US PMI/ISM down in October, but trend still up

Despite my forecasts that the US economy would slow sharply after the fastest rise in interest rates and the steepest fall in money supply in 40 years, it hasn't happened.   Growth appears to be accelerating.  (However, my forecast for a European recession, where, unlike the US, there has been no massive fiscal stimulus, is being fulfilled)

It appears that the federal fiscal stimulus is enough to offset the Fed's deep tightening.  So far, at any rate.  US GDP growth is the highest in the G20 GDP growth table from Trading Economics (though some data are only available till June).  Remarkable.  So much for neo-liberalism.  Joe Biden has returned us to the 1945-1984 situation where big government works, where fiscal stimulus and deficit spending is used to reduce the severity of economic downturns.

The chart shows the average of the extreme-adjusted PMI and ISM manufacturing surveys for the USA (the service sector surveys for October won't be available for a few days, yet).  An average of two statistically independent time series will have lower random month-to-month variability than either on its own.  In addition, each series is adjusted for extremes independently before the average is calculated.  This average is shown by the green line in the chart below.  It shows a rebound over the last few months, with a small dip in October. 

Unemployment & underemployment

 When I started in economics and investments, the unemployment rate was a reliable economic indicator.  The percentage of the labour force who worked part-time was small.  Most ppl had full-time jobs.  The definition of employment is one hour of work per week.  When most ppl worked full-time that was a workable (though odd) definition.  But that's all changed.  A person might work only an hour a week but would like to work 10 hours or 20.  And those ppl are called 'underemployed'.  

The Parliamentary website has a clear explanation.

The Australian Bureau of Statistics (ABS) identifies two distinct groups as underemployed:

• part-time workers who wanted to work more hours and could start additional hours either in the reference week or in the subsequent four weeks; and
• full-time workers who worked part-time hours in the reference week for economic reasons (such as being stood down or insufficient work being available). It is assumed these people wanted to work full-time and would have done so, had the work been available.

The underemployment rate has been steadily increasing over time, as the gig economy increases the size of the precariat.  Note that all these charts end before the covid crash.

The underutilisation rate is the sum of the unemployed and the underemployed, expressed as a proportion of the labour force.  It's scarcely surprising that with so many in the labour force 'underutilised' that wage increases are negligible.

This chart from Greg Jericho in The Guardian shows the inverse relationship between the underemployment rate and wage inflation.  The data in this chart end in 2018.

Given that the share of GDP going to profits is at a record high, and the share going to wages at a record low, it's obvious that we need to run the economy 'hotter', and it's equally obvious that monetary policy is not achieving this.  Monetarism is a central plank of neo-liberalism.  Time to dump this failed policy prescription.

Debt and deficits after coronavirus

A fascinating chart from Getup!

See how Federal deficits in Australia surged during both world wars, as did the ratio of outstanding debt to GDP.  For example, the (Federal) deficit to GDP ratio peaked in 1944 at 20%.  The debt to GDP ratio peaked at over 100% two years later.  The debt to GDP ratio didn't fall because the Federal government ran a surplus (though there was a small one in 1949) but because the denominator in the equation rose.  Debt to GDP  was high in all post-war belligerent economies, not just Australia.  But they understood the thesis that Keynes had made, which was that raising taxes and cutting expenditure to repay debt was counter-productive, because these actions reduced economic activity, so although the deficits naturally reduced as war ended, they didn't attempt to create fiscal surpluses as had been done after WW1.   The truth of Keynes's theory was conclusively demonstrated during the Euro crisis of 2011, when forced deficit reduction led to a "double-dip" recession.

Once again, governments are running large fiscal deficits, to keep economies afloat during the covid crash.  And it will be interesting to see whether "austerity", which has been discredited again and again, will be introduced after the recession is over to pay back sharply higher debt levels, or whether they'll do as most economies did after the war, and allow the ratio of debt to GDP to fall as a result of economic growth.

There is in any case a difference between debt incurred to fund the construction of capital goods (railways, roads, schools, housing, factories) and debt incurred to fund current expenditure (wages and salaries, running costs, etc.)  It makes sense to fund, say, a railway with bonds, repayable over 25 or 30 years.  However, only in the rarest circumstances, borrowing to fund current expenditures is unwise.  This is one of those rare circumstances.

World GDP heading for GFC lows

I've just updated my calculations of world GDP (blue line in chart below)  As you can see GDP growth (using official Chinese GDP data, not my own estimates) has been trending moderately upwards up to Q4 2019.  IP has already started to fall.  I expect the year-on-year decline in world IP to be at least as bad as during the GFC, which suggests world GDP could fall 4%.  It'll prolly be worse than that, given that outside China, the world is only just starting to contract by the 15% that happened in China when it went into lockdown.  It's possible that this decline may be short lived, but it is equally possible that the demand crunch resulting from the supply crunch (people out of work leading to plunging incomes, leading to further declines in employment and incomes, and so on in a doom loop) will take months to reverse itself.  The GFC was a demand crunch caused by  a financial crisis.  From its peak in early 2008, world IP took 3 years to reach that level again, despite massive fiscal stimulus from the USA and China, and massive monetary stimulus from every country.  This disruption is much worse. 

One factor which is positive.  The Right, which is very hostile to budget deficits, has been forced to accept emergency measures designed to prop up incomes and spending. And at current interest rates, fiscal policy will be much more effective than monetary policy.