How do people with so little idea of how the economy works get appointed to the Bank of England?

Today we have the opportunity to take a look at the thoughts of a UK monetary policymaker and indeed one who until recently thought that another interest-rate rise was appropriate. So we know that she takes no notice of the trends in the money supply which I suppose is no great surprise for someone who used to write for the Financial Times. Anyway the air of unreality starts as early as her third sentence at Make UK.

Over the last 2-3 years, we have seen a historically tight labour market, driven by recruitment difficulties as the pandemic likely caused structural shifts.

The cost of living crisis featured real wage falls which do bit fit at all with the claim of a tight labour market. Apparently though wages have done well.

And second, wages have remained high amid an easing labour market and inflation expectations. Labour hoarding may partially explain both.

Back in the real world we know that there has been a real wages crisis but apparently not in Megan’s one.

We see yet again a policymaker convinced that their theories have bite even though we have no real idea how to measure this.

Before I dive into these puzzles, it’s important to define what we mean by labour hoarding. Firms are said to hoard labour when they choose not to adjust employment in line with short-term fluctuations in demand. This happens all the time, and can save firms costs on things like recruitment and training. Today I want to look at whether there has been evidence of excess labour hoarding, beyond what can be considered normal.

How on earth do you define “normal” in this area? Central bankers got themselves into an awful mess over claims of “normal” interest-rates which when we got there only added to the confusion.

Unemployment Rate Problems

Briefly Megan hints that she may be about to discuss what is one of the economic issues of our times.

I’ll begin by setting out the first puzzle: unemployment is not rising much despite weak economic growth. The unemployment rate was low by historical standards prior to the pandemic at around 4%.

But sadly not as this glimmer of light is in fact an onrushing train of economic stupidity.

This is especially curious given the latest models indicate the medium-term equilibrium rate of unemployment, u*, has risen since the pandemic (Greene, 2023) , and the MPC has revised up its estimate of this to 4.5%

This all went wrong more than a decade again when Governor Mark Carney set an unemployment rate of 7% as being significant for an interest-rate rise. Here is the press conference after his first speech as Bank of England Governor.

But until we reach that 7% threshold we’re
in a position where we don’t have to make that assessment about whether to adjust Bank Rate up. And that’s core.

Actually things were already going badly as this from Larry Elliot of the Guardian highlights.

they don’t think that the unemployment
rate is going to take three years to get down to 7%. And given the Bank’s recent forecasting record, that’s hardly surprising.

In fact this turned into a shambles. Firstly rather than raising interest-rates ( and remember this speech led markets to thing a rise would be soon) his next move was to cit them! But even worse there was a theoretical underpinning of a 7% unemployment rate which you may note is very different to the 4.5% one of Ms Greene. This is a numerical version of Humpty-Dumpty.

“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.”

To be specific we went to 6.5% very quickly ( remember 7% was supposed to take 3 years) and I recall 5.5% 5% and 4.25% along the way. I am sure 6% must have been in their as an equilibrium unemployment rate estimate it is just I have forgotten its use.

This is my problem with using an equilibrium unemployment rate. It is way beyond me disagreeing with it The issue is that it was tried for several years and turned  into a farce. Things then get worse because back in 1983 the BBC television series Yes Minister had Jim Hacker telling us that nobody believed the unemployment rate meaning the claimant count. Yet over 40 years later that message seems not to have reached the Bank of England.

 Our main cross-check for the LFS unemployment rate is the claimant count – the numbers of people receiving unemployment benefits.

So we have a number subject to the Humpty-Dumpty critique combined with one that has not been believed for over 40 years!

Actually Ms.Greene again gets close to a live issue which is the divergence of around one million jobs between the main two measures of UK employment.

We have better cross-checks for employment figures, from HRMC’s Pay As You Earn (PAYE) dataset and Workforce Jobs (WFJ), which compiles estimates from a number of other surveys…… Both alternative metrics point to higher employment than the official figures.

But again the obvious implication for her equilibrium unemployment rate is ignored. Also there is this that Dario Perkins spotted.

Imagine trying to set monetary policy when the statisticians don’t have a clue what is happening… (the response rate for the LFS is at 10% 

Yes the response rate to the main UK labour market survey is rather appropriately a UB40.

I am the one in ten
A number on a list
I am the one in ten
Even though I don’t exist
Nobody Knows me
Even though I’m always there
A statistic, a reminder
Of a world that doesn’t care

Wages

This next bit needs to come with a warning which is that we are about to enter a combination of The Outer Limits and The Twilight Zone.

Wage growth across all metrics has been elevated for some time, and as I have noted before is a key indicator of domestic inflation persistence.

In fact it is the other way around as it is PAST inflation surges which have driven present wages growth. Anyway her earlier claims about wages growth over the past 2-3 years has the problem that according to the official numbers they peaked at 109.2 in March and April 2021 and are now 107.3. This is with them using a really woeful inflation measure ( I will be speaking on this subject at the Better Statistics conference on the 23rd) which has flattered the numbers.

Meanwhile back in the real world the average earnings figures broke down during the pandemic ( unless you believe that the cure for real wages was for the economy to collapse for a while). But if Ms.Greene has spotted this there is no sign.

Comment

So what can we expect in terms of her view on interest-rates? Ms.Greene seems determined to set policy via the rear-view mirror.

As stated in the minutes of our meetings in May, the MPC is still looking at labour market slack, wages and services inflation for a steer on the remaining degree of inflation persistence. This is something I enthusiastically endorse.

Although she does not say it there is quite a critique of her votes to increase interest-rates to 5.5% here.

The analysis I have presented to you today is broadly consistent with this benign outlook, and there are reasons to expect this to come to fruition……..To my mind, inflation persistence has waned since I joined the MPC last July.

But the situation is that she prefers theory to reality so she can justify keeping interest-rates too high.

In considering for how long we must retain our restrictive stance before policy should be eased, I think the burden of proof therefore needs to lie in inflation persistence continuing to wane.

How do so many people get appointed to the Bank of England when they have so little idea of the actual leads and lags in the economy?

Is it a coincidence that UK unemployment has risen following a methodological change or an effect of it?

This morning’s UK laboir market release is a bit of a change on what we have become used to. But we can start with something that is both familiar and in my opinion good news.

Annual growth in regular earnings (excluding bonuses) was 6.0%, and annual growth in employees’ average total earnings (including bonuses) was 5.6%.

Wage growth remains strong and with inflation fading brings with it the prospect of some decent real wage gains. There is a small fading of the monthly growth rate to 5.4% in February but for this series 5.9%,5.5% and now 5.4% for the monthly rates is in fact pretty stable.

We can continue that theme into the initial breakdown.

Annual average regular earnings growth for the public sector remains relatively strong at 6.1% in December 2023 to February 2024 (Figure 4). For the private sector this was 6.0%, and growth was last lower than this in April to June 2022 (5.4%). Annual average total earnings growth for the private and public sector was 5.6% and 6.0%, respectively, in December 2023 to February 2024.

So they are very similar which is a change on what we saw at times last year. In fact that pattern continues as whilst the official release shows a difference in regular pay as shown below the total pay figures are quite similar.

In December 2023 to February 2024, the manufacturing sector saw the largest annual regular pay growth at 6.9%. The finance and business services sector, and wholesaling, retailing, hotels and restaurants sector both followed at 6.8% and 6.4%, respectively

The stand out is construction where total pay rose by only 3.1%.Perhaps it was affected by the rain we noted when looking at the GDP release for February.

Overall there was even some good news for the Bank of England.

 If we compare the latest three months with the three months that preceded them, and then annualise this growth rate, nominal regular average weekly earnings grew by 4.8%.

Real Pay

Here the official release brings us two choices.

In real terms (adjusted for inflation using the Consumer Prices Index including owner occupiers’ housing costs (CPIH)), total real pay was 1.6% in December 2023 to February 2024……. Regular real pay was 1.9%;

The problem with CPIH as a measure is that nobody with any series believes its imputed rent driven version of housing costs. But as it happens the two official series are giving results not that different.

Using CPI real earnings, in December 2023 to February 2024, total pay was 1.8%…. Regular pay was 2.1%;

The nuance is that from an establishment point of view this is a failure as CPIH was designed to give lower inflation and this higher real wages figures. But even if we use an inflation measure that is much more realistic for the housing sector we see that the annual rate for the RPI was falling from 5.2% in December to 4.5% in February so we had real wages growth here too.

Employment

Switching from the quality to quantity numbers we get a little bit of a jolt.

Payrolled employees in the UK fell by 18,000 (0.1%) between January and February 2024, but rose by 352,000 (1.2%) between February 2023 and February 2024.

The situation had showed slower employment growth but if we now add in the provisional March figures we see that both numbers show a change of direction this time around.

The early estimate of payrolled employees for March 2024 decreased by 67,000 (0.2%) on the month but increased by 204,000 (0.7%) on the year to 30.3 million.

Regular readers will be aware I find it disappointing that the official release guides us towards payroll employment these days rather than the wider overall employment. In these numbers it is material as some would gleam from this.

The UK employment rate for December 2023 to February 2024 (74.5%) remains below estimates a year ago (December 2022 to February 2023), and decreased in the latest quarter.

As that is rather vague let me help out. as this is some 0.5% lower than a quarter ago and 0.8% lower than a year ago. Or employment has fallen by 156,000 in this period making it 195,000 lower than a year ago. These numbers are significant in themselves but also have further consequences. For example just as the GDP numbers have shown a return to growth we are seeing employment falls. Also we now have employment back below ( by 110,000) pre pandemic levels. If you wish a silver lining in this cloud then productivity has just improved.

Population Problems.

This is a contentious area as in party because the government is not keen to reveal its failures on migration we do not really know what the UK population is. In my own location of Battersea it feels like even more people have arrived and I am not making a value judgement simply stating what is reality albeit something of an anecdote. If you want an official confirmation of this it is here.

From our February 2024 labour market release, LFS periods from July to September 2022 onwards have been reweighted to incorporate the latest estimates of the size and composition of the UK population. This reweighting creates a discontinuity between June to August 2022 and July to September 2022.

If we switch to football terms a discontinuity is the sort of thing that would have fans chanting “You don’t know what you’re doing.” Ican take that further because since the pandemic we have seen employment dip by just over 0.3% but the employment rate fall by 1.7% meaning the labour force has risen by around 1.4%. That is different to the population growth but we can infer what it has been doing from this.

Unemployment

With employment now falling the number below should not unduly surprise in terms of direction but the size of the move is noticeable.

The UK unemployment rate for December 2023 to February 2024 (4.2%) is above estimates a year ago (December 2022 to February 2023), and increased in the latest quarter.

As the release seems a little reticent it rose from 3.9% to 4.2%. Putting it another way unemployment rose by 85,000 to 1.44 million in the latest quarter.

Comment

Over the time I have been writing this blog there have been many disappointments in the standards of official statistics. Right now is another one as we see the Bank of England getting out its electron microscope to examine numbers which the official release describes like this.

Therefore, we advise increased caution when interpreting short-term changes in series and recommend using them as part of a suite of labour market indicators……

Have the methodological changes caused the recorded changes in employment rather than reality? It is a little awkward at a time when GDP is growing again although they have been out of phase before.Plus the hours worked figures are more consistent with the GDP ones.

In the latest period (December 2023 to February 2024), total actual weekly hours worked increased on the quarter, to 1.06 billion hours, and are above the level a year ago (December 2022 to February 2023). Both men’s and women’s hours worked increased on the quarter.

Up by 13.2 million in fact.

Also returning to the strategic position there is this I pointed out on the day of the last release ( March 12th).

In summary, if the WFJ estimate is used to provide the overall picture, there are likely to be around one million more jobs than at the start of the pandemic instead of an LFS-based picture of employment stagnating since mid-2021 and even now only just attaining prerecession levels.

As the series Soap used to regularly remind us.

Confused? You will be….

The UK unemployment rate is almost half that of France

Today has brought the latest UK labour market information and in general the news was good. We can start with employment which “increased in the latest quarter.” For some reason our official statisticians are not keen to say by how much but it was by 72.000 meaning it was some 107,000 higher than a year ago. More detail is below.

Full-time employees drove the increase during the latest quarter, largely recovering from a slump observed throughout 2023. Full-time self-employed workers also increased on the quarter. Meanwhile, numbers of part-time employees and part-time self-employed workers fell in the latest quarter.

We can bring that more up to date with the tax data which tells us this.

Payrolled employment increased by 48,000 employees (0.2%) in January 2024 when compared with December 2023; this should be treated as a provisional estimate and is likely to be revised when more data are received next month.

So a strong January and that comes on the back of a much stronger December than we previously thought.

UK payrolled employee growth for December 2023 compared with November 2023 has been revised from a decrease of 24,000 reported in the last bulletin to an increase of 31,000, because of the incorporation of additional real time information submissions into the statistics, which takes place every publication and reduces the need for imputation.

The January data is subject to revision but the numbers as they stand provide some hope for us avoiding recession at the end of 2023. For those who have not followed the saga the UK looked to be escaping recession until the weak retail sales numbers for December reopened concerns. If we look back a year we see growth too.

Early estimates for January 2024 indicate that there were 30.4 million payrolled employees , a rise of 1.4% compared with the same period of the previous year. This is a rise of 413,000 people over the 12-month period.

That is in the same direction as the quarterly numbers but they show growth a fair bit lower at 107,000. So the growth there was pretty much in the last quarter of the year.

Hours Worked

These again suggest a stronger end to 2023.

have increased slightly in the latest quarter, by 6.6 million hours to 1.04 billion hours in October to December 2023. Both men and women’s hours increased on the quarter.

Because for the year overall they were pretty much unchanged ( strictly 100,000 lower). Because of the issues with the official survey about which more later we do not have a pre pandemic comparison. But after looking like we would exceed the pre pandemic numbers we have not done so.

Unemployment

There was some better news here too.

The UK unemployment rate (3.8%) decreased in the latest quarter, returning to the rate a year ago (October to December 2022).

As well as the fall it was hard to avoid comparing it with the numbers from France today.

In the fourth quarter of 2023, the number of unemployed in France (excluding Mayotte) as defined by the International Labor Office (ILO) increases by 29,000 compared to the previous quarter, to 2.3 million people. The unemployment rate as defined by the ILO stands at 7.5% of the active population,

As people are asking me on social media how comparable the numbers are they are both under ILO rules.

More Detail for the UK unemployment numbers is below.

The quarterly decrease was driven by those unemployed for up to 12 months. However, those unemployed for up to 6 months remain above the estimates from a year ago (October to December 2022). Meanwhile, those unemployed for over 6 months have fallen in comparison with October to December 2022.

Wages

Having seen generally good quantity numbers we can move onto the quality ones.

Annual growth in regular earnings (excluding bonuses) was 6.2% in October to December 2023, and annual growth in employees’ average total earnings (including bonuses) was 5.8% in October to December 2023.

Again I think that these were welcome. In a sense we are looking for a Goldilocks situation where we want to see slowing but want them to show some real wage growth. Or at least I so as I am reminded of the words of Sarah Breeden of the Bank of England last week who after trousering  a large rise herself wants others to be austere.

If we go to the single month figure for December of 5.6% I think we see that. As it is quite a decline on the 9.3% peak for the series in June and it shows some real wage growth even against the RPI inflation measure which was 5.2%. The official reading of real wages growth is below.

Using CPI real earnings, in October to December 2023, total pay rose by 1.6% on the year. Growth was last higher in July to September 2021 when it was 3.0%. Regular pay rose by 1.9% on the year; growth was last higher in July to September 2021 when it was 2.2%.

If we now switch to the tax data as we then get more up to date numbers we are told this.

Early estimates for January 2024 indicate that median monthly pay was £2,334, an increase of 6.4% compared with the same period of the previous year.

The numbers for this series have tended to be higher than the official one but we have a similar pattern after the peak in June, which in this case was at 10%.

Returning to the official series there is more of a breakdown here.

The wholesaling, retailing, hotels and restaurants sector saw the largest annual regular growth rate at 7.2%; the manufacturing sector and finance and business services sector both followed at 6.9% and 6.7%, respectively.

Also we can see more reinforcement of the idea that wage growth is not the concern that the Bank of England claims that it is.

If we compare the latest three months with the three months that preceded them, and then annualise this growth rate, nominal regular average weekly earnings grew by 2.2%.

Comment

These are pretty good numbers for the UK as we have rising employment and real wages. In terms of a nuance wage growth is slowing and if you follow the trend looks set to follow inflation lower. The only sad point at this stage is that the Bank of England prefers to look through the rear view mirror rather than look ahead.

Things get more awkward when we look at the state of play at the Office for National Statistics.

We are also continuing to transition to the Transformed Labour Force Survey (TLFS). This is already in the field and we expect it to become the primary source for the labour market release in March 2024.

This was when we were originally told there were problems with the survey used which were mostly around falling response rates and thus likely higher inaccuracy. Whereas now we are told this.

We therefore plan on publishing indicative TLFS data in July, which will allow users to compare it with LFS responses over a six-month period, with the TLFS becoming our main source of information on the UK labour market from September

So either July or September are the new March. Looking at what has taken place so far September seems more likely meaning we will get around a year of indicative numbers. Whilst I welcome the honesty in admitting the problems here it is also true that it is a failure which contrasts strongly with the claims about our data from the likes of the National Statistician Sir Ian Diamond. If you had listened to him at the Royal Society last June as I did you would be thinking he was singing along with PM Dawn.

Reality used to be a friend of mine
Reality used to be a friend of mine
Please don’t ask me ’cause I don’t know why
But reality used to be a friend of mine

How many interest-rate cuts can we expect in 2024?

As we start our economic journey through 2024 we see so many strands coming from the United States. In a way it feels it too as Jerome Powell of the US Federal Reserve was interviewed on 60 Minutes on CBS last night. Before that took place we found out more about the state of play on Friday.

Total nonfarm payroll employment rose by 353,000 in January, and the unemployment rate remained
at 3.7 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in professional and
business services, health care, retail trade, and social assistance. Employment declined in the mining,
quarrying, and oil and gas extraction industry.

This reinforced the view that the US economy is strong as we see strong employment growth in January. We can look back and if we do the phase of interest-rate increases looks to have had little impact on job growth.

Total nonfarm payroll employment rose by 353,000 in January, similar to the gain of 333,000 in
December. Payroll employment increased by an average of 255,000 per month in 2023. ( US BLS)

Initially wage growth looked strong too.

In January, average hourly earnings for all employees on private nonfarm payrolls rose by 19 cents, or
0.6 percent, to $34.55. Over the past 12 months, average hourly earnings have increased by 4.5 percent.

But that was weakened in terms of take home pay by a decline in hours worked.

The average workweek for all employees on private nonfarm payrolls decreased by 0.2 hour to 34.1
hours in January and is down by 0.5 hour over the year.

So we have an economy that at this stage of the cycle with interest-rates in the range 5.25% to 5.5% looks very strong. Or as the Black-Eyed Peas put it.

Boom boom boom
Gotta get that boom boom boom

That is very different to what we had previously heard from the Conference Board which was predicting a recession for now. Also we can make an international comparison with this morning’s numbers from the Euro area.

The HCOB Eurozone Services PMI Business Activity Index fell to 48.4 in January, from 48.8 in December, signalling a sixth successive month of falling service sector output levels. While only mild, the latest decline was the quickest for three months.

There has been a difference between this series and the official numbers but at best the Euro area looks to be stagnating or flat-lining which is very different to the US situation. There is a nuance which is that the US labour market release has two surveys and there is quite a divergence at the moment as the household survey showed jobs falling by 31,000 in January.

Chair Powell Speaks

I have to confess that the idea of central bankers speaking to the nation makes me a little uncomfortable as their role is to be in the background. In itself explaining themselves is a good thing, but I am not sure that behaving like a politician improves things. Speaking of politics we were assured this.

POWELL: We do not consider politics in our decisions. We never do. And we never will. And I think the record — fortunately, the historical record really backs that up.

Actually the issue is looking forwards not backward as the concerns are about the election on its way. But he continued in the same vein.

Two reasons. One, we are a non-political organization that serves all Americans. It would be wrong for us to start taking politics into account.

After the corruption scandal on his watch with policymakers investing in stocks benefiting from policy some might think the statement below is priceless.

POWELL: You know, I would just say this. Integrity is priceless. And at the end, that’s all you have. And we in, we plan on keeping ours.

The Economy

This was covered here.

POWELL: Well, interesting, you know, we were being honest, and I was being honest in saying that we thought there would be pain. And we thought that the pain would likely come, as it has in so many past cycles, in the form of higher unemployment. That hasn’t happened.

I still have my concerns about the brick on a piece of elastic which may yet arrive ( has the number of fixed-rate mortgages slowed the reaction time?), but as we stand the picture is described below.

It really hasn’t happened. The economy has continued to grow strongly. Job creation has been high. Unemployment is still, you know, bouncing around near 50-year lows. The labor market is very, very strong still. So really the kind of pain that I was worried about and so many others were, we haven’t had that. And that’s a really good thing. And, you know, we want that to continue.

That captures the central banking obsession with the labour market which is curious in the sense that he was asked earlier if he looked at one metric and he said no. The problem to my mind is that it is an indicator which lags and sometimes by quite a bit. What if it is the household survey which is more timely? The single metric theme continues below and some of you may note the language.

So, the labor market’s still very healthy. We’re highly attentive to any evidence of the labor market weakening.

What I mean by that is that “highly attentive” is a Christine Lagarde phase giving yet another example of my theme that central bankers are pack animals who copy each other.

There were some curve-balls in the interview.

POWELL: So, it, I would say this. In the long run, the U.S. is on an unsustainable fiscal path. The U.S. federal government’s on an unsustainable fiscal path. And that just means that the debt is growing faster than the economy. So, it is unsustainable.

But he was allowed to get away with the fact that the enormous barrage of Fed QE bond purchases and consequent low bond yields helped finance this.

Also with a bank hitting trouble and even worse it being one that the Fed has encouraged to take over another one he got away with this too.

There will be certainly — there will be some banks that have to be closed or merged out of, out of existence because of this. That’ll be smaller banks, I suspect, for the most part. You know, these are losses. It’s a secular change in the use of downtown real estate. And the result will be losses for the owners and for the lenders, but it should be manageable.

Also it is not clear to me that immigration is an issue for central bankers which to my mind shows have they have moved into the political arena.

I will say, over time, though, the U.S. economy has benefited from immigration. And, frankly, just in the last, year a big part of the story of the labor market coming back into better balance is immigration returning to levels that were more typical of the pre-pandemic era.

Comment

The real issue is what will happen to interest-rates where we received two main hints.We can start with timing.

And I would say, and I did say yesterday, that I think it’s not likely that this committee will reach that level of confidence in time for the March meeting, which is in seven weeks.

Then add in how much?

PELLEY: So something around a 4.6% interest rate is likely?

POWELL: I would say it this way. It’s really going to depend on the data.

So a suggestion of three 0.25% interest-rate cuts this year.

That theme was already in markets and I am not sure how much of that was the interview leaking ( it was recorded on Thursday) and the labour market numbers? The US ten-year yield is now 4.09% for example.

To mu mind the real issue is that having dithered on the way up the Fed is now in danger of dithering on the way down. Interest-rates above 5% were in response to inflation in double-digits and it is now way below that. A better policy in my view would be to note the weak money supply figures and cut soon but keep interest-rates higher than they were. One of say 3/4% would be much higher than we have had through the Credit Crunch era.

Podcast

 

 

I have seldom seen such wide variation in forecasts for the US economy

In the end so many of the economic influences on us come from the United States. We can start with this view from its Treasury Secretary.

Treasury Secretary Janet Yellen said she’s increasingly confident that the US will be able to contain inflation without major damage to the job market, hailing data showing a steady slowdown in inflation and a fresh influx of job seekers.

“I am feeling very good about that prediction,” Yellen said Sunday when asked about her previous hopes that the US would avoid a recession while still reining in consumer-price gains. “I think you’d have to say we’re on a path that looks exactly like that.” ( Bloomberg)

In Europe we have a central banker who switched from politics whereas in the US Janet Yellen went the other way. But they both got inflation wrong.

Treasury Secretary Janet Yellen stuck with her assessment that elevated U.S. inflation will prove “transitory,” while acknowledging it will take longer for the pace of price gains to return to normal. ( Bloomberg October 2021)

Thus her claims of a soft landing need to be taken with the awareness of her awful forecasting record. Especially as what she got so wrong should be a specialist area for a former Chair of the US Federal Reserve.

Jobs Market

Janet Yellen expressed confidence in the jobs market which was based on this from Friday.

Total nonfarm payroll employment increased by 187,000 in August, less than the average monthly gain of 271,000 over the prior 12 months.

The numbers are good but as you can see they are slowing and we keep finding out that the past was not as good as we thought it was.

The change in total nonfarm payroll employment for June was revised down by 80,000, from +185,000
to +105,000, and the change for July was revised down by 30,000, from +187,000 to +157,000. With
these revisions, employment in June and July combined is 110,000 lower than previously reported. ( BLS)

In fact every month in 2023 so far (7) has then been revised lower.

It also looks as though the US has some real wage growth.

In August, average hourly earnings for all employees on private nonfarm payrolls rose by 8 cents,
or 0.2 percent, to $33.82. Over the past 12 months, average hourly earnings have increased by 4.3
percent……The average workweek for all employees on private nonfarm payrolls edged up by 0.1 hour to 34.4 hours in August.

Although as I am expecting a higher inflation reading for August due mostly to higher fuel ( gas as they call it) prices on a monthly basis ground was lost but on an annual basis there was a small amount of real wage growth.

The weaker number in the labo(u)r market series was this one.

The unemployment rate rose by 0.3 percentage point to 3.8 percent in August, and the number of unemployed persons increased by 514,000 to 6.4 million.

Those of you with longish memories will remember the days when we looked at the structural changes ( lower) in the US participation rate which flattered the unemployment rate. This time around we saw the reverse as it improved by 0.2% to 62.8%. So the net increase in unemployment is smaller than it looks. Those who look for a longer term perspective will note that somewhere along the way in the credit crunch some 4% of the population has gone missing.

Economic Growth

The leader of the pack here is clearly the Atlanta Federal Reserve.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2023 is 5.6 percent on September 8, unchanged from September 6 after rounding.

Can economic growth in the third quarter really be 1.4% as we would put it? It’s own “Blue Chip Consensus” is less than half that. If we switch to the S&P PMI business survey we were told this.

Higher levels of business activity were seen in just three out
of seven US sectors during August. This was down from five
in July and the lowest number since February. Moreover, all sectors except Consumer Services experienced a loss of
momentum since the previous month.

Financials took quite a hammering which is concerning if we note they are likely to be a leading indicator.

Finally, the Financials category experienced a sharp and
accelerated fall in business activity during August. The speed of the downturn was the steepest recorded since February.

Are mortgage rates beginning to have an impact as the elastic provided by the long-term nature of much if this market slowly starts to wear off?

Oh and we seem to be back to an economy driven by the Beyonce and Taylor Swift tours.

hospitality and entertainment

But as you can see S&P are reporting  a very different picture to that from the Atlanta Fed.

“The PMI numbers for the third quarter so far point to a
faltering of economic growth after a robust second quarter,
as a renewed manufacturing downturn is accompanied by a deteriorating picture in the service sector.”

House Prices and Mortgage Market

I spotted this from @JoeyTickles on Twitter (X)

4 of my co workers (all making <$65k/yr) have been buying a house every year since 2019 using a HELOC in their primary residence for down payment cash. They told me there is no risk to doing this and there is a max of 10 mortgages they intend to fill.

We then find out where these are with a soupcon of something awfully familiar from the pre credit crunch period.

Central Florida – and yeah they claim it’s a primary residence, move into the new one for about a year as they prep it, buy the next and cycle. I overheard someone saying they didn’t really live in one but that no one verified. Kind of like how no one verified PPP loans lol

So far so good.

They didn’t have any renters who stopped paying during the moratorium- I asked a few , because I was trying to see why it might be stupid to leverage so hard but so far I’m the fool because I don’t have 5 homes lol.

If these people have long-term fixed-rate mortgages then one risk is hedged. But should the economy slow and renters struggle to pay their rent then this is a pack of cards waiting to collapse.

As today seems to be one for contrary views here is the Wall Street Journal.

Home prices aren’t falling anymore. After declining on a year-over-year basis for five consecutive months—the longest run of declines in 11 years—U.S. home prices rose in July The surprisingly quick recovery suggests that the residential real-estate downturn is turning out to be shorter and shallower than many housing economists expected after mortgage rates soared last year.

The problem for the WSJ is that it does not seem to realise that low volumes are a warning sign.

Scarcity is a big reason. High interest rates have prompted homeowners to stay put rather than buy new homes and take on more expensive mortgages, resulting in an unusually low inventory of homes for sale.

Comment

We are used to facing an element of uncertainty but this phase for the US economy has taken it to an extreme. I think the US Federal Reserve is starting to realise that too if their mouthpiece is any guide.

Fed officials are turning more cautious about raising rates too high now that inflation is finally showing signs of the rapid declines that they’d long anticipated A rate pause in September will give the Fed more time to see if recent progress continues ( Nick Timiraos)

The Jackson Hole claims of “higher for longer” may soon come under even more pressure. The situation here is that if we look at the mortgage tweets above things will go wrong pretty quickly in that scenario. On the other side of the coin higher oil prices will push inflation towards 4% over the next couple of months but this time around we are facing an inflationary ruse with interest-rates above 5%.

Podcast

https://soundcloud.com/shaun-richards-53550081/notayesmanspodcast241?si=63c848fdbfb246588dbd75987b4fafcb&utm_source=clipboard&utm_medium=text&utm_campaign=social_sharing

The fall in UK Real Wages shows how the cost of living crisis is biting hard

Much of the debate over the present economic situation comes down to wages growth. The waters were muddied earlier this year by Bank of England Governor Andrew Bailey when he told us this. 

The governor of the Bank of England has come under fire from unions and earned a rebuke from 10 Downing Street for suggesting workers should not ask for big pay rises to help control inflation.

Andrew Bailey said he wanted to see “quite clear restraint” in the annual wage-bargaining process between staff and their employers to help prevent an upward spiral taking hold. ( The Guardian February 4th)

At the time he came under fire partly because of this.

Bailey was paid £575,538, including pension, in his first year as the Bank’s governor from March 2020, more than 18 times the UK average for a full-time employee. ( The Guardian)

As we look back I note in his press conference the day before he told us this.

Turning to inflation, UK consumer price inflation rose to 5.4% in December, well above its 2% target
and almost 1 percentage point higher than expected at the time of the November Monetary Policy
Report.

So things were already going very wrong and in response he unveiled a tiny peashooter.

Today we have increased Bank Rate by 25 basis points to
0.5%

Not really deserving of £578,000 a year was it? They gambled on “Transitory” inflation and now we are all paying the price. Looking at this morning’s release we have a World Cup football story of two halves.

Wage Growth.

Fortunately the words of the Governor have been mostly ignored.

Growth in average total pay (including bonuses) and regular pay (excluding bonuses) among employees was the same at 6.1% in August to October 2022; for regular pay this is the strongest growth rate seen outside of the coronavirus (COVID-19) pandemic period.

Indeed we have another story of two halves although not my main one.

Average regular pay growth for the private sector was 6.9% in August to October 2022, and 2.7% for the public sector; outside of the height of the pandemic period, this is the largest growth rate seen for the private sector and is among the largest differences between the private sector and public sector growth rates we have seen.

Please ignore the part which refers to the pandemic period as my rationale for reporting the figures to the Office for Statistics Responsibility remains valid. Indeed part of it was to avoid the numbers being distorted.

In fact the private-sector pay growth seems remarkably level.

The finance and business services sector saw the largest regular growth rate at 7.0%, followed by the wholesaling, retailing, hotels and restaurants sector at 6.6%.

Indeed this has been true on a monthly basis where we have gone. 6.6%, 6.7%.7%. and in October 6.7%. 

The other side of the coin is being seen by the public-sector where the pay restraint has limited growth to 2.7%. No doubt that is a factor in this.

There were 417,000 working days lost because of labour disputes in October 2022, which is the highest since November 2011.

There was a flicker of light in the October figures though as for the single month wage growth rose to 3.8% for the public sector.

Also we have some estimates for November based on the tax ( HMRC) data and these look hopeful.

Early estimates for November 2022 indicate that median monthly pay was £2,181, an increase of 8.0% compared with the same period of the previous year.

I would suggest using such numbers as a general guide rather than a literal suggestion of what is to come. 

Real Wages

Now we move to a second half which is a lot tougher and even the official estimate is forced to admit it.

In August to October 2022, growth in total and regular pay both fell in real terms (adjusted for inflation) by 2.7% on the year; this is slightly smaller than the record fall in real regular pay we saw in April to June 2022 (3.0%) but still remains among the largest falls in growth since comparable records began in 2001.

The problem here is the inflation measure used.

As of 21 March 2017, the Consumer Prices Index including owner occupiers’ housing costs (CPIH) became our lead measure of inflation. It is our most comprehensive measure of UK consumer price inflation.

You may note it does not say accurate or even best because it is neither. Actually due to the problems with measuring rental inflation ( which makes up around a quarter of it) the comprehensive part is not true either.The real reason for using it is shown below.

The all items CPIH annual rate is 9.6%, up from 8.8% in September.

The all items CPI annual rate is 11.1%, up from 10.1% in September.

The all items RPI annual rate is 14.2%, up from 12.6% last month.

The reason is that it gives the lowest answer for inflation and thus the higher answer for real wage growth. It is even 1.5% below the measure ( CPI) that ignores owner-occupied housing costs which is both breathtaking and convenient for the body which has driven this ( HM Treasury). If there was anyone with real moral fibre at the Bank of England they would have been pointing this out but they turn a blind eye to it

Thus even switching to the measure targeted by the Bank of England towards 4% and noting the RPI I continue with my view that real wage falls are much more likely to be in the range 4% to 5% for 2022 than anything we are officially told.

Employment and Unemployment

This is a confusing picture which starts well.

The most timely estimate of payrolled employees for November 2022 shows another monthly increase, up 107,000 on the revised October 2022 figures, to a record 29.9 million.

But that ignores the self-employed and the picture there is of improvement but with a kicker.

The UK employment rate for August to October 2022 increased by 0.2 percentage points on the quarter to 75.6% but is still below pre-coronavirus (COVID-19) pandemic levels.

We have not regained the previous level and a major factor in this has been a decline in self-employment partly due to rule changes which have flattered the payroll numbers above.

Over the latest three-month period, the number of employees increased, while self-employed workers decreased.

That statement has been a post pandemic trend.

Next up is something that can be good or bad.

The economic inactivity rate decreased by 0.2 percentage points on the quarter to 21.5% in August to October 2022

The good bit is that we were worried about issues like Long Covid raising the numbers and thus the fall is welcome. Any bad tinge comes from the idea of people feeling forced back into work, due to hard times.

The decrease in economic inactivity during the latest three-month period was driven by those aged 50 to 64 years. Looking at economic inactivity by reason, the quarterly decrease was driven by those inactive because they are retired.

I am not sure what the unemployment figures tell us these days but do not welcome rises.

The unemployment rate for August to October 2022 increased by 0.1 percentage points on the quarter to 3.7%. 

More reliable is the hours worked figures. I remember thinking this time last year might bring us right back to pre pandemic levels but instead we stalled.

Total actual weekly hours worked dropped to 1.037 billion in August to October 2022, down 4.3 million on the previous 3 months. This is 15.4 million below pre #COVID19 pandemic levels.

Comment

The wages situation has played out as we both expected and feared. Inflation has considerably exceeded wage growth meaning this is the major factor in the cost of living crisis we are seeing. In relative terms we are seeing better wage growth than the Euro area but the picture is still grim meaning that feels literally like cold comfort. There is an additional factor likely to be making things worse and that is the fact that the self-employed are excluded from the official series. With their numbers shrinking it is reasonable to think that their real incomes picture would weaken the official data.

Returning to the issue of the Bank of England we see how badly 2022 has gone for it. Even if we cut it some slack on part of the energy costs rise an inflation target being exceeded by more than five times does not go with an interest-rate of 3% nor the 3,5% likely on Thursday. Also if people had taken the Governor’s advice on wages the cost of living crisis would be even worse. To be fair he did forgo a pay rise himself but there remains the issue of this that on a generic basis cannot be performance related.

The Bank of England, which has been criticised for underestimating the threat of rising inflation, last year paid out bonuses to its staff amounting to more than £23m, the Observer can reveal.

 

Australia is pivoting on interest-rates because of fears about house prices

This week is one that will be dominated by rises in interest-rates as domestically we await the Bank of England but also the whole world waits for the US Federal Reserve tomorrow. This morning we awoke to news from a land down under where according to Midnight Oil beds are burning.

At its meeting today, the Board decided to increase the cash rate target by 25 basis points to 2.85 per cent. It also increased the interest rate on Exchange Settlement balances by 25 basis points to 2.75 per cent.

That was from Phillip Lowe who is the Governor of the Reserve Bank of Australia. There are 3 immediate issues here. Firstly that the increase was only 0.25% when we have got used to a “new normal” of 0.75%. Secondly that there is a complete mismatch between the interest-rate and inflation as he kindly confirms below.

As is the case in most countries, inflation in Australia is too high. Over the year to September, the CPI inflation rate was 7.3 per cent, the highest it has been in more than three decades.

So they have slowed the rate of increase in spite of the fact that the rate of inflation is over 2 and half times higher than the interest-rate. As we also need to look forwards as interest-rates operate with a lag we in fact see that things are even worse.

A further increase in inflation is expected over the months ahead, with inflation now forecast to peak at around 8 per cent later this year.

There is an attempt to explain things with this.

Inflation is then expected to decline next year due to the ongoing resolution of global supply-side problems, recent declines in some commodity prices and slower growth in demand. Medium-term inflation expectations remain well anchored, and it is important that this remains the case. The Bank’s central forecast is for CPI inflation to be around 4¾ per cent over 2023 and a little above 3 per cent over 2024.

So they are suggesting that inflation will be lower next year and thus they do not need to increase interest-rates by much more.  Let us look back to last year to see how good they are at looking ahead as here is the statement from the 2nd of November 2021.

The central forecast is for underlying inflation of around 2¼ per cent over 2021 and 2022 and 2½ per cent over 2023.

As you can see they were completely wrong about this year by a factor approaching four and as we stand now think inflation next year would be double what they thought then. In fact they were so sure of this they kept interest-rates at record lows.

The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range….. The Board is prepared to be patient, with the central forecast being for underlying inflation to be no higher than 2½ per cent at the end of 2023 and for only a gradual increase in wages growth.

It was a clear policy error and one of the biggest of our times but for our purposes today we can see that their claimed rationale for reducing the pace of interest-rate rises is based on wishful thinking. More specifically based on economic models which could not have been much more wrong.

The third issue is how do you end up with an interest-rate of 2.85%?

Contradiction Time

The economy is awkward for them as we note an indicator that we have been guided to in the past.

The labour market remains very tight, with many firms having difficulty hiring workers. The unemployment rate was steady at 3.5 per cent in September, around the lowest rate in almost 50 years. Job vacancies and job ads are both at very high levels….

So we are around the lowest unemployment rate for 50 years and the growth pattern is much better than elsewhere.

The Bank’s central forecast for GDP growth has been revised down a little, with growth of around 3 per cent expected this year and 1½ per cent in 2023 and 2024.

Commodity prices have fallen in some areas but Australia must be benefiting from the LNG and coal boom.

Over the past year, the index has increased by 22.4 per cent in SDR terms, led by higher LNG, coking coal and thermal coal prices. The index has increased by 28.9 per cent in Australian dollar terms. ( RBA)

After he enjoyed his dinner in Hobart Governor Lowe confirmed this.

Our economy has bounced back better than most from the COVID-19 disruptions and we are benefiting from a surge in the prices of our key exports.

There is an obvious problem here as apparently Australia needs to increase interest-rates by less because it is doing better!

House Prices

If we now switch to what usually determines RBA policy we see that they were on their minds. From the official statement.

Another is how household spending in Australia responds to the tighter financial conditions. The Board recognises that monetary policy operates with a lag and that the full effect of the increase in interest rates is yet to be felt in mortgage payments. Higher interest rates and higher inflation are putting pressure on the budgets of many households. Consumer confidence has also fallen and housing prices have been declining following the earlier large increases.

So they are worried about the rise in mortgage interest-rates and hence mortgage costs and the implication for house prices. Perhaps suitably refreshed Governor Lowe went further at the dinner.

I understand that the higher interest rates that are needed to bring inflation under control are unwelcome by many people, especially those who have borrowed large amounts over recent times.

Who was that person who encouraged Australians to borrow so much? Here is Governor Lowe from a year ago.

Financial conditions in Australia remain highly accommodative, with most lending rates at record lows.

Comment

The basic point is that one of the stronger world economies is in the midst of what has become called the “pivot” on interest-rates. Indeed if we note these bits from the dinner speech there may be more to come.

This morning, we also discussed the consequences of not raising interest rates,

And….

Similarly, if the situation requires us to hold steady for a while, we will do that.

Our intrepid inflation fighters seem to be getting cold feet. If you follow my work you will know that my theme is that so much of central banking policy is driven by house prices. Looking at the figures below confirms that as we see how enormous rises were ignored but what are still small falls are getting an instant policy change.

House prices across the nation have continued to fall despite the spring selling season getting underway.

Prices have fallen by 0.06 per cent nationally, with a 0.11 per cent drop in Australia‘s capital cities according to PropTrack’s Home Price Index, the smallest fall since the March peak.

Hobart and Canberra led the declines with 0.46 per cent and 0.37 per cent dips respectively, followed by Sydney at 0.21 per cent.

But the dip isn’t a reason to panic according to property experts, with prices still up 30.2 per cent when compared with pre-pandemic levels. ( news.com.au )

 

 

 

 

The UK Labour Market is a place where you can get a job but your real wages are falling

The UK economic statistics season continues as we move onto the labour market and we can start with some good news.

Over the latest three-month period, the unemployment rate decreased to the lowest rate since May to July 1974.

So a welcome move and the numbers are below.

The UK unemployment rate was estimated at 3.6%, 0.2 percentage points lower than the previous three-month period, and 0.4 percentage points below pre-coronavirus pandemic levels.

The driver was that short-term unemployment fell which does tally with the past numbers on vacancies.

In the latest three-month period, the number of people unemployed for up to 6 months decreased to a record low, and those unemployed for between 6 and 12 months increased (Figure 5). Meanwhile, the number of people unemployed for over 12 months continued to decrease.

We can continue in positive fashion with this.

The most timely estimate of payrolled employees for August 2022 shows a monthly increase, up 71,000 on the revised July 2022 figures, to a record 29.7 million.

So we have moved forwards a month to August and there was continued growth in this area. Returning to July there was progress in this area.

The total number of Workforce Jobs in the UK in June 2022 rose by 290,000 on the quarter to a record 35.8 million, and for the first time exceeds the pre-coronavirus level of December 2019.

Although the introduction of new phrases like “Workforce Jobs” puts me on alert.

Next up is wage growth which improved this time around.

Growth in average total pay (including bonuses) was 5.5% and growth in regular pay (excluding bonuses) was 5.2% among employees in May to July 2022.

More Problematic

Regular readers will be aware that whilst I welcome the falls in unemployment rates and unemployment there are two nuances. Firstly they have fallen in amounts not reflected in other economic statistics. Also I recall Yes Minister telling us that nobody believes the unemployment figures and that was in the 1980s. This time around there is an issue in the detail.

The UK economic inactivity rate was estimated at 21.7%, 0.4 percentage points higher than the previous three-month period, and 1.5 percentage points higher than before the coronavirus pandemic.

This matters on its own but also flatters the unemployment numbers and if we look at the cause we do see a reason for concern.

Looking at economic inactivity by reason, the increase during the latest three-month period was driven by those inactive because they are students or long-term sick.

The student season so to speak is normal for the time of year but “long-term sick” poses a question? If we look back to the pandemic we had 2.11 million in this category whereas now we have 2.39 million. So there has been a change and this element of the fall in unemployment is not welcome. I think whilst Long Covid will be in play the struggles of the NHS will mean other problems are too.

Employment

There are nuances here too as a record number of workforce jobs is combined with this.

The UK employment rate was estimated at 75.4%, 0.2 percentage points lower than the previous three-month period and 1.1 percentage points lower than before the coronavirus pandemic (December 2019 to February 2020).

The employment situation has improved in the latest numbers ( up 40,000) and is up 337,000 over the past year. But it is also true we are some 327,000 below the previous peak. Whereas we see that workforce jobs have a new peak and it is complete in that it does include the self-employed and the military as well as government supported trainees. So we seem to have more people working more than one job.

Next up is a measure we have been following which is hours worked. These seem to have plateaued below the previous peak.

Compared with the previous three-month period, total actual weekly hours worked decreased by 3.5 million hours to 1.04 billion hours in May to July 2022. This is still 11.1 million hours below pre-coronavirus pandemic levels (December 2019 to February 2020).

If you are an optimist you can see that we look to have improving productivity and a pessimist the fact that for nearly a year now we have looked like regaining the previous peak but not done so. With prospects as they are it does not look likely we will do so this year.

Real Wages

This is the true problem area and has been so since the credit crunch. This phase of high inflation has exacerbated what is by now a long-running issue. Due to the problems created by the pandemic the numbers were distorted heavily which only served to muddy what are troubled waters. Even the official series cannot avoid showing a problem.

Growth in total and regular pay fell in real terms (adjusted for inflation) on the year in May to July 2022, at 2.6% for total pay and 2.8% for regular pay; this is slightly smaller than the record fall we saw last month (3.0%), but still remains among the largest falls in growth since comparable records began in 2001.

This series is handicapped by the use of an inflation measure that is imputed rent driven and thus fails to capture the reality of inflation right now. Let me illustrate by looking specifically at July where single month wage growth was 5.7% and giving you real wage growth with different inflation measures.

CPIH -3.1%

CPI -4.4%

RPI -6.6%

As you can see the new favourite measure of the establishment gives a lower reading for inflation and thus a lower reading for the fall in real wages. It is funny isn’t it how “improvements” lead to more favourable inflation and real wages numbers?! I see nothing to change my view that real wages are falling by around 5% per annum and this matters on two counts. First workers are seeing substantial real declines in their pay. But also that the official numbers which are copy and pasted by the media are misleading as to the true position.

Comment

As I have explained earlier we have some numbers with strength but others which are more troubled such as the rise in long-term sickness. Beneath that is the underlying drumbeat for 2022 which is the sustained decline in real wages or if you prefer the labour market version of the cost of living crisis.The latter has sub-plots depending what sector you work in.

Average regular pay growth for the private sector was 6.0% in May to July 2022, and 2.0% for the public sector; outside of the height of the pandemic period, this is the largest difference we have seen between the private sector and public sector.

So a more severe squeeze is being applied to public-sector pay so far at least.

Meanwhile it would appear that according to Sarah O’Connor in the Financial Times work is maybe not enough for some bosses who are trying to redefine it.

This year, a popular video on TikTok about “quiet quitting” has sent employee motivation experts into overdrive. According to Gallup, about half of Americans are “quiet quitters”, which it defines as people who are “not going above and beyond at work and just meeting their job description”. HR specialists and consultants have been quick to jump in with advice on how to fix the problem.

Just meeting their job description…..

 

What do the UK Labour Market statistics tell us these days?

This morning has brought the UK labour market statistics and they are a bit of a tale of the good ( payroll employment), the bad ( self-employment) and the ugly ( real wages). But I thought it was time again to step back and look at what they are really telling us? Because the Covid pandemic has added to the problems that the credit crunch created for some of these measures.

Unemployment Rate

Let us start with today’s numbers which are in themselves good news.

The unemployment rate for December 2021 to February 2022 decreased by 0.2 percentage points on the quarter to 3.8%. Those unemployed for up to 12 months decreased during the latest period to a record low. Meanwhile, those unemployed for over 12 months continued to decrease from the peak in July to September 2021.

So we are now at the levels of the peak ( or nadir in unemployment terms) before the pandemic as this from the Bank of England in January 2020 shows.

The unemployment rate remained at 3.8% in the three months to November (Chart 2.1). Bank staff’s estimate of the claimant count rate^[2] — a timelier indicator of unemployment — fell to a record low of 0.7% in December.

There are several issues here but let us start with the Bank of England view which would be very bullish on the record low in shorter-term unemployment.

Certain types of unemployment tend to lead the total. The rate of short-term unemployment leads overall unemployment by around six months as it contains newly unemployed people.

So according to them the overall unemployment rate is about to fall further. An interesting conclusion as we enter an area of stagflation! But there is more if we note that the unemployment numbers are not what some might think as they are not divided by the population they are divided by the labour force which excludes this.

Since comparable records began in 1971, the economic inactivity rate has generally been falling; however, it increased during the coronavirus (COVID-19) pandemic.

At first it was younger people presumably choosing to study if they could but more latterly it seems as though it is early retirement that has taken place.

During the coronavirus pandemic, increases in economic inactivity compared with the previous three-month period were largely driven by those aged 16 to 24 years. However, the number of economically inactive people aged 16 to 24 years has been decreasing since early 2021, with those aged 50 to 64 years driving the recent increases in economic inactivity

There is a direct impact from Covid too because over the pandemic period the number registering as sick has risen by 200,000. The overall effect has been a rise in inactivity from 20.5% when the Bank of England was looking at unemployment in 2019 to 21.2% now. So if we were a hurdler then the barrier is an inch or two lower.

I think we get confirmation of this from the hours worked figures which have improved but have yet to get back to pre pandemic levels.

Compared with the previous three-month period, total actual weekly hours worked increased by 18.8 million hours to 1.04 billion hours in December 2021 to February 2022 (Figure 5). However, this is still 14.6 million below pre-coronavirus pandemic levels (December 2019 to February 2020).

The Full Employment Problem

Let me highlight this issue with a letter from Bank of England Governor Mark Carney in April 2017.

On each of the first three annual stocktakes, the Committee decided to retain its central forecasting assumption of a long-run equilibrium unemployment rate of around 5%.

Oh hang on they changed their mind.

the Committee concluded in the February 2017 annual supply stocktake that the long-run equilibrium rate of unemployment was likely to be somewhat lower than
previously assumed.

There is quite a lot more in that official letter which mostly obfuscates around an issue that the Bank of England set initially an unemployment rate of 7% as significant and then ignored it. We watched it decide that it really meant 6.5% and then ran around with all sorts of definitions of equilibrium at 5.5%, 5% ,4,5% and 4.25%.

They have tried to cover it up with all sorts of swerves as they switch between full employment, the natural rate of unemployment and the equilibrium rate of unemployment but we are left singing along with The 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

Wages

We return to the issue of what do the numbers tell us? Or if you prefer how well do they reflect reality? Here is the official view.

Growth in average total pay (including bonuses) was 5.4% and growth in regular pay (excluding bonuses) was 4.0% in December 2021 to February 2022.

In itself the pick-up is welcome as February saw a rise in wage growth to 5.4% and if we exclude December due to year-end bonuses we see a rally. But even the woeful headline measure of inflation called CPIH that the ONS increasingly desperately plugs is picking up a problem.

In real terms (adjusted for inflation), growth in total pay was 0.4% and regular pay fell on the year at negative 1.0%; strong bonus payments over the past six months have kept recent real total pay growth positive.

If we switch to the RPI inflation measure we see a different picture as for example it showed a 2.8% fall in real wages in February as opposed to the 0.1% fall picked up by CPIH.

But there is much more to the problem that the way that CPIH misrepresents inflation via the use of Imputed Rents. I raised the issue with the Office of Statistics Regulation in February last year.

So after more than a decade of weak real wage growth that has been so poor we have failed to recover the previous high from 2008 we see that according to these figures all we needed was an economic depression. If we project that forwards then if 2021 is as bad as 2020 then we will see extraordinary real wage growth! Checking back through the series we do not seem to have had annual wage growth as fast as we have now since April 2001.

Yes the pandemic created the fastest real wage growth for decades! At least according to the official figures which was a complete nonsense. If we translate the language we see they agreed.

 However, having looked at the explanations for change in the statistics a simpler clearer explanation might have minimised the risk of misinterpreting the movements.

But the series is now misleading ( real wages were flattered by this) and the issue continued. From today’s release.

Previous months’ strong growth rates were affected upwards by base and compositional effects. These initial temporary factors have worked their way out.

Really? The series has been so badly distorted it should have been suspended ( I asked for this in my correspondence with the OSR) but it has continued and as you can see even they admit further distorted. If you have not leaned by now what the word “temporary” means in official language then you may never do so.

Up is the new down would be my summary.

Comment

As you can see the whole basis for calculating an unemployment rate has changed so that historical comparisons are misleading. Part of this is that life has changed and the definitions have been left behind.

The situation with wages is even worse as the numbers always were flawed  Let me explain with reference to a new appointment.

We are delighted to appoint Professor Martin Weale as the inaugural Chair for this new committee……….The advice NSCASE provides to the National Statistician will span the full range of domains in economic statistics, including the National Accounts, fiscal statistics, prices, trade and the balance of payments and labour market statistics.

One of the first things he should be looking into is this from back in the day.

The Office for National Statistics said on Wednesday that it would accept the recommendations of a technical peer review of its earnings data undertaken by Martin Weale, director of the National Institute of Economic and Social Research.

The review recommends that the ONS replace the Average Earnings Index (AEI) with Average Weekly Earnings (AWE) once the latter has been given an official seal of approval as a “National Statistic”.

Does anybody actually believe UK wages growth is 4.5%?

This morning has brought us the latest data on the UK labour market. One of the lessons of the Covid-19 pandemic is that the metrics used have creaked and groaned under the strain. An example of this is the unemployment rate which posted some welcome news.

The UK unemployment rate was estimated at 4.9%, 0.9 percentage points higher than a year earlier but 0.1 percentage points lower than the previous quarter.

That number has two positive elements as it has a quarterly fall as well as being at 4.9% much lower than we would have expected due to all the economic disruption. But the rub as Shakespeare would put it comes from the furlough scheme.

These experimental weekly Labour Force Survey ( LFS) estimates estimates show that before the first lockdown the estimated proportion of people temporarily away from work (that is, the total number of people temporarily away from work divided by the total number of people in employment) was approximately 7.5%…………It remained elevated and averaged around 15% in the first two months of 2021.

That is another way of looking at the impact of the furlough scheme and looking ahead someone needs to rethink this.

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.

Hours Worked

This has become by far the most useful metric of what is actually happening.

In December 2020 to February 2021, total actual weekly hours worked in the UK was 959.9 million hours (Figure 2). This was a decrease of 20.1 million, or 2.1%, from the previous quarter, coinciding with the introduction of further coronavirus (COVID-19) lockdown measures which has stalled the recent recovery in total hours……..Average actual weekly hours worked saw a decrease of 0.6 hours on the quarter to 29.6 hours.

We see that the latest lockdown has pushed us lower again and affected women more than men, presumably because more of them work in hospitality and the like.

Total hours worked for men saw a decrease of 9.6 million, or 1.7%, to 562.5 million hours, and total hours worked for women saw a decrease of 10.5 million, or 2.6%, to 397.3 million hours.

The overall picture is shown by this.

The total number of weekly hours worked was 959.9 million, down 92.3 million hours on the same period the previous year

This means that we have seen a fall of the order of 8.8% which means this has been an economic depression and I am a little surprised that more places are nit reporting it as such. Also if you look at the chart below over the longer term there are two previous messages. We see that hours worked had a strong recovery post credit crunch but before the pandemic we seemed to be hitting a peak which poses a question for the future.

Average Earnings

I am afraid that these belong in the fiction section of your local bookstore.

The rate of annual pay growth was positive 4.5% for total pay and positive 4.4% for regular pay in December 2020 to February 2021.

For newer readers I made a formal complaint to the UK statistics authorities about this issue and had some success.

Response from Ed Humpherson to Shaun Richards: ONS Average earnings figures

So we now get this explanation.

Average pay growth rates have been affected upwards by a fall in the number and proportion of lower-paid jobs compared with before the coronavirus (COVID-19) pandemic. Therefore, it is estimated the net impact of recent job losses is to increase the estimate of average pay by approximately 1.9% – suggesting an underlying wage growth of around 2.5% for total and regular pay.

So I have got them to clearly point out that at least 2% of this is misleading. Personally I think that they are so misleading that they should be either suspended or have their national statistics status removed. In simple terms a lot of lower paid workers have lost their jobs so the new average is higher and that could happen without anyone receiving a pay rise.

In fact there is a another potential shambles on its way because once the economy is recovering and the lower paid workers return we may well see this.

It is possible that headline average wage growth estimates will be negative in coming months. However, those negative estimates would reflect composition and base effects depressing the average wage, rather than wage cuts for workers.

That is from a White House briefing showing that the US has had the same issues. They spell it out here.

Most workers did not receive historic raises in April of 2020, even though that is what average wages suggest.

So the numbers record rises in a collapse and seem likely to show falls in the recovery. I am not sure how much more misleading they could be! But the show must go on.

Sadly even a brief look at social media shows these numbers being sent out as facts.

If we switch to the Bank of England Agents we get a very different picture.

Pay growth remained subdued. Sectors that have been most affected by the pandemic expected to freeze pay again this year and a few contacts planned to defer pay decisions until there is more clarity over the economic outlook.

Of course some people will have done well through the pandemic and I have met a couple of examples recently in a web developer and online fitness classes. These are examples of this from the Agents.

 However, some businesses expected to raise pay this year, either because they froze pay last year, their business is doing well or they are concerned about retaining skilled staff.

But the overall picture is nowhere near even the lower growth figures presented by our official statisticians, in my opinion.

March

The UK quarterly figures are always lagged so let me give our statisticians credit for trying to bring the numbers more up to date.

Early estimates for March 2021 indicate that there were 28.2 million payrolled employees (Figure 1), a fall of 2.8% compared with the same period of the previous year and a decline of 813,000 people over the 12-month period. Compared with the previous month, the number of payrolled employees decreased by 0.2% in March 2021 – equivalent to 56,000 people.

As you can see things got a little worse, but the outlook has turned more positive in April.

According to Adzuna, on 9 April 2021, total online job adverts reached 100% of their February 2020 average level, a 3 percentage point increase from 1 April 2021. This is the highest proportion of online job adverts observed since 6 March 2020, before the first national lockdown was imposed across the UK.

Comment

The Covid-19 pandemic has not only given our economy a shock it has also given the measures we use for it a shock too. Regular readers will be aware that the self-employed and indeed those in businesses with less then ten employees are omitted from the numbers. That ongoing issue will impact now but has been dwarfed by the lack of any measure to find out any sort of typical experience. As it is we are told that lower paid workers losing their jobs has led to a surge in pay when it means nothing of the sort. If we throw in the issues with inflation measurement highlighted by the omission of owner occupied housing it is hard to know where to start with the numbers below. I will simply point out that official statistics are supposed not to mislead.

In real terms, total pay is now growing at a faster rate than inflation, at positive 3.7%, and regular pay growth in real terms is also positive, at 3.6%.

Even their response to me still leaves us with a number lacking credibility.

suggesting an underlying wage growth of around 2% for real total and real regular pay.

They should be worried that the most reliable reverse indicator we have agrees with them.

The Office for Budget Responsibility’s economic and fiscal outlook published in March 2021 reported that earnings growth is likely to increase in 2021 and in 2022

Even the hours worked figures which have given us some sort of realistic steer are noy as accurate as we might have thought.

Imputation used for the Labour Force Survey was not designed to deal with the changes experienced in the labour market in recent months.

How much?

However, now that total hours have declined again, the experimental methodology is once again suggesting we are understating the reduction in hours, by approximately 2%.

So the decline may have been even worse than we thought as we cross our fingers for a speedy recovery.