Simon Briscoe has suggested by suspending some of the clothing section for a while or producing numbers with and without it. After all CPI was the official measure for over a decade and it ignored owner occupied housing which is 17% of the index when included. But apparently you cannot exclude less than 1% which leads me to believe they already know the answer which presumably would be found in the 2012 pilot scheme which has been kept a secret.

Today’s Data

There was a quirk in the series meaning a rise was likely but not this much.

The all items CPI annual rate is 1.8%, up from 1.3% in December.

The factor which was mostly expected was this.

In January 2020, the largest upward contribution to the CPIH 12-month inflation rate came from housing and household services……….However, in January 2020, its contribution increased to 0.55 percentage points (an increase of 0.19 percentage points from December 2019), as the gas and electricity price reductions from January 2019 unwound.

I was a bit slack yesterday in saying that inflation will fall to help real wage growth when I should have put it is heading lower but the impact of regulatory moves will cause bumps in the road. Apologies.

Changes to Ofgem’s energy price cap introduce some volatility — with CPI inflation expected to pick up to 1.8% in 2020 Q1, before falling back to around 1¼% in the middle of the year. The expected reduction in water bills as a result of action by the regulator Ofwat is also expected to contribute to the fall in inflation in 2020 Q2.  ( Bank of England)

As it does not happen often let us congratulate the Bank of England on being on the money so far. Returning to UK inflation it was also pushed higher by this.

Rising pump prices and upward contributions from transport services (in particular, airfares) meant transport’s contribution rose to 0.22 percentage points in January 2020.

There was also a nudge higher ( 0.07% in total) from a more surprising area as we are know the retail sector is in trouble but clothing and footwear prices saw a slightly lower sales impact. There was a similar impact on restaurants and hotels where prices fell less than last year.Meanwhile.

The all items RPI annual rate is 2.7%, up from 2.2% last month.

House Prices

Sadly there are ongoing signs of a market turn.

The latest house price data published on GOV.UK by HM Land Registry for December 2019 show that average house prices in the UK increased by 2.2% in the year to December 2019, up from 1.7% in the year to November 2019 (Figure 1). Over the past three years, there has been a general slowdown in UK house price growth (driven mainly by a slowdown in the south and east of England), but there has been a pickup in annual growth since July 2019.

I was contacted on social media yesterday to be told that the market has really turned in Wales. The official numbers seem to have turned the other way though…

House price growth in Wales increased by 2.2% over the year to December 2019, down from 5.5% in November 2019, with the average house price in Wales at £166,000.

Maybe they will turn back in January.

Comment

A lot of today’s article has been comment via fact based opinions. Let me add two more factors. Firstly the UK establishment just as the Euro area has released it cannot get away any longer with ignoring the owner-occupied housing sector in its official inflation measure. Meaning the screams of those unable to afford housing have even penetrated the clouds around the skyscraper Ivory Towers of the ECB. Next whilst this may seem like a fait accompli it has seemed like this as every consultation has begun but each time so far I have ended up winning. If you think about it they are admitting they cannot win on the arguments by trying to eliminate them from the consultation.

As to this month’s data it is a shame to see a rise but with the UK Pound £ and the oil price where they are the trend should remain downwards. But there will be swings and roundabouts as the impact of utility price regulation comes into play.

UK Real Wages have not regained their previous peak

As we switch out focus to the UK labour market we see two contrasting forces being applied to it. The first comes from the better news being reported for the UK economy recently.

Financial wellbeing expectations hit survey-record high in
February ( IHS Markit )

That came only yesterday and according to it the outlook is brightening.

Looking ahead, UK households signalled positive expectations towards their financial health. The Future Household Finance Index – which measures expected change in financial health over the next 12 months – rose to 52.7 in February, from 49.6 in January. The level of optimism was at its highest since the data were first collected in February 2009, exceeding the previous
peak seen in January 2015.

This led according to the survey to a better labour market situation.

UK households recorded a lessened degree of pessimism
towards their job security during February, with the respective index rising (but remaining below 50.0) to a seven-month high. Meanwhile, the rate of growth in both workplace activity and income from employment accelerated from January.

This survey is a curious beast because the headline index which went from 44.6 to 47.6 in this report has never been in positive territory. Whilst in some ways that does cover out experience ( real wages for example) it does not cover the employment situation which has been pretty good.

This backed up the survey of the wider UK economy conducted by IHS Markit earlier this month.

At 53.3 in January, up from 49.3 in December, the seasonally adjusted IHS Markit/CIPS UK Composite Output Index posted above the neutral 50.0 mark for the first time since last August. The latest reading signalled a faster pace of growth than the earlier ‘flash’ estimate (52.4 in January) and was the highest for 16 months.

This too came with positive news for the labour market.

This uplift in success also created some business pressures
as the rush to increase staffing levels resulted in demands
for higher salaries.

Apple and HSBC

Last night, however, brought a reminder that on a world wide scale there is an ongoing economic impact from the Corona Virus.

Apple Inc become the latest company to flag lower revenue as a result of the epidemic, saying it would not meet its revenue guidance for the March quarter because of slower iPhone production and weaker demand in China. ( Reuters)

The main Apple market is not yet open due to yesterday being Presidents Day but more minor markets have suggested it will open more than 4% lower. I note that Reuters is also reporting this for the Chinese economy.

Analysts at Nomura again downgraded their China first-quarter economic growth forecast, to 3%, half the pace in the fourth quarter, and said there was a risk it could be even weaker.

This morning we have seen another consequence of the era of treating banks as The Precious.

HSBC posted plummeting profits for 2019 today as it outlined plans to get rid of $100bn (£77bn) of assets and dramatically downsize its investment banking arm in a restructure that will cost 35,000 jobs over the next three years. ( City-AM )

We know that the situation is really poor because the chief executive has deployed the word “resilient” which we have learnt means anything but.

Today’s Data

Employment

The long sequence of good news in this area continues.

The UK employment rate was estimated at a record high of 76.5%, 0.6 percentage points higher than a year earlier and 0.4 percentage points up on the previous quarter.

If we look further we see that such numbers are based on this.

There was a 180,000 increase in employment on the quarter. This was, again, mainly driven by quarterly increases for full-time workers (up 203,000 – the largest increase since March to May 2014), and for women (up 150,000 – the largest increase since February to April 2014). The quarterly increase for women working full-time (also up 150,000) was the largest since November 2012 to January 2013.

Actually this continues to be a remarkable performance and is a clear gain in the credit crunch era. However we do need context because there is for example an element of subjectivity in the definition of full-time work. Those completing the survey are guided towards 16 hours per week which is a bit low in itself but they can also ignore that. Also the rise in female employment is no doubt influenced by the rise in the retirement age for them.

The overall position is that on this measure things turned for the UK economy in 2012 a year earlier that GDP picked up. Regular readers will recall that back then we were worried about it being part-time but that has changed. Overall though there has been a pick-up in self-employment with ebbs and flows which is currently flowing.

Whilst there is an implicit rather than explicit link to unemployment ( as there is also the inactivity category) the good employment news has driven this.

the estimated UK unemployment rate for all people was 3.8%; this is 0.2 percentage points lower than a year earlier and 0.1 percentage points lower than the previous quarter…..For October to December 2019, an estimated 1.29 million people were unemployed. This is 73,000 fewer than a year earlier and 580,000 fewer than five years earlier.

Wages

Here the news has been less good. Let me explain using today’s release.

Estimated annual growth in average weekly earnings for employees in Great Britain slowed to 2.9% from 3.2% last month for total pay (including bonuses), and to 3.2% from 3.4% for regular pay (excluding bonuses).

This gives us two contexts. We have been in a better phase for wages growth but it has been slowing recently and that has continued. Things get more complex as we look at real wages as there are serious problems with the official representation of them.

In real terms (after adjusting for inflation), annual growth in total pay is estimated to be 1.4%, and annual growth in regular pay is estimated to be 1.8%.

The problem is that a simply woeful inflation measure is being used, via the use of fantasy imputed rents in the official CPIH inflation measure. This ensures that housing inflation is under-recorded and thus real wages are over recorded. A much better context is provided by this from Rupert Seggins.

UK real regular pay is now above its pre-crisis peak! If you like the CPIH measure of consumer prices. For CPI enthusiasts, it’s -1.8% below. For the RPI crew, it’s -7% below, for the RPIX hardcore, it’s -10.4%. If the household deflator’s your thing, then it happened in 2016 Q1.

Can anybody think why Her Majesty’s Treasury is trying to replace house prices in the RPI with Imputed Rents?! Actually trying to measure housing inflation stops the establishment claiming house prices are a Wealth Effect rather than the more accurate gains for existing owners but inflation for present and future buyers. Returning to real wages as you can see it makes a very large difference.

Having established that I have been disappointed to see so many news sources copy and paste this part of the release.

In real terms, regular pay is now at its highest level since the series began in 2000, whereas total pay is still 3.7% below its peak in February 2008.

As The Zombies pointed out.

And if she should tell you “come closer”
And if she tempts you with her charms
Tell her no no no no no-no-no-no
No no no no no-no-no-no
No no no no no

If we look into the monthly data we see that the UK chemicals sector is doing well and wage growth has picked up to 8.9%. Care is needed with such detail but it has been around 7% for over 6 months. However other areas of manufacturing are more troubled with the clothing and textiles sector seeing no increase at all. Whilst I am all for higher wages I have to confess that fact that the real estate sector is seeing consistent rises above 6% has a worrying kicker.

Comment

We find ourselves in broadly familiar territory where the quantity news for the UK economy is again very good but the quality news is not as good. At least these days the real wages position is improving a little. But to claim we are back to the previous peak is frankly a case of people embarrassing themselves.

The numbers themselves always need a splash of salt. For example I have pointed out already the growth of the self-employed, so their omission from the wages data is increasingly significant. Also whilst we are employing more people this time around hours worked was not as strong.

Between October to December 2018 and October to December 2019, total actual weekly hours worked in the UK increased by 0.8% (to 1.05 billion hours), while average actual weekly hours decreased by 0.2% (to 31.9 hours).

I look at such numbers because out official statisticians have yet to cover the concept of underemployment adequately. There is an irony here in that productivity will be boosted by a shorter working week. Maybe even by this.

In October to December 2019, it was estimated that there were a record 974,000 people in employment on a “zero-hour contract” in their main job, representing a record 3.0% of all people in employment. This was 130,000 more than for the same period a year earlier.

Are falling real wages the future for us all?

The issue of wage growth is something we have found ourselves returning to time and time again. The cause is in one sense very simple there has been a lack of it. There are two components of this of which the first is just simply low numbers but the second is another reversal for the economics establishment . This is where we have seen employment gains and in some cases record low levels of unemployment but the wage growth fairy has turned out to be precisely that. As an example if we look back we see that the UK Office for Budget Responsibility opened with equations that would have UK wage growth above 5% in today’s environment rather than the 3% we have.

Japan

The leader in the pack in this regard continues to be Japan so let us go straight to the data released at the end of last week.

The inflation-adjusted average monthly wage fell 0.9 percent from a year earlier in 2019, dragged down by an increase in part-time workers, the labor ministry said Friday.

Average monthly cash earnings per worker, including bonuses, fell 0.3 percent to ¥322,689 ($2,900) on a nominal basis, the first decline in six years, according to preliminary data by the Ministry of Health, Labor and Welfare. ( Japan Times)

If we for the moment stick with the fact that wages fell we can then note that this happened in spite of this.

The unemployment rate was unchanged in December from the previous month, at 2.2 percent, reflecting an ongoing labor shortage due to the rapidly graying population, government data showed Friday.

In the reporting month the number of unemployed was 1.45 million, down 140,000 from a year earlier, according to the Internal Affairs and Communications Ministry. ( Japan Times January 31)

Although they do not mention it this equals the record low for the unemployment rate and we get more detail on the labour shortage below.

The number of people with jobs grew for the 84th straight month, up 810,000 from a year earlier at 67.37 million in December. Of those, 30 million were women, up 660,000 from a year earlier, and 9.02 million were 65 or over, up 470,000.

This is a success for the Japanese economy which has reached I think what economists used to call “full employment”. Actually if they saw the numbers below they would be predicting it would be party time for wage growth.

Separate data from the Health, Labor and Welfare Ministry showed that the job availability ratio in December stood at 1.57, unchanged since September. The ratio indicates that there were 157 job openings for every 100 people seeking jobs.

But reality has not been kind to that particular and it has discombobulated some Ivory Towers so much that they believe in it regardless. A case of Restaurant at the end of the Universe thinking.

Reality is frequently inaccurate

If we go back to the wages data we started with there were two components beginning with a real fall but also a nominal one. The latter I point out because when we look at Japan’s public debt burden it is not going to be solved with income taxes with nominal incomes falling. It is the opposite of what we call inflating away the debt.

The situation is so troubling that a scapegoat is required which are part-time workers.

The proportion of workers that are part-time reached a record 31.53 percent, up 0.65 percentage point from the previous year.

For those who want to know how much the Japanese get paid here you are.

Average monthly wages for full-time workers increased 0.3 percent, to ¥425,288, while those of part-time workers stayed flat at ¥99,758.

December wages are especially important in Japan as they are the main bonus season meaning they are around 175% of the average. So bonuses are low and whilst we do not get much of a sectoral breakdown we see that total manufacturing wages were 2.6% lower in December in real terms.

The index for real wages is now 99.9 or slightly lower than the 2015 average. This is quite a critique of the official policy of Abenomics which was supposed to raise wages in both nominal and real terms but as you can see has not done so.

Regular readers will know I have been concerned since the advent of Abenomics that it was really just another version of Japan Inc under the covers. Well in that scenario Japanese companies would be doing well but not raising wages.

The retained earnings of Japanese companies combined hit a record ¥463 trillion last year. Corporate earnings — which remain near record levels despite the setbacks of the past two years — have clearly not been invested enough in manpower.  ( Japan Times )

Whereas according to the Nikkei Asian Review the longer-term picture is this.

The growing ranks of nonregular workers puts pressure on average nominal wages, which remain 13% below their peak in 1997. From 2012 to 2018 nominal wages grew only 2.6%, labor ministry figures show.

United States

Friday lunchtime in the UK produced this.

Total nonfarm payroll employment rose by 225,000 in January, and the unemployment rate was little changed at 3.6 percent, the U.S. Bureau of Labor Statistics reported today. Notable job gains occurred in construction, in health care, and in transportation and warehousing.

This continued a pretty strong picture especially at this stage in the cycle.

After revisions, job gains have averaged 211,000 over the
last 3 months.

Now if we switch to wage growth we see this.

In January, average hourly earnings for all employees on private nonfarm payrolls rose by 7 cents to $28.44. Over the past 12 months, average hourly earnings have increased by 3.1 percent. Average hourly earnings of private-sector production and nonsupervisory employees
were $23.87 in January, little changed over the month (+3 cents).

In nominal terms this is much better than in Japan but if we switch to real terms then we need to compare with this.

From 2018 to 2019, consumer prices for all items rose 2.3 percent.

I am taking the numbers as a broad sweep because we do not have the January data yet, But we see that whilst there is some real wage growth it is a bit under 1% per annum so not much.

Comment

The difference between the US and Japan is that there is some real wage growth in the former there is none in the latter. Can we explain that? There are two possible causes of which the first is demographics where Japan has a shrinking and ageing population whereas the US is growing. Also there is a structural issue where the Japanese are very resistant to price rises which in a reversal of the wages and prices spirals of the 70s and 80s in my home country seems to have infected wage growth too. The fear as Lily Allen would put it might be a case of the vapors.

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

For the economics establishment there is only pain because they continue to plough ahead with “output gap” style theories. Even worse because they failed in the GDP or economic output arena they switched to the labour market. It has turned out to be like playing 3 at the back in football and losing 3-0 and thus switching to 4 at the back and losing 5-0. That is because the labour market has is some places gone beyond what was called full employment and yet real wage growth is weak at best and has gone backwards in Japan which has a stellar employment situation at least according to conventional metrics.

Moving to the UK we finally got some real wage growth but we need to cross our fingers and there is still some distance to travel before we get right back where we started from. Hopefully we can at least regain the previous peak.

Podcast

 

The UK Labour Market continues to look strong

This week has already seen a fair flurry of new information on the UK economy, so let us start with what will have caught the eye of Mark Carney and the Bank of England.

LONDON (Reuters) – Asking prices for British houses put on sale in the five weeks to Jan. 11 rose by a record amount for the time of year, property website Rightmove said on Monday, adding to signs of a post-election bounce in consumer and business confidence…….Rightmove said average asking prices of property marketed between Dec. 8 and Jan. 11 jumped 2.3% in monthly terms, the biggest increase for that period since the survey started in 2002.

The cautionary note is that it is asking prices ( you can ask what you want…) and not sold or traded prices but those looking for a post election bounce will add it to the Halifax numbers.

Yesterday also brought positive news on UK household finances as well.

“Latest survey data certainly show some post-election
bounce for UK households, with the headline index up
to a one-year high and house price expectations at their
strongest since October 2018. That said, cooling inflation
was most likely the real driving force, propping up real
earnings and disposable incomes” ( Markit )

So there are various surveys suggesting optimism for house prices and one saying something similar for household finances. This is really rather awkward for a Bank of England not only warming up for a Bank Rate cut with Gertjan Vlieghe explicitly saying he will look at sentiment measures. Of course Friday’s Retail Sales showed weakness but they can be unreliable and erratic.

Employment

This morning has brought both good and not so good news on the employment situation. So let us start with the positive.

Facebook says it is to create 1,000 new jobs in the UK this year, delivering a vote of confidence in the UK economy ahead of Brexit.

The tech firm issued a long-term commitment to the country as it made the announcement, in the run-up to a speech to be made in London later on Tuesday by its chief operating officer Sheryl Sandberg.

Facebook said the new roles would take its UK workforce beyond 4,000 people. ( Sky News)

Meanwhile the Financial Times is doing some scaremongering about HS2.

Hundreds of employees could face job cuts, while companies working on HS2 have been told to slow down work as uncertainty mounts over the fate of Britain’s most ambitious infrastructure project

I do not wish for people to lose their jobs but in this instance we have the issue of what are they actually producing?

UK Labour Market Release

We saw another in a long-running series where there was strong employment growth.

There was a 208,000 increase in employment on the quarter. This was, again, mainly driven by quarterly increases for full-time workers (up 197,000; the largest increase since September to November 2015) and for women (up 148,000; the largest increase since February to April 2014). The quarterly increase in women working full-time (up 126,000) was the largest since November 2012 to January 2013.

The tilt towards female employment was also to be found in the annual comparison where of an increase of 349,000 full-time jobs some 317,000 were for women.

This meant that there was another record.

The UK employment rate was estimated at a record high of 76.3%, 0.6 percentage points higher than a year earlier and 0.5 percentage points up on the previous quarter.

I will look at the broader consequences of this later but for the moment let us stay in the labour market and note the influence of what with apologies to those in it is something of a residual category.

The UK economic inactivity rate was estimated at a record low of 20.6%, 0.4 percentage points lower than the previous year and the previous quarter.

Okay so what is going on here?

Estimates for September to November 2019 show 8.51 million people aged between 16 and 64 years not in the labour force (economically inactive). This was 145,000 fewer than a year earlier and 587,000 fewer than five years earlier. The annual decrease was driven by women, with the level down 157,000 to reach a record low of 5.18 million.

So it is another case of let’s hear it for the girls where women have stopped being recorded as inactive and are now employed instead. There is a combination of good news and the influence of the raising of the state pension age at play here. As an aside the broad sweep has been women moving from inactivity to employment since these records began in 1971. The timing of the recent move also suggests that there was an influence from students as well.

There were fears of a rise in unemployment but as you can see below they were unfounded.

For September to November 2019, an estimated 1.31 million people were unemployed. This is 64,000 fewer than a year earlier and 618,000 fewer than five years earlier……The UK unemployment rate was estimated at 3.8%, 0.2 percentage points lower than a year earlier but largely unchanged on the previous quarter.

Wages

The previous release had seen a fall but this was not repeated.

Estimated annual growth in average weekly earnings for employees in Great Britain remained unchanged at 3.2% for total pay (including bonuses), and slowed to 3.4% from 3.5% for regular pay (excluding bonuses).

There was a switch towards bonus payments although slightly confusingly less than last year!

The annual growth in total pay was weakened by unusually high bonus payments paid in October 2018 compared with more typical average bonus payments paid in October 2019.

Let me now switch to the official view on real pay.

In real terms, annual pay growth has been positive since December 2017 to February 2018, and is now 1.6% for total pay (compared with 1.5% last month) and 1.8% for regular pay (unchanged from last month).

Sadly this relies on the woeful CPIH inflation measure and if we now switch from good news ( real wage growth) to the overall picture we get some bad news.

The equivalent figures for total pay in real terms are £503 per week in November 2019 and £525 in February 2008, a 4.1% difference.

Regular readers will be aware of my views on the inflation measure so let me present the issue another way today. The offiicial release points us towards the numbers for real regular pay. Can you guess which of the lines below that one is and no cheating?!

https://pbs.twimg.com/media/EOy_EsTXsAEsM8G?format=jpg&name=900×900

The chart was provided by Rupert Seggins and as you can see rather changes both the narrative and the perspective.

Comment

We find that if we look back the sequence of strong UK employment data started in 2012 and it is ongoing. There is a particular context to this though and let me illustrate with a tweet from Chris Dillow of the Investors Chronicle.

ONS also says hours worked rose 0.5% in Sep-Nov. With GDP rising only 0.1%, this means productivity fell. Might be partly a Brexit effect (uncertainty cut output but encouraged labour hoarding). But it reinforces the picture of long-term stagnation.

The issue here is that with the numbers we have productivity fell. But it is also true that last time the UK labour market and GDP diverged like we are seeing now it was the ( more positive) labour market which was correct as GDP later rose. It is another problem for the economics 101 view that the labour market responds in a lagged fashion as back then it led and GDP followed. More specifically we often see these days that employment is a driver of the economy rather than a follower.

Moving to wages we see that finally the employment growth gave us real wage growth but it took so long we have a bit of a mountain to climb. That is really quite a devastating critique of the Ivory Tower “output gap” thinking that has as many holes in it as I am hoping Arsenal’s defence will have tonight. Yet only last week Bank of England policymakers were repeating their output gap mantra. On that subject they have something of a problem again because they have got us ready for an interest-rate cut just in time for most of the data to be good. The bad bit was the retail sales numbers from Friday which now look out of phase with the employment numbers making me wonder if their seasonality algorithm has had a HAL-9000 moment? Whilst there is an intra-market shift in their favour as well maybe Aldi thinks do if this is any guide.

Aldi plans to increase pay for its staff by just over 3%, making it one of the best-paying supermarkets in the UK.

The discounter said its minimum hourly pay rates will rise from £9.10 an hour to £9.40, with workers inside the M25 getting £10.90 an hour instead of £10.55…….Aldi, Britain’s fifth-largest supermarket, also said it would be hiring 3,800 new employees for store level positions.

 

The good news from lower UK inflation ( think real wages) may not last

Today brings the various UK inflation numbers into focus as we get the updates for consumer, producer and house prices. Already though the Bank of England has given its view on the general outlook.

Second, the most likely outlook is a further period of subdued growth, and hence a disinflationary backdrop
of a persistent – albeit modest – output gap.

That is from Michael Saunders who is giving a speech in Northern Ireland and we see him backing up the previously expressed view of UK inflation falling towards 1.25% in the early part of this year. It is sad though that he still uses the “output gap” that has worked so poorly even some ex-central bankers are being forced to admit it has been a failure. Here is the former Vice-President of the ECB ( European Central Bank) Vitor Constancio.

In “FED listens” events, they found that:..”there is more “slack” than the Fed had thought — more people who could still come into the labour force, particularly in poorer areas”. I am sure the same is true in Europe. Forget output gaps

If only those still in power would see the light and accept reality!

There is an irony in all of this as we note that whilst the Bank of England expects lower inflation it is presently trying to raise it and Micheal Saunders has another go.

Fourth, against this backdrop, it probably will be appropriate to maintain an expansionary monetary policy
stance and possibly to cut rates further, in order to reduce risks of a sustained undershoot of the 2% inflation
target. With limited monetary policy space, risk management considerations favour a relatively prompt and aggressive response to downside risks at present.

This is via the impact of their words on the value of the UK Pound £ and the way a lower value ( mostly via the role of the US Dollar in setting commodity prices) tends to raise subsequent inflation. You may note that the bi-polar view of monetary policy space continues to be in play as he joins Mark Carney’s statement that it is limited from last Wednesday which morphed into the equivalent of a Bank Rate cut of 2.5% as quickly as Thursday. What a difference a day made!

twenty four little hours
Brought the sun and the flowers where there use to be rain ( Dinah Washington )

If we complete the points made by Michael Saunders we see something of an obsession with output gap theory.

First, with softer global growth and high Brexit uncertainty, the UK economy has remained sluggish. The
slowdown has created a modest output gap, and there are signs that the labour market is turning.

Also something perhaps even sillier.

Third, the neutral level of interest rates may have fallen further over the last year or two, both in the UK and
externally.

Or, of course, it may not.

Consumer Inflation

The backdrop was worrying because US consumer inflation had risen yesterday and Euro area inflation had risen last week and that is before we get to this.

Also, Zimbabwe’s annual inflation rate (the one that is officially concealed) rose to 521% in December. ( Joseph Cotterill)

But the numbers were good possibly showing that a little knowledge is a dangerous thing.

The Consumer Prices Index (CPI) 12-month rate was 1.3% in December 2019, down from 1.5% in November 2019.

There were two main factors at play and I wonder if any of you spotted this one?

Restaurants and hotels, where prices for overnight hotel accommodation fell by 7.5% between November and December 2019, compared with a rise of 0.9% between November and December 2018;

Also the next one may have affects elsewhere because the last time we saw a burst of this as we saw retail sales rise in response ( thank you ladies) which is against the present consensus.

Clothing and footwear, where the largest individual downward contributions came from women’s casual jackets and cardigans, where prices fell between November and December 2019 but rose between the same two months in 2018. There were also small individual downward contributions from formal trousers and formal skirts

Also if we continue to look wider we see a possible impact from the slow down in car sales.

There was also a smaller downward contribution from the purchase of vehicles where prices overall were little changed in 2019 but increased by 0.7% in 2018.

Let us move on but not without noting that the impact of the UK Pound £ is for once zero compared to the Euro as we have the same inflation rate.

Euro area annual inflation is expected to be 1.3% in December 2019,

What Happens Next?

There is still a slight downwards push but the impetus has gone.

The growth rate of prices for materials and fuels used in the manufacturing process was negative 0.1% on the year to December 2019, up from negative 1.9% in November 2019.

Indeed if we switch to output prices we see that there are ongoing albeit small rises in play.

The headline rate of output inflation for goods leaving the factory gate was 0.9% on the year to December 2019, up from 0.5% in November 2019.

If we look to future influences we know that 70% of the input number comes from the £ and the oil price. As we stand at US $64.40 for a barrel of Brent Crude that is where it roughly was in mid-December so maybe not much influence. With the Bank of England engaging in open mouth operations against the £ it may come into play.

House Prices

There was a worrying change here.

UK average house prices increased by 2.2% over the year to November 2019, up from 1.3% in October 2019……Average house prices increased over the year in England to £251,000 (1.7%), Wales to £173,000 (7.8%), Scotland to £155,000 (3.5%) and Northern Ireland to £140,000 (4.0%).

This adds a little credibility to the Halifax 4% reading for December although we await the official December data. As to the breakdown we have observed parts of the Midlands leading the line in recent times.

The annual increase in England was driven by the West Midlands and North West…..The lowest annual growth rate was in the East of England (negative 0.7%) followed by London (positive 0.2%).

Although that is for just England so we should also look wider and whilst it looks an anomaly there was this.

House price growth in Wales increased by 7.8% over the year to November 2019, up from 3.6% in October 2019, with the average house price in Wales at £173,000.

Comment

There is some much needed good news in today’s report for real wage growth as we see inflation dip. However we need context because if we switch to the UK’s longest running measure of inflation there is a different story in play.

The all items RPI annual rate is 2.2%, unchanged from last month.

The difference neatly illustrates my major theme in this area.

Other housing components, which increased the RPI 12-month rate relative to the CPIH 12-month rate by 0.06 percentage points between November and December 2019. The effect came mainly from house depreciation.

As you can see our official statisticians are desperate to make everyone look at their widely ignored favourite measure called CPIH which I will cover in a moment. But for now we see that past house prices via depreciation are exerting an upwards pull on the RPI and November’s number suggests this may continue. Most will understand that for many house prices are a big deal but the fact that they usually pull inflation higher means the establishment has launched an increasingly desperate campaign to ignore them.

If we now cover the official CPIH measure it indulges in a fleet of fantasy by assuming that owners pay themselves rent and then includes this fantasy in its inflation reading. Even worse there have been problems in measuring rents so it may well be a fantasy squared should such a thing exist. Anyway the effort to reduce the inflation reading has backfired this month as CPIH is above CPI due to this.

In December 2019, the largest upward contribution to the CPIH 12-month inflation rate came from housing and household services. The division has provided the largest upward contribution since November 2018.

Oh well…..

Will UK real wages and its banks ever escape the depression they seem trapped in?

Today brings the UK labour market into focus and in particular the situation regarding both real and nominal wage growth. Before we get to that there was news yesterday evening from the Bank of England on one of the highest paid categories.

The 2019 stress test shows the UK banking system is resilient to deep simultaneous recessions in the UK and global economies that are more severe overall than the global financial crisis, combined with large falls in asset prices and a separate stress of misconduct costs. It would therefore be able to withstand the stress and continue to meet credit demand from UK households and businesses.

Yes it is time for the results of the annual banking stress tests which of course are designed to look rigorous but for no-one to fail. So far the Bank of England has avoided the embarrassment of its Euro area peers who have seen a collapse quite soon after. In terms of the detail there is this.

Losses on corporate exposures are higher than in previous tests, reflecting some deterioration in asset quality and a more severe global scenario. Despite this, and weakness in banks’ underlying profitability (which reduces their ability to offset losses with earnings), all seven participating banks and building societies remain above their hurdle rates. The major UK banks’ aggregate CET1 capital ratio after the 2019 stress scenario would still be more than twice its level before the crisis.

As you can see the Bank of England is happy to slap itself on the back here as it notes capital ratios. Although of course higher capital ratios have posed their own problems abroad as we have seen in the US Repo crisis.

Major UK banks’ capital ratios have remained stable since year end 2018, the starting point of the 2019 stress test. At the end of 2019 Q3, their CET1 ratios were over three times higher than at the start of the global financial crisis. Major UK banks also continue to hold sizeable liquid asset buffers.

Actually the latter bit is also an explanation as to why banks struggle to make profits these days and why many think that their business model is broken.

Also I note that their view is that the highest rate of annual house price growth in the period 1987-2006 was 6.6% and the average 1.7%. I can see how they kept the average low by starting at a time that then saw the 1990-92 drop but only 6.6% as a maximum? Odd therefore if prices have risen so little that house prices to income seem now to have become house prices versus household disposable income and thereby often two incomes rather than one.

In terms of share prices this does not seem to have gone down that well with Lloyds more than 4% lower at 64 pence, Royal Bank of Scotland more than 3% lower at 252.5 pence and Barclays over 3% lower at 186 pence. Meanwhile it is hard not to have a wry smile at the fact that the UK bank which you might think needs a stress test which is Metro Bank was not included in the test. Although it has not avoided a share price fall today as it has fallen over 3% to 198 pence. Indeed, this confirms that it is the one which most needs a test as we note it was £22 as recently as January.

Labour Market

Let us start with what are a couple of pieces of good news.

The UK employment rate was estimated at 76.2%, 0.4 percentage points higher than a year earlier but little changed on the previous quarter; despite just reaching a new record high, the employment rate has been broadly flat over the last few quarters.

They get themselves into a little bit of a mess there so let me zero in on the good bit which is tucked away elsewhere.

There was a 24,000 increase in employment on the quarter.

There was also a favourable shift towards full-time work.

This was driven by a quarterly increase for men (up 54,000) and full-time employees (up 50,000 to a record high of 20.71 million), but partly offset by a 30,000 decrease for women and a 61,000 decrease for part-time employees.

I do not know why there was some sexism at play and suspect it is just part of the ebb and flow unless one of you have a better suggestion.

The next good bit was this.

the estimated UK unemployment rate for all people was 3.8%, 0.3 percentage points lower than a year earlier but largely unchanged on the previous quarter…….For August to October 2019, an estimated 1.28 million people were unemployed. This is 93,000 fewer than a year earlier and 673,000 fewer than five years earlier.

There were fears that the unemployment rate might rise. But the reality has been reported by the BBC like this.

UK unemployment fell to its lowest level since January 1975 in the three months to October this year. The number of people out of work fell  by 13,000 to 1.281 million.

Wages

This area more problematic and complex so let me start my explanation with the data.

Estimated annual growth in average weekly earnings for employees in Great Britain slowed to 3.2% for total pay (including bonuses) and 3.5% for regular pay (excluding bonuses).

The first impact is simply of lower numbers than we have become used to especially for total pay. Let us move to the explanation provided.

The annual growth in total pay was weakened by unusually high bonus payments paid in October 2018 compared with more typical average bonus payments paid in October 2019.

I have looked at the detail and this seems to have been in the finance and construction sectors where bonus pay was £12 per week and £6 per week lower than a year before. I have to confess I am struggling to think why October 2018 was so good as the numbers now are in line with the others? Anyway this should wash out so to speak in the next 2 months as October 2018 really stood out. Otherwise I would be rather troubled about a monthly increase this year that is only 2.4% above a year before.

So if we now switch to regular pay then 3.5% is a bit lower than we had become used to but in some ways is more troubling. This is because the spot figure for October was 3.2% and it looks as if it might be sustained.

This public sector pay growth pattern is affected by the timing of NHS pay rises which saw some April 2018 pay increases not being paid until summer 2018. As a result, public sector pay estimates for the months April to July 2019 include two NHS pay rises for 2018 and 2019 when compared with 2018. In addition, the single month of April 2019 included a one-off payment to some NHS staff.

Thus public-sector pay growth has faded away and is also now 3.2% on a spot monthly basis.

Anyway the peaks and troughs are as follows.

construction saw the highest estimated growth at 5.0% for total pay and 5.4% for regular pay…….retail, wholesale, hotels and restaurants saw the lowest growth, estimated at 2.3% for total pay and 2.5% for regular pay; this is the sector with the lowest average weekly pay (£339 regular pay compared with £510 across the whole economy)

Comment

There are elements here with which we have become familiar. The quantity numbers remain good with employment rising and unemployment falling although the rate of change of both has fallen. Where we have an issue is in the area of wage growth. The context here is that it did improve just not as much as we previously thought it did. However we still have this.

In real terms (after adjusting for inflation), annual growth in total pay is estimated to be 1.5%, and annual growth in regular pay is estimated to be 1.8%.

That is calculated using the woeful CPIH inflation measure but by chance it at CPI are pretty similar right now, so I will simply point out it would be lower but still positive using RPI.

Thus we see that wage growth and inflation seem both set to fall over the next few months as we wait to see how that balances out. But the underlying issue is that we have an area which in spite of the recent improvements is still stuck in a depression.

For October 2019, average regular pay, before tax and other deductions, for employees in Great Britain was estimated at £510 per week in nominal terms. The figure in real terms (constant 2015 prices) is £472 per week, which is still £1 (0.2%) lower than the pre-recession peak of £473 per week for April 2008.

The equivalent figures for total pay in real terms are £502 per week in October 2019 and £525 in February 2008, a 4.3% difference.

Fingers crossed that we can escape it…..

 

Where next for US house prices?

Yesterday brought us up to date in the state of play in the US housing market. So without further ado let us take a look.

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported a 3.2% annual gain in September, up from 3.1% in the previous month. The 10-City Composite annual increase came in at 1.5%, no change from the previous month. The 20-City Composite posted a 2.1% year-over-year gain, up from 2.0% in the previous month.

The first impression is that by the standards we have got used to that is a low number providing us with another context for the interest-rate cuts we have seen in 2019 from the US Federal Reserve. Of course it is not only the Fed that likes higher asset prices.

“DOW, NASDAQ, S&P 500 CLOSE AT RECORD HIGHS”

Another new Stock Market Record. Enjoy!

Those are 2 separate tweets from Monday from President Trump who not only loves a stock market rally but enjoys claiming it is all down to him. I do not recall him specifically noting house prices but it seems in the same asset price pumping spirit to me.

In my opinion the crucial part of the analysis provided by S&P comes right at the beginning.

After a long period of decelerating price increases, it’s notable that in September both the national and
20-city composite indices rose at a higher rate than in August, while the 10-city index’s September rise
matched its August performance. It is, of course, too soon to say whether this month marks an end to
the deceleration or is merely a pause in the longer-term trend.

If we look at the situation we see that things are very different from the 10% per annum rate reached in 2014 and indeed the 7% per annum seen in the early part of last year.That will concern the Fed which went to an extreme amount of effort to get house prices rising again. From a peak of 184.62 in July of 2006 the national index fell to 134.62 in February of 2012 and has now rallied to 212.2 or 58% up from the low and 15% up from the previous peak.

As ever there are regional differences.

Phoenix, Charlotte and Tampa reported the highest year-over-year gains among the 20 cities. In
September, Phoenix led the way with a 6.0% year-over-year price increase, followed by Charlotte with
a 4.6% increase and Tampa with a 4.5% increase. Ten of the 20 cities reported greater price increases
in the year ending September 2019 versus the year ending August 2019…….. Of the 20 cities in the composite, only one (San Francisco) saw a year-over-year price
decline in September

Mortgage Rates

If we look for an influence here we see a contributor to the end of the 7% per annum house price rise in 2018 as they rose back then. But since then things have been rather different as those who have followed my updates on the US bond market will be expecting. Indeed Mortgage News Daily put it like this.

2019 has been the best year for mortgage rates since 2011.  Big, long-lasting improvements such as this one are increasingly susceptible to bounces/corrections……Fed policy and the US/China trade war have been key players.

But we see that so far a move that began in bond markets around last November has yet to have a major influence on house prices. If you wish to know what US house buyers are paying for a mortgage here is the state of play.

Today’s Most Prevalent Rates For Top Tier Scenarios

  • 30YR FIXED -3.75%
  • FHA/VA – 3.375%
  • 15 YEAR FIXED – 3.375%
  • 5 YEAR ARMS –  3.25-3.75% depending on the lender

More recently bonds seem to be rallying again so we may see another dip in mortgage rates but we will have to see and with Thanksgiving Day on the horizon things may be well be quiet for the rest of this week.

The economy

This has been less helpful for house prices.There may be a minor revision later but as we stand the third quarter did this.

Real gross domestic product (GDP) increased 1.9 percent in the third quarter of 2019, according to the “advance” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 2.0 percent. ( US BEA ).

Each quarter in 2019 has seen lower growth and that trend seems set to continue.

The New York Fed Staff Nowcast stands at 0.7% for 2019:Q4.

News from this week’s data releases increased the nowcast for 2019:Q4 by 0.3 percentage point.

Positive surprises from housing data drove most of the increase.

Something of a mixture there as the number rallied due to housing data from building permits and housing starts.Mind you more supply into the same demand could push future prices lower! But returning to the wider economy back in late September the NY Fed was expecting economic growth in line with the previous 5 months of around 2% in annualised terms.But now even with a rally it is a mere 0.7%.

Employment and Wages

The situation here has continued to improve.

Total nonfarm payroll employment rose by 128,000 in October, and the unemployment rate was little
changed at 3.6 percent, the U.S. Bureau of Labor Statistics reported today. Notable job gains occurred in
food services and drinking places, social assistance, and financial activities……..In October, average hourly earnings for all employees on private nonfarm payrolls rose by 6 cents to $28.18. Over the past 12 months, average hourly earnings have increased by 3.0 percent.

But the real issue here is the last number. Yes the US has wage gains and they are real wage gains with CPI being as shown below in October.

Over the last 12 months, the all items index increased 1.8 percent before seasonal adjustment.

So this should be helping although it is a slow burner at just over 1% per annum and of course we are reminded that according to the Ivory Towers the employment situation should mean that wage growth is a fair bit higher and certainly over 4% per annum.

Moving back to looking at house prices then wage growth is pretty much the same so houses are not getting more affordable on this criteria.

Comment

As we review the situation it is hard not to laugh at this from Federal Reserve Chair Jerome Powell on Monday.

While events of the year have not much changed the outlook,

You can take this one of two ways.Firstly his interest-rate cuts are not especially relevant or you can wonder why he did them? Looking at the trend for GDP growth does few favours to his statement nor for this bit.

Fortunately, the outlook for further progress is good

Indeed he seemed to keep contradicting himself.

 The preview indicated that job gains over that period were about half a million lower than previously reported. On a monthly basis, job gains were likely about 170,000 per month, rather than 210,000.

But I do note that house prices did get an implicit reference.

But the wealth of middle-income families—savings, home equity, and other assets—has only recently surpassed levels seen before the Great Recession, and the wealth of people with lower incomes, while growing, has yet to fully recover.

As to other signals we get told pretty much every day that the trade war is fixed so there is not a little fatigue and ennui on this subject. Looking at the money supply then it should be supportive but the most recent number for narrow money M1 at 6.8% shows a bit of fading too.

So whilst we may see a boost for the economy from around the spring of next year we seem set for more of the same for house prices.Unless of course the US Federal Reserve has to act again which with the ongoing Repo numbers is a possibility. The background is this though which brings me back to why central bankers are so keen on keeping on keeping house prices out of consumer inflation measures.Can you guess which of the lines below goes into the official CPI?

https://www.bourbonfm.com/blog/house-price-index-vs-owners-equivalent-rent-residences-1990

Whilst it is not sadly up to date it does establish a principle….

 

 

UK employment trends will worry the Bank of England

Today moves us on from the output situation of the UK economy to the employment and wages situation. On the latter we have already received some good news this week. From the BBC.

Thousands of UK workers will enjoy a pre-Christmas pay bump if their employer is a member of the “real living wage” campaign.

Businesses who have signed up to the voluntary scheme will lift their UK hourly rate by 30p to £9.30.

People living in London will see their hourly pay rise by 20p to £10.75.

The scheme is separate to the statutory National Living Wage for workers aged 25 and above which currently stands at £8.21 an hour.

The Living Wage Foundation said its “real” pay rate – which applies to all employees over 18 – is calculated independently and is based on costs such as food, clothing and household bills.

If we look at the wider pay picture we see from the Bank of England that it has been really rather good.

Pay growth has increased steadily over the past few years as the labour market has tightened. Private sector regular
pay growth was 4.0% in the three months to August, as high as it has been in over a decade. The
strength in pay growth has been broadly based, with growth picking up in both the private and public sectors in recent years.

I am not so sure about their “increased steadily” as they have been like the boy ( and occasional girl) who cried wolf on this subject. But we have seen a better phase and it is this that has been a major factor in keeping us away from recession and seeing some economic growth. The fear looking ahead is that it may fade.

A number of indicators suggest that pay pressures are no longer building, and pay growth may cool over the coming
months . The Bank’s settlements database suggests pay awards are clustering between 2% and 3%, slightly
lower than a year ago. Surveys by the REC and the Bank’s Agents also suggest pay growth is stabilising a little below
the pace of growth in the official data.

This may not be as bad for real pay growth as you might think because there are grounds for thinking inflation will decline. The rally in the UK Pound £ will help bring it lower and I note that having improved against the Euro to over 1.16 we should head towards the inflation rate there.

Euro area annual inflation is expected to be 0.7% in October 2019, down from 0.8% in September according to a
flash estimate from Eurostat, the statistical office of the European Union.

Today’s Data

If we start with the wages data then maybe the Bank of England has been right for once. It does not happen often so let’s give them a little credit.

In the year to September 2019, nominal total pay (which includes bonus payments) grew by 3.6% to reach £542 per week. Over the same period, nominal regular pay (which excludes bonus payments) grew by 3.6% to reach £508 per week.

The nuance to this is that it was not so long ago we would be quite happy with this and there were suspicions that the numbers had been boosted by the timing of NHS settlements. The official view on the impact of this is shown below.

Total and regular pay can be expressed in real terms when they have been deflated. We deflate them using the Consumer Prices Index including owner occupiers’ housing costs (CPIH) (2015=100). After adjustment, real total pay increased by 1.8% over the year to £502 in September 2019. Real regular pay increased by 1.7% over the year to £470.

I am pleased they have switched to “we deflate them” which at least gives some sort of hint of the woeful inflation measure they use as it is driven ( 17%) by imputed rents. As it happens because house price growth has fallen back it is not as wrong as usual but is still an over estimate of real wage growth in my opinion.

There was a counter current in the detail because September wage growth at 3.6% was better than the 3.4% of August. The sector pulling it higher was construction at 6%.

A Wages Depression?

If we move to the bigger picture then even using such a flattering and favourable view of inflation cannot escape this reality.

real regular pay was £3 (or 0.63%) lower than the pre-downturn peak of reached in the three months to April 2008 (£473). The real total pay value of £502 in September was £23 (or 4.38%) lower than the peak reached in the three months to February 2008 (£525).

In spite of the recovery we have seen in other areas particularly output and employment those numbers are a stark reminder that the credit crunch era has brought ch-ch-changes. Even at the current rate of real wage growth it will be more than a couple of years before we do a Maxine Nightingale and get right back where we started from.

Employment

The Resolution Foundation have summed it up here.

it’s clear that there is no bigger change to our economy over this period than the employment boom. Over 3 million more people are in work and the working-age employment rate is around 3 percentage points higher than when we were last broadly at full employment in 2008.

They however find themselves in some theoretical quicksand highlighted by their use of “full employment” when it was a fair bit lower than now and the use of “broadly” does not cut it. They are in the same quicksand with wages as higher labour supply has apparently kept it low and yet in the past we recall being told that higher migration ( higher labour supply) did not affect wage growth.

But the picture here has been like the “Boom! Boom! Boom!” of the Black-Eyed Peas as we note that now the winds of change might be blowing.

The latest UK Labour Force Survey (LFS) estimates for Quarter 3 (July to Sept) 2019 saw employment decline by 58,000 to 32.75 million, the second rolling quarterly decrease. However, in the year to September 2019, employment increased by 323,000.

This is consistent with a slowing economy and high levels of employment. We will have to see if the numbers will ebb and flow or have now turned lower. Also the mixture has changed as recent years have been a case of let’s hear it for the girls.

The fall in employment in Quarter 3 was driven by the fall in the number of women in employment, down by 93,000 to 15.46 million. Over the same period, the number of employed men increased by 35,000 to 17.3 million.

Comment

Let me now switch to the best part of today’s report which is this.

The level of unemployment fell by 23,000 to 1.31 million in Quarter 3 2019, while the unemployment rate fell by 0.1 percentage point to 3.8%. Compared with Quarter 3 2018, the level of unemployment decreased by 72,000.

For newer readers unemployment and employment can both rise or as they have in this instance fall. It seems illogical but there is also an inactive category, but the specific move at this time of year is probably related to students.

The mixed picture we have today of slowing wage growth with employment falling will be noted at the Bank of England. Already 2 have voted for an interest-rate cut and more much of these will see that number rise. Of course the Bank of England is in quite a mess as Samuel Tombs of Pantheon inadvertently pointed out.

And at 3.8%, the u/e rate is well below the MPC’s estimate of its sustainable level, 4.25%.

So wage growth should be rising. Oh well! Also that is before we get to them thinking it was 4.5%, 5%, 5.5% and 6.5%. So they do not know what they are doing which usually in their case means another interest-rate cut is in the offing.

That would be curious as we are in a phase where bond yields generally have been backing up. The UK 5 and 2 year yields have risen in response to 0.55%, who said markets were always right? Or indeed always logical?