UK labour market data confirm that we are in an economic depression

Today has brought news that adds to my contention that the UK is experiencing an economic depression right now. We have to look deeper than the conventional signals because tight now some of them are not working. For example the official unemployment definition set by the International Labor Organisation or ILO is missing the target by quite a lot. To use a football analogy if they took a shot at goal they not only miss it but they miss the stand as well. This is why.

Under this definition, employment includes both those who are in work during the reference period and those who are temporarily away from a job. The number of people who are estimated to be temporarily away from work includes furloughed workers, those on maternity or paternity leave and annual leave.

As we stand that covers approximately an extra 4 million people which is a huge number compared to what are being reported as unemployed as you can see below.

Estimates for June to August 2020 show an estimated 1.52 million people were unemployed, 209,000 more than a year earlier and 138,000 more than the previous quarter.

This can be misleading for the unwary and I note that the BBC Economics Editor Faisal Islam has failed to note this development.

Sharp spike up in unemployment rate to 4.5%, above 1.5 million, after revisions and the headline numbers finally catching up with grim reality. Suggests monthly number in August as furlough unwound around 5%.

If you actually think the UK unemployment rate is either 4.5% or 5% then I have a bridge to sell you. Poor old Faisal looks completely lost at sea.

Unemployment still low by historic (3 year high) and international standards – but on way up…

It is in reality as I shall explain high but recently has fallen so he is wrong in every respect.

Hours Worked

The actual signal of a depression in the UK labour market is provided here which looks through the issue of the furlough scheme muddying the waters. Let us start with the better part of it which shows a post lockdown ( which just in case we should now call Lockdown 1.0) improvement.

Between March to May 2020 and June to August 2020, total actual weekly hours worked in the UK saw a record increase of 20.0 million, or 2.3%, to 891.0 million hours. Average actual weekly hours worked saw a record increase of 0.7 hours on the quarter to 27.3 hours.

However the overall picture is of a 15% fall in hours worked. Because is we look back to this time last year ( June to August for this purpose) the number of hours worked was 1.049.2 million. Sadly we get little detail on what is the most significant number right now and the maths is mine. The bit below hides more than it reveals.

Although decreasing over the year, total hours worked had a record increase on the quarter, with the June to August period covering a time when a number of coronavirus lockdown measures were eased.

Redundancies

These provide another clear signal as we note this.

Redundancies increased in June to August 2020 by 113,000 on the year, and a record 114,000 on the quarter, to 227,000. The annual increase was the largest since April to June 2009, with the number of redundancies reaching its highest level since May to July 2009.

So in round terms the rate of redundancies has doubled. There is also a hint that things are also getting worse.

The redundancies estimates measure the number of people who were made redundant or who took voluntary redundancy in the three months before the Labour Force Survey interviews; it does not take into consideration planned redundancies.

Pay as You Earn ( PAYE)

The tax data gives us another insight.

Early estimates for September 2020 indicate that there were 28.3 million payrolled employees, a fall of 2.2% compared with the same period in the previous year and a decline of 629,000 people over the 12-month period. Compared with the previous month, the number of payrolled employees increased by 0.1% in September 2020 – equivalent to 20,000 people.

As you can see these numbers are much more timely than the other labour market data which only reach March. It also shows much more of a change than the unemployment numbers but is still undermined somewhat by the existence of the furlough scheme. There will be payrolled employees who are being subsidised by the furlough scheme until the end of October.

Wages

These are giving the same signal as we note this.

In June to August 2020, the rate of annual pay growth was unchanged for total pay but positive 0.8% for regular pay. The difference between the two measures is because of subdued bonuses, which fell by an average negative 15.3% (in nominal terms) in the three months June to August 2020.

So pay growth is no longer negative as we note an unsurprising divergence between regular pay and bonuses. This compares to where we were pre pandemic as shown below.

The rate of growth stood at 2.9% in December 2019 to February 2020 immediately prior to the coronavirus (COVID-19) pandemic,

We saw wages fall and now they are flatlining. This means that in real terms they are doing this according to the official release.

In real terms, total pay is growing at a slower rate than inflation, at negative 0.8%. Regular pay growth in real terms is now positive, at 0.1%.

So if we use a better inflation measure we see that real wages are falling by a bit more than 1% per annum. This means we are even further below the pre credit crunch peak as we note that this measure has experienced its own version of a Japanese style lost decade.

The aggregate numbers hide a few things as we note some substantial shifts within them.

The public sector saw the highest estimated growth, at 4.1% for regular pay. Negative growth was seen in the construction sector, estimated at negative 5.3%, the wholesaling, retailing, hotels and restaurants sector, estimated at negative 1.8%, and the manufacturing sector, estimated at negative 0.9%. This is, however, an improvement over the growth rates during May to July 2020.

We can learn more from the August data if we look at it as a single month. This is because wages rose from £531 per week to £550 meaning that they were 1.9% higher than a year before. A fair bit of this was the finance sector which saw weekly wages rise by £32 to £721. However there was also welcome news for construction up by £12 to £631 and the hospitality sector where they rose £8 to £364 per week.

Comment

Looking at properly today’s UK labour market release confirms the prognosis of the economic growth or GDP release from Friday. It is not that we lack some green shoots as the August wage data is one and this from the PAYE numbers adds to it albeit is too good to be true right now.

Early estimates for September 2020 indicate that median monthly pay increased to £1,905, an increase of 4.3% compared with the same period of the previous year.

But on the other side of the coin the annual fall in hours worked correlates with the decline in GDP we have seen pretty well. I hope that we can get through this more quickly than in the past but the reality is that these are falls of a size which indicate an economic depression. If reality is too much then you can take a Matrix style blue pill and follow the BBC reporting a 4.5% unemployment rate.

As a caveat all of these numbers are subject to wider margins of error right now. You may be surprised how few are surveyed for the main data source

One key data source for understanding the UK labour market is the Labour Force Survey (LFS), which usually covers around 35,000 households a quarter.

At the moment that will be less representative because in switching to a telephone based system they discovered a change that seems too big to be true.

Back in February around 67 per cent of households in their first interview in the LFS sample were owner occupiers and 32 per cent were renters. But in July this was around 77 per cent and 21 per cent respectively……… For tomorrow’s release we will therefore reweight the estimates so that the shares of owner occupiers and renters are the same as before the pandemic hit in March.

 

 

 

The Euro area unemployment rate is much higher than the 7.4% reported today

A clear feature of the economic landscape post the Covid-19 pandemic is mass unemployment. We should firstly note that this is and will continue to create quite a bit of suffering and angst. Also that all the easing policies of the central banks over the past decade or so were supposed to avoid this sort of thing. But if the system was a rubber band it had been stretched towards breaking point and now all they can do is pump it all up even more. But for our purposes there is another issue which is that we have little idea of either how much unemployment there is or how long it will last. Let me illustrate by looking at the numbers just release by Italy.

The Italian Job

As you might expect employment fell in May.

On a monthly basis, the decline of employment (-0.4%, -84 thousand) concerned more women ( 0.7%, 65 thousand) than men (-0.1%, -19 thousand), and brought the employment rate to 57.6% (-0.2 p.p.)…….With respect to the previous quarter, in the period March – May 2020, employment considerably decreased (-1.6%, 381 thousand) for both genders.

 

Also unemployment rose.

In the last month, also unemployed people grew (+18.9%, +307 thousand) more among women (+31.3%, +227 thousand) than men (+8.8%, +80 thousand). The unemployment rate rose to 7.8% (+1.2 percentage points) and the youth rate increased to 23.5% (+2.0 p.p.).

Now the problems begin. Firstly I recall that last time around we were told the unemployment rate was 6.3% which has seen a substantial revision to 6.6%. There my sympathy is with the statisticians at a difficult time. But for the next bit we have to suspend credulity.

In the last three months, also the number of unemployed persons decreased (-22.3%, -533 thousand), while a growth among inactive people aged 15-64 years was registered (+6.6%, +880 thousand).

If we look further back we just compound the issue.

On a yearly basis, the decrease of employed people was accompanied by a fall of unemployed persons (-25.7%, -669 thousand) and a growth of inactive people aged 15-64 (+8.7%, +1 million 140 thousand).

As I pointed out last month the issue is how unemployment is defined.

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

The definition fails when you have a lockdown as some cannot go to work and others quite reasonably think that there is no point. If we assume that the rise in activity is all a type of hidden unemployment then we get an unemployment rate of 12.4% in Italy. Our estimate will be far from perfect so let us say we think it has risen from ~11% last in April to more like 12% in May.

An even grimmer situation is shown by youth unemployment. The official reading is bad enough.

the youth rate increased to 23.5% (+2.0 p.p.).

But if we apply the same methodology we get to a rather chilling 46.3%. The inactivity category here is huge at 4.6 million which I hope is pretty much students. I have to confess that I am reminded of the Yes Prime Minister quote from the 1980s that education was mostly extended to reduce the unemployment numbers. Anyway it is a blunt number but frankly will be much nearer than the official one. Also there will be many young Italians who have had little hope of a job post credit crunch as it was and it just got worse.

What we do learn is how few people are surveyed for these numbers.

The number of interviewed households for May 2020 is about 17,000 (almost equal to 35,500 individuals) and is
approximately 10% lower than the average number of interviews used for the production of estimates related to a
four-weeks month.

Spain

If we switch to the Ministry of Labour we get a barrage of numbers.

Unemployment is reduced in all sectors except agriculture and among claimants “without previous employment”
There are fewer unemployed registered in ten autonomous communities
In June 308,985 more contracts were signed than in the previous month
Almost six million people received SEPE benefits in May.

These numbers look both more useful and realistic. Things started to get better last month with around 309,000 new jobs but the Furlough scheme count in May of 6 million gives a perspective. Also unemployment edged higher.

The registered unemployment in the offices of the State Public Employment Service (SEPE) has increased by 5,107 people compared to the previous month. This represents an increase of 0.1%, which deepens the trend of slowing down the growth rate of unemployment that began in May.

So we end up with this.

The total number of unemployed persons registered in the SEPE offices amount to 3,862,883.

There is an irony in using registered unemployment numbers as they fell into disrepute due to the way they can be manipulated and fiddled. But right now they are doing better than the official series. El Pais summarises it like this.

The total number of jobseekers in Spain has risen to 3.86 million, the highest figure registered since May 2016……The rise in unemployment for June is the first increase seen since 2008, just months before the fall of Lehman Brothers and the year of the financial crisis. The increase in contributors to the Social Security system for the month is also the smallest since 2015.

So we see that there are also still around 2.1 million people on the furlough scheme. In total these benefits were paid out.

In May, the SEPE paid 5,526 million euros in benefits, of which 3,318 million were dedicated to paying ERTE benefits and 2,208 million to unemployment benefits, both at the contributory and assistance level.

If we use these numbers are plug them into the official unemployment series we end up with an unemployment rate of 16.8%.

Euro Area

This morning’s official release tells us this.

In May 2020, a third month marked by COVID-19 containment measures in most Member States, the euro area seasonally-adjusted unemployment rate was 7.4%, up from 7.3% in April 2020……..Eurostat estimates that 14.366 million men and women in the EU, of whom 12.146 million in the euro area, were unemployed in May 2020. Compared with April 2020, the number of persons unemployed increased by 253 000 in the EU and by 159 000 in the euro area.

Unfortunately we do not have an update on inactivity so we can have a go at getting a better picture. We are promised more but not until next week.

To capture in full the unprecedented labour market situation triggered by the COVID-19 outbreak, the data on
unemployment will be complemented by additional indicators, e.g. on employment, underemployment and potential
additional labour force participants, when the LFS quarterly data for 2020 are published.

Comment

As you have seen earlier this is a “Houston we have a problem moment” for unemployment data as it rigorously calculates the numbers on the wrong football pitch. It creates problems highlighted by this tweet from Silvia Amaro of CNBC.

#unemployment in the euro zone came in at 7.4% in May. At the height of the debt crisis it reached 12.1%. #COVIDー19

That creates the impression things are much better now when in fact they may well be worse. Without the furlough schemes they certainly would be. What we fo not know is how long it will last?

 

The problems posed by mass unemployment

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

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

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

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

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

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

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

Italy

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

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

The full detail is below.

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

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

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

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

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

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

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

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

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

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

Germany

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

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

For our purposes we get a signal from this.

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

Perhaps the headline read a lot better in German.

No spring upturn

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

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

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

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

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

Comment

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

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

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

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

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

The Investing Channel

 

 

 

 

The Output Gap Problem

The new pandemic economic era has brought some new features to our lives but some things have remained the same or as The Four Tops put it.

Now it’s the same old song
But with a different meaning
Since you been gone

It is also an example of how once some people get wedded to a concept no amount if reality can shake them from it. Or if you prefer a type of institutional group think where they are so busy telling each other that they are clever and intelligent they are then unable to accept that they have been consistently wrong. That is usually associated with people who via their circumstances are insulated from the effects of the error.

Let me see if you can guess it from this reference in the Financial Times?

One reason the measure often gets overlooked in mainstream headlines is because it doesn’t sound all that consequential. Yet it is. Arguably more so than ever. Encumbering its popularity, however, is the fact it’s not always universally considered to be a thing. Saltwater-type economists (a.k.a the stimulus inclined) are far more partial to backing its theoretical existence than fresh water austerity types because it helps them justify more government spending. Added to that, it’s also notoriously difficult to measure in real time.

Some might think that not being able to measure something is quite a hurdle! In some circumstances like a pandemic we are still learning because it is new but this issue has been round for decades. Another warning klaxon is fired as we note that some consider it is not a thing as surely it should be clear. We see a potential angle for the FT as one impact of its Japanese ownership is that it has become a strong supporter of stimulus.

Anyway as I am sure some and maybe many of you have guessed here it is.

In its simplest terms, the output gap measures the difference between actual output (or GDP) and potential output (or potential GDP). Since this gap illustrates how much better the economy could be faring at any given time had whatever demand shock which slowed growth not occurred, it indicates the theoretical excess supply capacity in the system. Whenever output is running under potential output, there is said to be economic slack, which supposedly justifies additional stimulus as the slack is the factor that is likely to keep price inflation at bay. Or so the theory goes.

As you can see they are unable to resist loading a factual statement with value judgements. This is especially disappointing from two of its better journalists ( Izabella Kaminska and Claire Jones) which reminds me that the better ones are usually women. The confusion continues here.

However, if lockdown-type measures are to persist for up to two years — as is increasingly thought — the impact would be not only an upper double-digit trillion bill in terms of overall economic losses, but could also destroy supply capacity and potential GDP. The longer the lockdowns last, the graver the supply-side impact is likely to be.

Again they are merging two concepts which highlights the confusion. Has supply capacity been destroyed? Yes for example if we think of the airline industry in the UK we may be shifting to us going forwards with Heathrow but Gatwick being closed for example. That would be quite a change and may not be that literal but also some examples of that are already happening. On a personal level I guess it is bad for me ( noisy planes overhead) but good for the aunt I spoke to yesterday as she lives near Gatwick as there wont be any over her. Although of course the economic effects will be the opposite of that.

However “potential GDP” means what exactly? In the end that is always the problem as supporters end up echoing Alice In Wonderland.

“When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’

’The question is,’ said Alice, ‘whether you can make words mean so many different things.’

Let me however agree with the authors on this point as frankly some of the analysis suggesting this has been laughable.

This is important because so much private and public policy is now being determined by the notion that the economy can be easily stop-started without any real long-term negative consequences. It’s this sort of thinking that is backing the V-shaped recovery argument, which in turn is justifying putting the economy’s needs second to the needs of saving lives (whether rightly or wrongly, we won’t and don’t want to speculate).

The idea that we would rebound like Zebedee from the Magic Roundabout always was silly as this morning in the UK has demonstrated. From the BBC.

Business groups have called for clarity on what will need to change in the workplace as Boris Johnson unveils a “conditional plan” to reopen society.

“Businesses need their practical questions answered so they can plan to restart, rebuild and renew,” said the British Chambers of Commerce.

The prime minister said those who could not work from home should be “actively encouraged to go to work” in England.

Those that can return are trying to figure out how they can? It will take a while and perhaps places will begin with half production.

Comment

Let me give you an example of a policy error from my home country as it tried to implement output gap theory. So if we jump into Doctor Who’s TARDIS and go back to the summer of 2013 here is the Bank of England.

In essence, the MPC judges that, until the margin of slack within the economy has narrowed significantly.

The choice of words “margin of slack” is/are significant but please park that for a moment as we check what that meant in practice.

At its meeting on 1 August 2013, the Monetary Policy Committee (MPC) agreed its intention not to
raise Bank Rate from its current level of 0.5% at least until the Labour Force Survey (LFS) headline
measure of the unemployment rate had fallen to a ‘threshold’ of 7%, subject to the conditions below.

They used “margin of slack” as explicitly using the phrase “output gap” had failed. The UK had one in theory but inflation had surged over target so it was a bit of a laughing stock. As they are slow learners they kept the policy and changed the language used instead. Next they used the employment rate because using GDP had failed.

The problem was that the “unemployment rate” was an even worse measure than GDP! There is some good news here as the UK labour market improved quickly but the Bank of England was left with a whole pack of eggs on its face. This matters as people made real decisions on Forward Guidance like this. You see whether how much you regarded 7% as a threshold there was also this.

Bank staff estimate that the medium-term equilibrium unemployment rate is presently in the region of 6.5%.

So when it went below 4% as it later did in the UK you might have expected Bank Rate to have been raised several times to say 2.5%. I will just leave that there….

Returning to GDP as the authors of the FT piece have there are other problems. The first is that it was abandoned as a signal for this sort of thing because it failed and indeed sailed utterly. But it gets worse because there are plenty of grounds to argue it will do even worse now. A lot of the issues come around the fact that it only counts things that are paid for. If people work from home more they are likely to use the commuting time gained to do more for themselves. An example of this sort of thing is one of my neighbours who due to the situation did not get a repair(wo)man in when his washing machine broke he ordered a new motor and fitted it himself. That is the same effect but lower GDP. Some might be able to do more of their own childcare and so on.

But we seem to keep finding supporters of the output gap no matter how often it fails or as The Eagles put it.

“Relax”, said the night man
“We are programmed to receive
You can check out any time you like
But you can never leave”

 

What are the economic prospects for the Euro area?

As we progress into 2020 there has been a flurry of information on the Euro area economy. However there has been quite a bit of dissatisfaction with the usual indicators so statistics offices have been looking  at alternatives and here is the German effort.

The Federal Office for Goods Transport (BAG) and the Federal Statistical Office (Destatis) report that the mileage covered by trucks with four or more axles, which are subject to toll charges, on German motorways decreased a seasonally adjusted 0.6% in December 2019 compared with the previous month.

As a conceptual plan this can be added to the way that their colleagues in Italy are now analysing output on Twitter and therefore may now think world war three has begun. Returning to the numbers the German truck data reminds us that the Euro areas largest economy is struggling. That was reinforced this morning by some more conventional economic data.

Germany exported goods to the value of 112.9 billion euros and imported goods to the value of 94.6 billion euros in November 2019. Based on provisional data, the Federal Statistical Office (Destatis) also reports that German exports decreased by 2.9% and imports by 1.6% in November 2019 on the same month a year earlier. Compared with October 2019, exports were down 2.3% and imports 0.5% after calendar and seasonal adjustment.

We get a reminder that what was one if the causes of economic imbalance before the credit crunch has if anything grown as we note the size of Germany’s trade surplus.  It is something that each month provides support for the level of the Euro. Switching to economic trends we see that compared to a year before the larger export volume has fallen by more than import volume. This was even higher on a monthly basis as we note that the gap between the two widened. But both numbers indicate a contractionary influence on the German economy and hence GDP ( Gross Domestic Product).

Production

Today’s data opened with a flicker of positive news.

In November 2019, production in industry was up by 1.1% on the previous month on a price, seasonally and calendar adjusted basis according to provisional data of the Federal Statistical Office (Destatis). In October 2019, the corrected figure shows a decrease of 1.0% (primary -1.7%) from September 2019.

However this still meant this.

-2.6% on the same month a year earlier (price and calendar adjusted)

There is a particular significance in the upwards revision to October as some felt that the original numbers virtually guaranteed a contraction in GDP in the last quarter of 2019. In terms of a breakdown the better November figures relied on investment.

In November 2019, production in industry excluding energy and construction was up by 1.0%. Within industry, the production of capital goods increased by 2.4% and the production of consumer goods by 0.5%. The production of intermediate goods showed a decrease by 0.5%.

Only time will tell if the investment was wise. The orders data released yesterday was not especially hopeful.

Based on provisional data, the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing had decreased in November 2019 a seasonally and calendar adjusted 1.3% on the previous month.

Producing more into weaker orders has an obvious flaw and on an annual basis the situation was even worse.

-6.5% on the same month a year earlier (price and calendar adjusted)

Perhaps the investment was for the domestic economy as we look into the detail.

Domestic orders increased by 1.6% and foreign orders fell 3.1% in November 2019 on the previous month. New orders from the euro area were down 3.3%, new orders from other countries decreased 2.8% compared to October 2019.

But if we widen our outlook from Germany to the wider Euro area we see that it was the source of the strongest monthly slowing.

In a broad sweep orders for production rose from 2013 to December 2017 with the series peaking at 117.1 ( 2015=100) but we have been falling since and have now gone back to 2015 at 100.3.

The Labour Market

By contrast there is more to cheer from this area.

The euro area (EA19) seasonally-adjusted unemployment rate was 7.5% in November 2019, stable compared with
October 2019 and down from 7.9% in November 2018. This remains the lowest rate recorded in the euro area
since July 2008.

In terms of the broad trend the Euro area is now pretty much back to where it was before the credit crunch and is a long way from the peak of above 12% seen around 2013. But there are catches and nuances to this of which a major one is this.

In November 2019, the unemployment rate in the United States was 3.5%, down from 3.6% in October 2019 and
from 3.7% in November 2018.

That is quite a gap and whilst there may be issues around how the numbers are calculated that still leaves quite a gap. Also unemployment is a lagging indicator but it may be showing signs of turning.

Compared with October 2019, the number of persons unemployed increased by
34 000 in the EU28 and decreased by 10 000 in the euro area. Compared with November 2018, unemployment fell
by 768 000 in the EU28 and by 624 000 in the euro area.

The rate of decline has plainly slowed and if we look at Germany again we wait to see what the next move is.

Adjusted for seasonal and irregular effects, the number of unemployed remained unchanged from the previous month, standing at 1.36 million people as well. The adjusted unemployment rate was 3.1% in November, without any changes since May 2019.

Looking Ahead

There was some hope for 2020 reflected in the Markit PMI business surveys.

Business optimism about the year ahead has also improved
to its best since last May, suggesting the mood
among business has steadily improved in recent
months.

However the actual data was suggested a low base to start from.

Another month of subdued business activity in
December rounded off the eurozone’s worst quarter
since 2013. The PMI data suggest the euro area
will struggle to have grown by more than 0.1% in
the closing three months of 2019.

There is a nuance in that France continues to do better than Germany meaning that in their turf war France is in a relative ascendancy. In its monthly review the Italian statistics office has found some cheer for the year ahead.

The sectoral divide between falling industrial production and resilient turnover in services persists. However, business survey indicators convey first signals of optimism in manufacturing. Economic growth is projected to slightly increase its pace to moderate growth rates of 0.3% over the forecast horizon.

Comment

The problem for the ECB is that its monetary taps are pretty much fully open and money supply growth is fairly strong but as Markit puts it.

At face value, the weak performance is
disappointing given additional stimulus from the
ECB, with the drag from the ongoing plight of the
manufacturing sector a major concern.

It is having an impact but is not enough so far.

However, policymakers will be encouraged by the resilient
performance of the more domestically-focused
service sector, where growth accelerated in
December to its highest since August.

This brings us back to the opening theme of this year which has been central bankers both past and present singing along with the band Sweet.

Does anyone know the way, did we hear someone say
(We just haven’t got a clue what to do)
Does anyone know the way, there’s got to be a way
To blockbuster

Hence their move towards fiscal policy which is quite a cheek in the circumstances.

The conceptual issue is that all the intervention and central planning has left the Euro area struggling for any sustained economic growth and certainly slower growth than before. This is symbolised by Italy which remains a girlfriend in a coma.

The Composite Output Index* posted at 49.3 in December,
down from 49.6 in November, to signal a second consecutive fall in Italian private sector output. Moreover, the decline quickened to a marginal pace.

 

Bank of England Forward Guidance ignores the falls in UK real wages

Yesterday evening Michael Saunders of the Bank of England spoke in Southampton and gave us his view on our subject of today the labour market.

 the output gap is probably closed……….. The labour
market continued to tighten, and the MPC judged in late 2018 that the output gap had closed, with supply
and demand in the economy broadly in balance.

As you can see we quickly go from it being “probably closed” to “had closed” and there is something else off beam. You see if there is anyone on the Monetary Policy Committee who would think it is closed is Michael via his past pronouncements, so if he is not sure, who is? This leads us straight into the labour market.

In general, labour market data suggest
the output gap has closed. For example, the jobless rate is slightly below the MPC’s estimate of equilibrium,
vacancies are around a record high, while pay growth has risen to around a target-consistent pace (allowing
for productivity trends).

Poor old Michael does not seem to realise that if pay growth is consistent with the inflation target he does not have a problem. Of course that is before we hit the issue of the “equilibrium” jobless rate where the Bank of England has been singing along to Kylie Minogue.

I’m spinning around
Move outta my way
I know you’re feeling me
‘Cause you like it like this

In terms of numbers the original Forward Guidance highlighted an unemployment rate of 7% which very quickly became an equilibrium one of 6.5% and I also recall 5.5% and 4.5% as well as the present 4.25%. Meanwhile the actual unemployment rate is 3.8%! What has actually happened is that they have been chasing the actual unemployment rate lower and have only escaped more general derision because most people do not understand the issue here. Let’s be generous and ignore the original 7% and say they have cut the equilibrium rate from 6.5% to 4.25%. What that tells me is that the concept tells us nothing because on the original plan annual wage growth should be between 5% and 6%.

What we see is that an example of Ivory Tower thinking that reality has a problem and that the theory is sound.  It then leads to this.

This would reinforce the prospect that the
economy moves into significant excess demand over the next 2-3 years, and hence that some further
monetary tightening is likely to be needed to keep inflation in line with the 2% target over time.

Somebody needs to tell the Reserve Bank of India about this excess demand as it has cut interest-rates three times this year and also Australia which cut only last week. Plus Mario Draghi of the ECB who said no twice before the journalist asking him if he would raise interest-rates last week finished his question and then added a third for good measure.

Wage Data

We gain an initial perspective from this. From this morning’s labour market release.

Including bonuses, average weekly earnings for employees in Great Britain were estimated to have increased by 3.1%, before adjusting for inflation, and by 1.2%, after adjusting for inflation, compared with a year earlier.

If we start with the economic situation these numbers are welcome and let me explain why. The previous three months had seen total weekly wages go £530 in January, but then £529 in both February and March. So the £3 rise to £532 in April is a welcome return to monthly and indeed quarterly growth. As to the number for real wages it is welcome that we have some real wage growth but sadly the official measure used called CPIH is a poor one via its use of imputed rents which are never paid.

Ivory Tower Troubles

However as we peruse the data we see what Taylor Swift would call “trouble, trouble trouble” for the rhetoric of Michael Saunders. Let us look at his words.

Wage income again is likely to do better than expected.

That has been something of a hardy perennial for the Bank of England in the Forward Guidance era where we have seen wage growth optimism for just under 6 years now. But whilst finally we have arrived in if not sunlit uplands we at least have some real wage growth there is a catch. Let me show you what it is with the latest four numbers for the three monthly total wages average. It has gone 3.5% in January then 3.5%, 3.3% and now 3.1%. Also if we drill into the detail of the April numbers I see that the monthly rise was driven by an £8 rise in weekly public-sector wages to £542 which looks vulnerable to me. Was there a sector which got a big rise?

Thus as you can see on the evidence so far we have slowing wage growth rather than it picking up. That would be consistent with the slowing GDP growth yesterday. So we seem to be requiring something of a “growth fairy” that perhaps only Michael is seeing right now. This is what he thinks it will do to wage growth.

Pay growth has recently
risen to about 3% YoY and the May IR projects a further modest pickup (to about 3.5% in 2020 and 3.75% in 2021). That looks reasonable in my view: if anything, with the high levels of recruitment difficulties, risks may
lie slightly to the upside.

Real Wages

There is a deeper problem here as whilst the recent history has been better the credit crunch era has been a really poor one for UK real ages. Our official statisticians put it like this.

£468 per week in real terms (constant 2015 prices), higher than the estimate for a year earlier (£459 per week), but £5 lower than the pre-recession peak of £473 per week for April 2008.

As you can see even using their favoured ( aka lower) inflation measure real wages are in the red zone still. I noted that they have only given us the regular pay data so I checked the total wages series. There we have seen a fall from the £512 of January 2008 to £496 in April so £16 lower and just in case anyone looks it up I am ignoring the £525 of February 2008 which looks like the equivalent of what musicians call a bum note.

We see therefore that the closed output gap measured via the labour market has left us over a decade later with lower real wages!

Comment

If we view the UK labour market via the lenses of a pair of Bank of England spectacles then there is only one response to the data today.

Between February to April 2018 and February to April 2019: hours worked in the UK increased by 2.4% (to reach 1.05 billion hours) the number of people in employment in the UK increased by 1.1% (to reach 32.75 million).

From already strong numbers we see more growth and this has fed directly into the number they set as a Forward Guidance benchmark.

For February to April 2019, an estimated 1.30 million people were unemployed, 112,000 fewer than a year earlier and 857,000 fewer than five years earlier.

It is hard not to have a wry smile at falls in unemployment like that leading to in net terms the grand sum of one 0.25% Bank Rate rise. Also even a pair of Bank of England spectacles may spot that a 2.4% increase in hours worked suggests labour productivity is falling.

But the Forward Guidance virus is apparently catching as even the absent-minded professor has remembered to join in.

BoE’s Broadbent: If Economy Grows As BoE Forecasts, Interest Rates Will Probably Need To Rise A Bit Faster Than Market Curve Priced In May ( @LiveSquawk )

My conclusion is that we should welcome the better phase for the UK labour market and keep our fingers crossed for more in what look choppy waters. Part of the problem at the Bank of England seems to be that they think it is all about them.

Second, why should growth pick up without any easing in monetary or fiscal policies? ( Michael Saunders)

Of course that may be even more revealing…..

 

 

The UK labour market is booming Goldilocks style

Let me open by bringing you up to date with the latest attempt at monetary easing from the Bank of England. Yesterday it purchased some more UK Gilts as part of its ongoing Operation Twist effort.

As set out in the Minutes of the MPC’s meeting ending on 6 February 2019, the MPC has agreed to make £20.6 billion of gilt purchases, financed by central bank reserves, to reinvest the cash flows associated with the maturity on 7 March 2019 of a gilt owned by the Asset Purchase Facility (APF)……….The Bank intends to purchase evenly across the three gilt maturity sectors. The size of auctions will initially be £1,146mn for each maturity sector.

Yesterday was for short-dated Gilts ( 3 to 7 year maturity) and today will be for long-dated Gilts ( 15 years plus). Why is this extra QE? This is because you are exchanging a maturing Git for one with a longer maturity and thus means QE will be with us for even longer. Odd for an emergency response don’t you think?

Regular readers will be aware that I wrote a piece in City-AM in September 2013 suggesting the Bank of England should let maturing Gilts do just that. So by now we would have trimmed the total down a fair bit which would be logical over a period where we have seen economic growth which back then was solid, hence my suggestion. Whereas we face not only a situation where nothing has been done in the meantime but today’s purchase of long and perhaps ultra long Gilts ( last week some of the 2037 Gilt was purchased) returns us to the QE to Infinity theme.

This area has been profitable for the Bank of England via the structure of UK QE as it charges the asset protection fund Bank Rate. So mostly 0.5% but for a while 0.25% and presumably now 0.75%. In the end the money goes to HM Treasury but if you get yourself close the the flow of money as Goldman Sachs have proven you benefit and in the Bank of England’s case you can see this by counting the number of Deputy-Governors. Also its plan to reverse QE at some point continues in my opinion to be ill thought out but for now that is not fully pertinent as it has no intention of actually doing it!

UK Labour Market

In ordinary times the UK government would be putting on a party hat after seeing this.

The level of employment in the UK increased by 222,000 to a record high of 32.71 million in the three months to January 2019……..The employment rate of 76.1% was the highest since comparable records began in 1971.

As you can see a trend which began in 2012 still seems to be pushing forwards and poses a question as to what “full employment” actually means? Also let me use the construction series as an example of maybe the output data has been too low. From @NobleFrancis.

ONS Employment in UK construction in 2018 Q4 was 2.41 million, 2.8% higher than in 2018 Q3 & 3.2% higher than one year earlier.

To my question about the output data he replied.

Given the strength of the construction employment data, potentially we may see an upward revision to ONS construction output in Q4 although there can be odd quarters where the construction employment & output data go in different directions.

To give you the full picture @brickonomics points out that different areas of construction have very different labour utilisation so we go to a definitely maybe although that gets a further nudge from the wages data as you see the annual rate of growth went from 3.2% in October to 5.5% in December. So whilst this is not proof it is a strong suggestion of better output news to come.

Let us complete this section with the welcome news that unlike earlier stages of the recovery we are now creating mostly full-time work.

 This estimated annual increase of 473,000 was due mainly to more people working full-time (up 424,000 on the year to reach 24.12 million). Part-time working also contributed, with an increase of 49,000 on the year to reach 8.60 million.

Unemployment

Again the news was good.

The UK unemployment rate was estimated at 3.9%; it has not been lower since November 1974 to January 1975…..For November 2018 to January 2019, an estimated 1.34 million people were unemployed, 112,000 fewer than for a year earlier. There have not been fewer unemployed people in the UK since October to December 1975.

There have been periods recently where we have feared a rise in unemployment whereas in fact the situation has continued to get better. We again find the numbers at odds with the output data we have for the economy. But let us welcome good news that has persisted.

Wage Growth

This was a case of and then there were three today.

Excluding bonuses, average weekly earnings for employees in Great Britain were estimated to have increased by 3.4%, before adjusting for inflation, and by 1.4%, after adjusting for inflation, compared with a year earlier. Including bonuses, average weekly earnings for employees in Great Britain were estimated to have increased by 3.4%, before adjusting for inflation, and by 1.5%, after adjusting for inflation, compared with a year earlier.

The total wages number which they now call including bonuses had a good January when they rose by 3.7% which means we have gone 4%,3.4%,3.3% and now 3.7% on a monthly basis. For numbers which are erratic this does by its standards suggest a new higher trend. This is good news for the economy and also for the Bank of England which after seven years of trying has finally got a winning lottery ticket. I will let readers decide whether to award it another go or a tenner ( £10) .

As to real wage growth we now have some but sadly not as much as the official figures claim. This is because the inflation measure used called CPIH has some fantasy numbers based on Imputed Rents which are never paid which lower it and thereby raise official real wage growth. Thus if we use the January data it has real wage growth at 1.9% but using the RPI gives us a still good but lower 1.2%

Putting that another way you can see why there has been so much establishment effort led by Chris Giles of the Financial Times to scrap the RPI.

Comment

The UK labour market seems to have entered something of a Goldilocks phase where employment rises, unemployment falls and added to that familiar cocktail we have real wage growth. So we should enjoy it as economics nirvana’s are usually followed by a trip or a fall. As to the detail there remain issues about the numbers like the way that the self-employed are not included in the wages numbers. Also whilst I welcome the rise in full-time work the definition is weak as the respondent to the survey chooses.

Next let me just raise two issues for the Bank of England as it finally clutches a winning wages lottery ticket. It is expanding monetary policy into a labour market boom with its only defence the recent rise in the UK Pound £. Next its natural or as some would put it full (un)employment rate of 4.5% needs to be modified again as we recall when it was 7%.

Those of you who follow me on social media will know I do an occasional series on how the BBC economics correspondent only seems to cover bad news. Sometimes Dharshini David does it by reporting the good as bad.

eyebrows raised as jobs market figs “defy” Brexit Uncertainty BUT 1) hiring/firing tends to lag couple quarters behind activity 2)as per financial crisis, workers relatively cheap so firms may be “hoarding” workers 3)some jobs will have been created to aid with Brexit prep

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