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…..

 

 

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The claims that higher inflation is good for us are not backed by reality

Some issues just keep returning like a boomerang and the idea that higher inflation is good for us is something that makes me think of these lines from Hotel California by The Eagles.

They stab it with their steely knives,
But they just can’t kill the beast.

This is an issue that the Ivory Towers return to again and again in spite of the fact that the evidence is the other way. Let me show you what has triggered the revival of this particular beast. From Eurostat yesterday.

Euro area annual inflation is expected to be 1.2% in May 2019, down from 1.7% in April according to a flash
estimate from Eurostat, the statistical office of the European Union.
Looking at the main components of euro area inflation, energy is expected to have the highest annual rate in May
(3.8%, compared with 5.3% in April), followed by food, alcohol & tobacco (1.6%, compared with 1.5% in April),
services (1.1%, compared with 1.9% in April) and non-energy industrial goods (0.3%, compared with 0.2% in April).

I have give you the full breakdown because as you note that inflation such as it is finds itself driven by energy and food prices. So the core measures so beloved of central bankers will be even lower than the headline. You can take your pick from the choices but if you exclude energy core inflation falls to 1% and the food category ( along with alcohol and tobacco) it falls even more to 0.8%.

The Perception

This is perceived to be a failure as inflation nutters look back to a headline inflation level of 2% last May. In terms of the ECB ( European Central Bank) target last May was bang on although if one indulges in some numerical pedantry we know that former President Jean-Claude Trichet defined the target as being 1.97%.

So we have fallen below it and the picture on the core measures is lower than that. Hence the argument that something needs to be done. This is added to by inflation expectations and here people like to concentrate on the 5year, 5year swap which this morning has fallen to 1.26% according to Bloomberg as opposed to the 1.8% that 2018 opened with. So if you believe it we will see lower inflation for the next five years.

Before I move on I would just like to be clear that I have little or no faith in that swaps contract as being reliable. Just like in other forwards markets it tells you what we know and think now which is not a reliable indicator of the future. Putting it another way Frederik Ducrozet has broken it down.

His breakdown, which is based on models used in a 2017 ECB working paper, show that actual inflation expectations have made up over 30% of the drop in the forwards pricing this year, up from less than 15% in the past year. ( from

As you can see even fans of the measure only think 30% of it is relevant

The Problem of a 2% Inflation Target

It is time for my regular reminder that the 2% inflation target was pulled out of thin air. Or to be more specific it was chosen because it “seemed reasonable” by the Reserve Bank of New Zealand. On that basis the 1.2% of the Euro area can also seem reasonable. Personally I would prefer it but I will come to that later.

Higher Inflation Targets

The Ivory Towers have regularly pressed for this as we step back in time to June 2014 and look at a working paper from the IMF.

This essay argues that a two percent inflation target is too low. It is not clear what target is ideal,
but four percent is a reasonable guess, in part because the United States has lived comfortably with
that inflation rate in the past.

Most of those would lived through such periods would not agree with that but remember it is a long way down to the reality of earth when your Ivory Tower is in the clouds. More recently Adam Posen of the Peterson Institute suggested this for the ECB.

committing itself to forms of fiscal quantitative easing, and working with other central banks to raise inflation targets above 2 percent.

As you can see we are being taken to extreme levels of central planning here. Back when he was at the Bank of England Adam Posen supported ever more extreme monetary measures but we never get an answer to the question why we always need more? Also of course he left the Bank of England due to this.

‘They should have somebody who gets it right and not me. I am accountable for my performance.’

You may not be surprised to read that he got inflation wrong after expecting a decline and getting an overshoot.

The Ordinary Person

If we look at a breakdown of inflation in 2018 from Eurostat the ordinary person might be convinced inflation is already at the levels the Ivory Towers want.

On average, household electricity prices in the European Union (EU) increased to €21.1 per 100 kWh (+3.5%),
between the second half of 2017 and the second half of 2018………Household gas prices increased by 5.7% on average in the EU between the second semester of 2017 and 2018 to €6.7 per 100 kWh.

Also the Ivory Towers look at inflation numbers and make a clear error which is not to acknowledge the fact that we require housing. The Euro area numbers only account for those who rent and not those who own so let me help out a bit.

House prices, as measured by the House Price Index, rose by 4.2% in both the euro area and the EU in the fourth
quarter of 2018 compared with the same quarter of the previous year. These figures come from Eurostat, the
statistical office of the European Union.
Compared with the third quarter of 2018, house prices rose by 0.7% in the euro area and by 0.6% in the EU in the
fourth quarter of 2018.

We do not know the more up to date numbers but if we take the broad sweep they would be an upwards influence if they were counted in the official measure as they were supposed to be. I will not tire you with the details here as it is an area of expertise for me and to cover it fully is worthy of an article on its own. But the summary is that after years of what the apocryphal civil servant Sir Humphrey would call “fruitful work”    we have arrived back at the beginning or if you prefer it in musical terms.

We’re on a road to nowhere
Come on inside
Takin’ that ride to nowhere
We’ll take that ride ( Talking Heads)

Thus our Ivory Towers with their core measures make a pretty clean sweep of missing the areas which are most vital as we note they include food,energy and shelter.

Comment

There are two essential problems with the arguments above. The opening one is the changed behaviour of wages. Pre credit crunch we had the so-called NICE period where wages growth generally exceeded inflation. It changed things and the pattern now is that the relationship was broken as we have seen periods where real wages have fallen. In my country the UK the sharpest real wages fall came when Adam Posen got the sort of thing he wanted as inflation went above 5% but wage growth did not respond. Putting it another way we got a real wage boost when inflation fell in the period 2015/16 which was exactly the reverse of the somewhat hysterical headlines from that period suggested. Also since my post of the 29th of January 2015 I have regularly pointed out that lower inflation has clearly been a boost for retail sales across a wide range of countries.

Next comes an issue which I will highlight with a simple question. Why do we always need more stimulus? The proponents of them never answer this. The issue that we may make marginal temporary gains but face permanent losses gets marginalised and pushed aside.

Also the stimulus has quite often failed in generating either inflation or growth. The place that has tried pretty much everything is Japan and here is Governor Kuroda from the end of last month.

Bank of Japan Governor Haruhiko Kuroda said major central banks may have to become more flexible targeting inflation, as they are missing targets due to the price dampening effects of technological innovations and globalisation.

He is getting so desperate he now needs to present “technological innovations ” as a bad thing. I bet he will not be getting rid of his smartphone.

 

 

 

UK wage growth shows the first sign of weakness for a while

Today brings the UK labour market into focus as we hope for more good news. However we have seen over the past day or so some reminders that the credit crunch era left long lasting scars for some. In isolation the UK has recovered well in terms of employment and getting people back to work but has done much less well overall in terms of what they are paid for it. In particular the Resolution Foundation has taken a look at one rather unfortunate group.

This report looks at the specific fortunes of the “crisis cohort” those who left education between 2008 and 2011. By analysing outcomes for those unfortunate enough to enter the labour market in the aftermath of the 2008-09 recession, this paper estimates how severe an impact
the downturn had on people who left education in its midst, and how long-lasting these effects were.

These individuals were of course guilty of nothing and were only involved via an accident of the timing of their birth. The Resolution Foundation discovered these effects.

We find that people starting their careers in the midst of a downturn experience a reduction in real hourly pay of around 6 per cent one year after leaving education, and that compared to people who left education in better economic conditions their wages do not recover for up to 6 years. For those with lower levels of education, the chance of being in work falls by over 20 per cent, while for graduates the chance of being in a low paying occupation rises.

The find something which resonates with past Bank of England research on this subject.

The chance of a graduate working in a lowpaid occupation rose by 30 per cent, and remained elevated a full seven
years later. Indeed, we find that people ‘trading down’ in terms of the occupations they enter after leaving education, coupled with pay restraint in mid-paid roles, are main drivers of poor pay outcomes for those entering
the labour market in a recession.

The issue I have with this is that we are looking at a period when being a graduate was not what it had been in the past due to the expansion of numbers in the Blair era. So that may well also have been in play but not fully considered. Whatever the cause there was a strong effect on wages.

This helps explain why the impact on pay was more enduring in the recent downturn. People’s hourly wages took 50 per cent longer to recover (to the rates of pay enjoyed by those leaving education outside the downturn).

Thus not only did wages fall they took longer to recover to levels seen by those lucky enough not to start work and graduate as the credit crunch hit. A clear issue for thos affected.

However we did get one thing right in the sense that pre credit crunch we wanted to be what was considered to be more Germanic. In this instance that meant more flexible wages ( as in potentially down) in return for a better employment trajectory.

On the other hand, youth unemployment did not rise as high as in the early 1990s, and came down much faster.

Many now seem to have forgotten that as it has turned out to be a success but at a price in terms of wages especially for those unlucky enough to be born at the wrong time. Although as this from BBC economics correspondent Andy Verity illustrates some are keener on lower unemployment than others.

The unemployment rate is now down to 3.8%. But is lower unemployment always a good thing? Not necessarily – if eg you’re a business and you can’t get the staff.

Today’s Data

The drumbeat of the UK data series for around the last seven years continues to beat out its tune.

Estimates for January to March 2019 show 32.70 million people aged 16 years and over in employment, 354,000 more than for a year earlier. This annual increase of 354,000 was due entirely to more people working full-time (up 372,000 on the year to reach 24.11 million). Part-time working showed a small fall of 18,000 on the year to reach 8.59 million……..The UK employment rate was estimated at 76.1%, higher than for a year earlier (75.6%) and the joint- highest figure on record.

The bass line was in tune as well.

For January to March 2019, an estimated 1.30 million people were unemployed, 119,000 fewer than for a year earlier and 914,000 fewer than for five years earlier…….

the estimated unemployment rate: for everyone was 3.8%; it has not been lower since October to December 1974 (for men was 3.9%; it has not been lower since March to May 1975, for women was 3.7%, the lowest since comparable records began in 1971)

As you can see the unemployment performance is a case of lets hear it for the girls.

Also as I regularly get asked here is the other category.

The UK economic inactivity rate was estimated at 20.8%, lower than for a year earlier (21.1%) and close to a record low.

Wages

Here there was a more nuanced version of better news.

Including bonuses, average weekly earnings for employees in Great Britain were estimated to have increased by 3.2%, before adjusting for inflation, and by 1.3%, after adjusting for inflation, compared with a year earlier.

If we put to one side for a moment the attempt to sugar coat the real wages numbers, there is a fading of nominal wage growth here. We should welcome the fact that the annual rate of growth is still above 3% but there is an issue as it has fallen back from 3.5%. Why? Well weekly wages peaked at £530 in January and fell to £529 in February and £528 in March. Various areas contributed to this as the annual rate of pay growth in finance fell from 5% to 1.8% over the same period and growth in the wholesaling,retail and hotel sector actually went negative ( -0.3%). This was due to weak and in some cases negative bonus payments ( I am not sure how that works…) being recorded so it is a case of what that space.

I did say I would return to real wage growth and let me present it in chart form to illustrate the issue.

Those who have had a hard time in the credit crunch provide yet another reason to make the case for an RPI style measure of inflation I think. It also shows that choosing your inflation measure is a genuinely big deal and something that establishment’s love to manipulate.

Comment

One of the ironies of the credit crunch era is that the economics establishment regularly gets worked up about things it wanted. Of course some of those reporting the situation are too young to remember that but not all. We see that we got the better employment situation we wanted but that especially for those who joined the job market at what turned out to be the wrong time real wages shifted onto a lower path from which they have yet to recover. Sadly the main response from government has been to try to change the numbers via the use of the fantasies involved in Imputed Rents which are never paid, rather than dealing with reality. Also the way that the self-employed are ignored in the wages data is becoming a bigger and bigger issue.

4.93 million self-employed people (15.1% of all people in employment), 180,000 more than a year earlier.

As to the current situation it may no longer be quite so Goldilocks as whilst employment growth continues we face the possibility that wage growth is slowing again. Perhaps in spite of its many fault as a measure it is related to this.

In contrast, output per worker in Quarter 1 2019 increased by 0.7% compared with the same quarter in the previous year.

If you want the full picture it is the difference between the two numbers here.

It indicates that in Quarter 1 2019, all three economic indicators were above their pre-downturn levels, with GDP being 12.7% higher while both hours and employment were equally 10.2% higher.

Putting all this another way it is yet another punch hammered home on output gap style theories which must now be in boxing terms on the canvas again. What happened to the three knockdowns and you are out rule?

 

 

 

 

Good to see UK wages rising much faster than house prices at last

Today feels like spring has sprung and I hope it is doing the same for you, or at least those of you also in the Northern Hemisphere. The economic situation looks that way too at least initially as China has reported annual GDP growth of 6.4% for the first quarter of 2019. However the industrial production data has gone in terms of annual rates 5.8%,5.9%,5.4%,5.7%, 5.3% and now 8.7% in March which is the highest rate for four and a half years. Or as C+C Music Factory put it.

Things that make you go, hmm
Things that make you go, hmm
Things that make you go, hmm, hey
Things that make you go, hmm, hmm, hmm

In the UK we await the latest inflation data and we do so after another in a sequence of better wage growth figures. In its Minutes from the 20th of March the Bank of England looked at prospects like this.

Twelve-month CPI inflation had risen slightly in February to 1.9%, in line with Bank staff’s expectations
immediately prior to the release, and slightly above the February Inflation Report forecast. The near-term path
for CPI inflation was expected to be a touch higher than at the time of the Committee’s previous meeting,
though remaining close to the 2% target over the coming months. This partly reflected a 6% increase in sterling
spot oil prices, and the announcement by Ofgem on 7 February of an increase in the caps for standard variable
and pre-payment tariffs, from April, which had been somewhat larger than expected.

I do like the idea of claiming you got things right just before the release, oh dear! Also it is not their fault but the price cap for domestic energy rather backfired and frankly looks a bit of a mess. It will impact on the figures we will get in a month.

Prospects

Let us open with the oil prices mentioned by the Bank of England as the price of a barrel of Brent Crude Oil has reached US $72 this morning. So a higher oil price has arrived although we need context as it was here this time last year. The rise has been taking place since it nearly touched US $50 pre-Christmas. Putting this into context we see that petrol prices rose by around 2 pence per litre in March and diesel by around 1.5. So this will be compared with this from last year.

When considering the price of petrol between February and March 2019, it may be useful to note that the average price of petrol fell by 1.6 pence per litre between February and March 2018, to stand at 119.2 pence per litre as measured in the CPIH.

Just for context the price now is a penny or so higher but the monthly picture is of past falls now being replaced by a rise. Also just in case you had wondered about the impact here it is.

A 1 pence change on average in the cost of a litre of motor fuel contributes approximately 0.02 percentage points to the 1-month change in the CPIH.

If we now switch to the US Dollar exchange rate ( as the vast majority of commodities are priced in dollars) we see several different patterns. Recently not much has changed as I think traders just yawn at Brexit news although we have seen a rise since it dipped below US $1.25 in the middle of December. Although if we look back we are around 9% lower than a year ago because if I recall correctly that was the period when Bank of England Governor Mark Carney was busy U-Turning and talking down the pound.

So in summary we can expect some upwards nudges on producer prices which will in subsequent months feed onto the consumer price data. Added to that is if we look East a potential impact from what has been happening in China to pig farming.

Chinese pork prices are expected to jump more than 70 percent from the previous year in the second half of 2019, an agriculture ministry official said on Wednesday………China, which accounts for about half of global pork output, is struggling to contain an outbreak of deadly African swine fever, which has spread rapidly through the country’s hog herd.

That is likely to have an impact here as China offers higher prices for alternative sources of supply. So bad news for us in inflation terms but good news for pig farmers.

Today’s Data

I would like to start with something very welcome and indeed something we have been waiting for on here for ages.

Average house prices in the UK increased by 0.6% in the year to February 2019, down from 1.7% in January 2019 . This is the lowest annual rate since September 2012 when it was 0.4%. Over the past two years, there has been a slowdown in UK house price growth, driven mainly by a slowdown in the south and east of England.

This means that if we look at yesterday’s wage growth data then any continuation of this will mean that real wages in housing terms are rising at around 3% per annum. There is a very long way to go but at least we are on our way.

The driving force is this and on behalf of three of my friends in particular let me welcome it.

The lowest annual growth was in London, where prices fell by 3.8% over the year to February 2019, down from a decrease of 2.2% in January 2019. This was followed by the South East where prices fell 1.8% over the year.

As they try to make their way in the Battersea area prices are way out of reach of even what would be regarded as good salaries such that they are looking at a 25% shared appreciation deal as the peak. Hopefully if we get some more falls they will be able to average down by raising  to 50% and so on but that is as Paul Simon would say.

Everybody loves the sound of a train in the distance
Everybody thinks it’s true

One development which raises a wry smile is that house price inflation is now below rental inflation.

Private rental prices paid by tenants in the UK rose by 1.2% in the 12 months to March 2019, up from 1.1% in February 2019……..London private rental prices rose by 0.5% in the 12 months to March 2019, up from 0.2% in February 2019.

What that tells us is not as clear as you might think because the numbers are lagged. Our statisticians keep the exact lag a secret but I believe it to be around nine months. So whilst we would expect rents to be pulled higher by the better nominal and real wage data the official rental series will not be showing that until the end of the year

Comment

The development of real wages in housing terms is very welcome. Of course the Bank of England will be in a tizzy about wealth effects but like so often they are mostly for the few who actually sell or look to add to their mortgage as opposed to the many who might like to buy but are presently priced out. Also existing owners have in general had a long good run. Those who can think back as far as last Thursday might like to mull how house price targeting would be going right now?

Moving to consumer inflation then not a lot happened with the only move of note being RPI inflation nudging down to 2.4%. The effects I described above were in there but an erratic item popped up and the emphasis is mine.

Within this group, the largest downward effect came from games, toys and hobbies, particularly computer games

If a new game or two comes in we will swing the other way.

Looking further up the line I have to confess this was a surprise with the higher oil price in play.

The growth rate of prices for materials and fuels used in the manufacturing process was 3.7% on the year to March 2019, down from 4.0% in February 2019.

So again a swing the other way seems likely to be in play for this month.

Meanwhile,what does the ordinary person think? It is not the best of news for either the Bank of England or our official statisticians.

Question 1: Asked to give the current rate of inflation, respondents gave a median answer of 2.9%, compared to 3.1% in November.

Question 2a: Median expectations of the rate of inflation over the coming year were 3.2%, remaining the same as in November.

Will the UK labour market data prove to be a better guide than GDP again?

It was a week or so ago that we took an in-depth view on UK productivity and yesterday the Financial Times was on the case. As ever they open with what is their priority.

Britain is the only large advanced economy likely to see a decline in productivity growth this year, according to new research, a development the Bank of England governor has blamed on Brexit.

There are a few begged questions here as for example the particularly weak period for UK productivity was in 2013/14 well before Brexit and in fact late 2017 or so was a relatively good period for it. The next part is more soundly based I think.

The figures from the Conference Board, a US non-profit research group, highlight the productivity crisis that has struck the UK since the financial crash of 2008-09, with the slowdown worse than in any other comparable country.

Indeed we have had a problem here but I am afraid that the Conference Board then gets a little carried away as it veers towards Fake News territory.

Britain is now in its tenth year of feeble labour productivity growth, Bart van Ark, chief economist of the Conference Board, said. “The UK is a consistent story of slow output growth, slow employment growth and slow productivity growth,” he warned. “Not even employment is growing quickly any more.”

The UK employment performance is something we follow month by month and has been really good since about 2012 so I am afraid that Bart is barking up the wrong tree. If we look at matters from the perspective of the UK employment rate it has risen from 70.1% at the end of 2011 to 76.1% now. On a chart going back to 1971 there is only one period where it rose faster ( 87-89) and that sadly then led to a bust.

Here are the numbers from the Conference Board and you may spot the holes in this yourselves.

The Conference Board figures show that the UK’s annual growth in output for every hour worked fell from 2.2 per cent between 2000 and 2007 to 0.5 per cent between 2010 and 2017. Last year, productivity growth achieved that figure again but with a buoyant jobs market and weak output growth, it is likely to fall to only 0.2 per cent in 2019.

So the “Not even employment is growing quickly any more” is also a “buoyant jobs market”! I note that rather than being hit by Brexit as originally claimed productivity last year was in line with the post credit crunch average, We end up with an expected weak 2019 leading to low productivity growth. If that makes you fear for Italy and Germany which at the moment have worse output prospects than us well apparently not.

The average equivalent growth rate in several dozen other mature economies is expected to be 1.1 per cent, said the Conference Board.

If we use the OECD and compare ourselves in 2018 we did better than Italy ( -0.2%) Spain ( -0.3%) and Germany (0%) but worse than France (0.6%) albeit only slightly.

Investment

This has been a troubled area recently for the UK economy as the Brexit uncertainty has seen a drop in business investment. But it would seem that if we ever get over that hill money will be arriving from different quarters.

The United Kingdom has snatched the top spot in a survey that ranks how attractive countries are as investment destinations over the coming year.

Despite “continued uncertainty stemming from its intention to leave the European Union”, the UK knocked the United States off its perch, which it had held since 2014, according to the data conducted by accountancy firm EY. ( Daily Telegraph)

Of course that is a different definition of investment usually focusing more on the financial sector.

Today’s Data

Unfortunately for the rhetoric of the Conference Board above but fortunately for UK workers our official statisticians have released this.

Estimates for December 2018 to February 2019 show 32.72 million people aged 16 years and over in employment, 457,000 more than for a year earlier. This annual increase of 457,000 was due entirely to more people working full-time (up 473,000 on the year to reach 24.15 million)……The UK employment rate was estimated at 76.1%, higher than for a year earlier (75.4%) and the joint-highest figure on record.

If we compare the annual rate above to the latest three-monthly one we see that job growth may even have sped up.

The level of employment in the UK increased by 179,000 to a record high of 32.72 million people in the three months to February 2019.

Considering the level of employment we are now at then this are pretty impressive numbers. If we switch to hours worked they are up by 2.1% on a year ago which again is strong. As GDP growth seems lower there may well be an issue here again for productivity growth but not for the opposite to the reason given by the Conference Board.

Wages

In the period since the quantity numbers for the UK economy turned for the better we have waited quite a long time for the quality or wages numbers to also do so. But more recently we have seen better news.

Excluding bonuses, average weekly earnings for employees in Great Britain were estimated to have increased by 3.4%, before adjusting for inflation, and by 1.5%, 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 3.5%, before adjusting for inflation, and by 1.6%, after adjusting for inflation, compared with a year earlier.

If we look at the more comprehensive category we note that bonuses are pulling up the numbers which may be a hopeful sign. As to the real wage figures whilst I believe we now have some growth sadly it is not as high as claimed due to the flaws in the inflation number used. For some perspective the Retail Prices Index grew by 2.5% in the year to February as opposed to the 1.8% recorded by the Imputed Rent influenced CPIH. So real wage growth is more like 1% I would argue.

If we look at the month of February alone then we see that at 3.2% the number is lower but the monthly numbers are erratic. The growth has been pulled higher by the construction sector which has seen wages rise by 4.6% over the year to February and pulled lower by manufacturing which saw growth of a mere 1.9%. Although it was not an especially good February for them a factor in the overall rise in UK wage growth has come from the public-sector where the circa 1% of a couple of years ago has been replaced by 2.6% over the three months to February.

Comment

As ever there is much to consider here. The picture presented by our official statisticians is as good as it has been for quite some time. With employment at these high levels in some ways it is a surprise it continues to rise at all. For wages the picture is different but is now brighter than it has been for some time. Although if we look for perspective there is still if not a mountain quite a hill to climb.

For February 2019, average regular pay, before tax and other deductions, for employees in Great Britain was estimated at: £465 per week in real terms (constant 2015 prices), higher than the estimate for a year earlier (£459 per week), but £8 lower than the pre-recession peak of £473 per week for March 2008.

Using a more realistic inflation measure than the officially approved CPIH only makes the perspective darken along the lines sung about by Paul Simon.

Slip slidin’ away
Slip slidin’ away
You know the nearer your destination
The more you’re slip slidin’ away

Moving to productivity I would remind readers of my analysis of the subject from the 5th of this month. As to the Conference Board analysis well the idea of UK employment growth being weak has had a bad 7 years and there is an irony as of course it has been that pushing productivity growth lower. Looking ahead will the labour market numbers prove to be a better guide to the economic situation than the output or GDP ones like in 2012? Only time will tell…….

Less welcome is the new way of presenting the numbers which frankly is something of a mess.

What is happening with US house prices and its economy?

Sometimes it helps to look back so let us dip into Yahoo Finance from the 17th of December last year.

Home price growth has slowed for six consecutive months since April, according to the S&P CoreLogic Case-Shiller national home price index. And for the first time in a year, annual price growth fell below 6%, dropping to 5.7% and 5.5%, in August and September, respectively. October home price results will be released later this month.

So we see what has in many places become a familiar pattern as housing markets lose some of their growth. There was and indeed is a consequence of this.

“A couple of years of home prices running twice the rate of home income growth leads to affordability challenges,” said Mortgage Bankers Association Chief Economist Mike Fratantoni. “If you’re a buyer in 2019, you won’t see home price running away from you at the same speed in 2018.”

I think he means wages when he says “home income growth” but he is making a point which we have seen in many places where house price growth has soared and decoupled from wage growth. This has been oil by the way that central banks slashed official interest-rates which reduced mortgage-rates and then also indulged in large-scale bond buying which in the US included Mortgage-Backed Securities to further reduce mortgage-rates. This meant that affordability improved as long as you were willing to look away from higher debt burdens and the implication that should interest-rates rise the song “the heat is on” would start playing very quickly.

Or if you wish to consider that in chart form Yahoo Finance helped us out.

That is a chart to gladden a central bankers heart as it shows that the policy measures enacted turned house prices around and led to strong growth in them. The double-digit growth of late 2013 and early 2014 will have then scrambling up into their Ivory Towers to calculate the wealth effects. But the problem is that compared to wage growth they moved away at 8% per annum back then and the minimum since has been 2% per annum. That means that a supposed solution to house prices being too high and contributing to an economic crash has been to make them higher again especially relative to wages.

What about house price growth now?

Yesterday provided us with an update.

CoreLogic® (NYSE: CLGX), a leading global property information, analytics and data-enabled solutions provider, today released the CoreLogic Home Price Index (HPI) and HPI Forecast for February 2019, which shows home prices rose both year over year and month over month. Home prices increased nationally by 4 percent year over year from February 2018. On a month-over-month basis, prices increased by 0.7 percent in February 2019.

So there has been a slowing in the rate of growth which is reflected here.

“During the first two months of the year, home-price growth continued to decelerate,” said Dr. Frank Nothaft, chief economist for CoreLogic. “This is the opposite of what we saw the last two years when price growth accelerated early.

Looking ahead they do however expect something of a pick-up.

“With the Federal Reserve’s announcement to keep short-term interest rates where they are for the rest of the year, we expect mortgage rates to remain low and be a boost for the spring buying season. A strong buying season could lead to a pickup in home-price growth later this year.”

That gives us another perspective on the change of policy from the US Federal Reserve. So far its U-Turn has mostly been locked at through the prism of equity prices partly due to the way that President Trump focuses on them. But another way of looking at it is in response to slower house price growth which was being influenced by higher mortgage rates as the Federal Reserve raised interest-rates and reduced its bond holdings. This saw the 30-year mortgage-rate rise from just under 4% to a bit over 4.9% in November, no doubt providing its own brake on proceedings.

What about now?

If we look at monetary policy we see that perhaps something of a Powell Put Option is in place as at the end of last week the 30-year mortgage rate was 4.06%. Now bond yields have picked up this week so lets round it back up to say 4.15%. Even so that is quite a drop from the peak last year.

There is also some real wage growth according to the Bureau of Labor Statistics.

Real average hourly earnings for all employees increased 1.9 percent, seasonally adjusted, from February 2018 to February 2019. The change in real average hourly earnings, combined with a 0.3-percent decrease in the average workweek, resulted in a 1.6-percent increase in real average weekly earnings over this 12-month period.

In terms of hourly earnings the situation has been improving since last summer whereas the weekly figures were made more complex by the drop in hours worked meaning we particularly await Friday’s update for them.

Moving to the economy then recent figures have been a little more upbeat than when we looked at the US back on the 22nd of February but not by much.

The New York Fed Staff Nowcast stands at 1.3% for 2019:Q1 and 1.6% for 2019:Q2..News from this week’s data releases left the nowcast for 2019:Q1 unchanged and decreased the nowcast for 2019:Q2 by 0.1 percentage point.

Of the main data so far this week we did not learn an enormous amount from the retail sales numbers from the Census Bureau.

Advance estimates of U.S. retail and food services sales for February 2019, adjusted for seasonal variation
and holiday and trading-day differences, but not for price changes, were $506.0 billion, a decrease of 0.2
percent (±0.5 percent)* from the previous month, but 2.2 percent (±0.7 percent) above February 2018.

As these are effectively turnover rather than real growth figures a monthly fall is especially troubling but January had been revised higher.

Comment

We are observing concurrent contradictory waves at the moment. The effect from 2018 was of a slowing economy combined with monetary tightening in terms of higher mortgage-rates. More recently after the policy shift we have seen mortgage-rates fall pretty sharply and since last summer a pick-up in wage growth. So we can expect some growth and maybe we might even see a phase where wage growth exceeds house price growth. But it would appear that the US Federal Reserve has shifted policy to keep asset (house and equity) prices as high as it can so it may move again,

As to the overall picture this from Corelogic troubles me.

According to the CoreLogic Market Condition Indicators (MCI), an analysis of housing values in the country’s 100 largest metropolitan areas based on housing stock, 35 percent of metropolitan areas have an overvalued housing market as of February 2019. The MCI analysis categorizes home prices in individual markets as undervalued, at value or overvalued, by comparing home prices to their long-run, sustainable levels, which are supported by local market fundamentals (such as disposable income).

Only 35% overvalued? Look again at the gap between house price rises and wage rises in the Yahoo chart above. So if we look backwards very few places must have been overvalued just before the crash. Also times are hard for younger people.

Frank Martell, president and CEO of CoreLogic. “Our research tells us that about 74 percent of millennials, the single largest cohort of homebuyers, now report having to cut back on other categories of spending to afford their housing costs.”

I am not sure that goes with the previous research. Also if the stereotype has any validity times for millennials in the US are grim or should that be toast?

The price for Hass avocados from Michoacán, Mexico’s main avocado producing region, increased 34 percent on Tuesday amid President Trump’s calls to shut down the U.S.-Mexico border ( The Hill).

Let me end with a reminder from CoreLogic that averages do not tell us the full story.

Annual change by state ranged from a 10.2 percent high in Idaho to a -1.7 percent low in North Dakota

 

 

 

 

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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