Morning Report – The Great American Deleveraging Continues 3/2/15

Markets are flattish this morning on no major news. Bonds and MBS are down small.

Merger Monday is back with a couple of big deals in the tech space. NXP is buying Freescale Semi for 11.8 billion, and HP is buying Aruba Networks for $2.7 billion.

Lots of important economic data this week, but the jobs report on Friday will be the highlight of the week. Bond Markets will be focused on average hourly earnings. Below is a chart of average hourly earnings. Note the change in the slope of the line starting in 2009. That is a change from roughly 3.2% annual growth to 2% annual growth, which is more or less in line with inflation. Later on this week, we will get non-farm productivity, which is expected to fall, and unit labor costs which are expected to increase 3.3%.

Personal Income rose .3% in January, which was below expectations, but flat with December. Wages and salaries were up .6%, which was a big increase from the .1% reading in December. This tends to be a volatile component however, so don’t read too much into one data point. Disposable income rose .9%. The savings rate increased to 5.5% from 5% last month as well.  Personal spending fell .5%, however that was partially driven by lower energy prices. Stripping out food and energy, spending increased .1%, which is pretty much in line with what we have been seeing. The punch line: The Great American Deleveraging continues. As incomes increase, that money is used to pay down debt or is getting put in the bank. Investors hoping for another late 90s or mid aughts debt-driven consumption boom are probably going to be disappointed.

Construction Spending fell 1.1% in January, a disappointment. December was revised upward from .4% to .8%. Month to month numbers tend to be volatile. Where is the money going? Lodging, office and commercial space as well as manufacturing. Also public infrastructure spending with increases in transportation, and sewage. Where is it not going? Residential (still). Given the price increases and the current tight inventory, you should expect to see more homebuilding. If the personal income numbers continue to improve that will hopefully change.

Note that optimism about 2015 construction is the highest in 20 years, according to Wells Fargo. Nonresidential construction is the driver, not resi however. Still, that means we are finally seeing some capital expenditures which is encouraging.

The ISM Manufacturing PMI dropped in February to 52.9 from 53.5. The West Coast port slowdown is impacting exporters. The current level of 52.9 corresponds to a GDP growth rate of 3.1%.

Stanley Fischer is telling the markets not to get used to being spoon-fed by the FOMC. Once rates start increasing, the guidance will become more and more murky.

Warren Buffet’s annual letter to shareholders is out. There is nothing earth-shattering in the letter, except for the usual schedule of events for Buffetapalooza, where you can try to throw a newspaper more accurately than Warren. No mention if he is going to bust out the ukulele and jam with the Fruit of the Loom guys however.

32 Responses

  1. Frist!

    *drops mic*

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  2. Does anybody here disagree with this?

    Isn’t this the inevitable life-cycle of all Republics? It’s as natural as evolution, no?

    If not, where is the counter example?

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  3. It would be interesting if Robert Byrd was still around.

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  4. Krugman’s devolution from economist to polemicist is complete.

    http://www.nytimes.com/2015/03/02/opinion/paul-krugman-walmarts-visible-hand.html?ref=opinion&_r=0

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    • jnc:

      Krugman’s devolution from economist to polemicist is complete.

      It truly is remarkable, the nonsense he spouts. This one in particular struck me:

      And because workers are people, wages are not, in fact, like the price of butter, and how much workers are paid depends as much on social forces and political power as it does on simple supply and demand.

      First of all, the fact that the prices of labor are subject to the forces of political power hardly distinguishes them from other goods like butter. It’s hard to believe Krugman has never heard of price controls on things other than wages.

      Second, social forces effect the pricing of labor (as well as other goods, another Krugman elision) precisely by effecting supply and demand. How else does Krugman think “social forces” operate to effect the pricing of labor?

      How does Krugman explain Walmart’s move to raise wages, if not through “simple supply and demand”?

      “Meanwhile, workers are gaining clout thanks to an improving labor market, reflected in increasing willingness to quit bad jobs.”

      Let’s see…an improving labor market means a greater supply of jobs, and a willingness to quit bad jobs means less demand for those jobs. And somehow Krugman thinks that this proves that prices for labor are not reacting to “simple supply and deman”. The Nobel committee should demand its award back. I don’t know how this guy looks himself in the mirror each morning.

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  5. Krugman’s devolution from economist to polemicist is complete

    I’m no economist, nor do I play one on a blog, but I thought that it had become complete a couple of election cycles ago.

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  6. It was. Today’s piece is a particularly revealing reversal from his earlier views:

    This is basically my take on it:

    http://www.forbes.com/sites/timworstall/2015/03/02/paul-krugmans-amazing-about-face-on-the-minimum-wage/

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  7. I am sure Dr.Cowbell makes more as a polemicist than he would have made as an economist.

    But yes, he has basically turned into a left wing Larry Kudlow…

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  8. Peggy Noonan on what Walker was getting at with respect to facing the unions and foreign policy (No, he wasn’t saying teachers are terrorists)

    http://blogs.wsj.com/peggynoonan/2015/02/28/walker-reagan-and-patco/

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  9. What if I actually agree that current public school indoctrination of students is terroristic?

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  10. @mcwing: “Isn’t this the inevitable life-cycle of all Republics? It’s as natural as evolution, no?”

    I’m not even sure those voting for Clinton’s impeachment or agitating for Nixon to resign were doing anything more than playing politics, looking at their own futures, or paying back for real or imagined wrongs in the past.

    So, that being said, I believe it could happen, but it would only happy by accident, as the plus side for those guarding against usurpation would be to better their own fortunes, or pay back the usurper for past wrongs against them.

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  11. @jnc4p: From Krugman’s piece: “Part of the answer is direct government intervention, especially during World War II, when government wage-setting authority was used to narrow gaps between the best paid and the worst paid. ”

    That’s the explanation for the creation of the middle class. And, no doubt, a slyly implied solution for the decline of the middle class, so-called, today. A government wage-setting authority.

    Indeed, why content ourselves with a minimum wage? If the government knows best what the lowest paid person should be paid, don’t they also know what the highest paid person should be paid? Indeed, don’t they know what everybody should be paid?

    “Meanwhile, workers are gaining clout thanks to an improving labor market, reflected in increasing willingness to quit bad jobs.”

    What . . . without government intervention, this is happening? That’s unpossible!

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  12. “How does Krugman explain Walmart’s move to raise wages, if not through “simple supply and demand”?”

    He explains it by other pressures, including the complaints of activist groups and, implicitly, the threat of the raising of the minimum wage, I’m guessing.

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    • KW:

      He explains it by other pressures, including the complaints of activist groups and, implicitly, the threat of the raising of the minimum wage, I’m guessing.

      As I quoted from the column:

      Meanwhile, workers are gaining clout thanks to an improving labor market, reflected in increasing willingness to quit bad jobs.

      Of course, that is a supply/demand explanation, even as Krugman pretends for rhetorical purposes that it is something else.

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  13. He used to condemn the reasoning that he now actively embraces:

    “Now to me, at least, the obvious question is, why take this route? Why increase the cost of labor to employers so sharply, which–Card/Krueger notwithstanding–must pose a significant risk of pricing some workers out of the market, in order to give those workers so little extra income? Why not give them the money directly, say, via an increase in the tax credit?

    One answer is political: What a shift from income supports to living wage legislation does is to move the costs of income redistribution off-budget. And this may be a smart move if you believe that America should do more for its working poor, but that if it comes down to spending money on-budget it won’t. Indeed, this is a popular view among economists who favor national minimum-wage increases: They will admit to their colleagues that such increases are not the best way to help the poor, but argue that it is the only politically feasible option.

    But I suspect there is another, deeper issue here–namely, that even without political constraints, advocates of a living wage would not be satisfied with any plan that relies on after-market redistribution. They don’t want people to “have” a decent income, they want them to “earn” it, not be dependent on demeaning handouts. Indeed, Pollin and Luce proudly display their estimates of the increase in the share of disposable income that is earned, not granted.

    In short, what the living wage is really about is not living standards, or even economics, but morality. Its advocates are basically opposed to the idea that wages are a market price–determined by supply and demand, the same as the price of apples or coal. And it is for that reason, rather than the practical details, that the broader political movement of which the demand for a living wage is the leading edge is ultimately doomed to failure: For the amorality of the market economy is part of its essence, and cannot be legislated away.”

    http://www.pkarchive.org/cranks/LivingWage.html

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    • jnc:

      He used to condemn the reasoning that he now actively embraces:

      That is a very damning link. He really should be laughed out of economic circles.

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  14. @ScottC: Indeed, there’s a necessary cognitive dissonance that accompanies using a free-market decision by a free-market company as the good example that justifies government interference. To the use of “visible hand” as some sort of slight against “invisible hand”ers. When it’s a perfect example of the invisible hand of the market at work. So to speak.

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  15. When one considers it, there must be a lot of financial and social and general prestige benefits (re: incentives) the be an enlightened (re: liberal) Nobel-prize winning economist in a liberal environment working at a liberal media organization. As such, the “invisible hand” of economic and social incentives act upon Krugman, as they do Wal-Mart and others, to adjust his behavior and his output to maximize the benefit he’s able to reap in his particular marketplace.

    In some way, there has to be an irony there.

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  16. The PL-ers are convinced that this raise happened because states increased their MW laws. And yes, the living wage argument is 100% a moral argument and someones marginal product of labor is irrelevant.

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  17. I am sure Dr.Cowbell makes more as a polemicist than he would have made as an economist.

    The same reason Dennis Miller is on Fox News.

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  18. Which is fine, but Krugman doesn’t get to invoke his authority as a Nobel prize winner in service of his polemics.

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  19. Anyone actually believe that they won’t cave when push comes to shove?

    “Samantha Power on Iran nuclear bomb: ‘We will not let it happen'”

    http://www.washingtonpost.com/blogs/post-politics/wp/2015/03/02/samantha-power-on-iran-nuclear-bomb-we-will-not-let-it-happen/?hpid=z1

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  20. It’s not possible to stop.

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  21. “And it’s a cave folks.”

    And you expected something else?

    Look, everyone knows our security apparatus would fall apart without the steady, guiding hand of giant layer of additional bureaucracy on top of the already bureaucrat-filled agencies that it “oversees” (and by oversees I mean fights-with/is-ignored-by). They can’t risk the possibility that any 4 hour meetings where bureaucrats come together to justify their jobs might be missed.

    Oh, and, um, terrorism.

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  22. @McWing: “This is more about Obama having leverage over elected D’s to keep them in line.”

    You sure it isn’t Obama trying to screw the next Democratic candidate? Because “the first thing I’m going to do is rescind Obama’s executive order to tax our country’s creators and employers” is all pretty much anybody is going to have to say to get elected.

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  23. @yellojkt: “The same reason Dennis Miller is on Fox News.”

    Well, in all fairness, Dennis Miller never won a Nobel prize. That being said, I agree: Paul Krugman caters to liberal readers (and I’m not saying consciously, I suspect his actual thoughts and positions are shifting, because of the context he finds himself in and the incentives he faces). He has become more liberal over the years in part because he’s in an environment where it is encouraged, and being more liberal is rewards while being less liberal is punished.

    Similarly, a formerly more liberal-y Dennis Miller found his hard line on child molesters and crime and terrorists was appealing to the right, and the right started feting him, and he started a similar cycle: the more right wing he was, he more benefits and accolades from the important people in his context. When he spoke in favor of gay marriage, the response was less positive, and so his position may have shifted slightly, or he just might have started getting more irritated by people agitating for gay marriage, or he may have just dropped it as any kind of regular topic.

    Additionally, at some point I think it’s like being in an eddy in a current; there’s some critical point where the rewards of one group are at a certain level and the attempts at punishment from the other group end up pushing in the opposite direction. More than one ideologue has cited punishments for “wandering off the reservation” as part of why they abandoned group A and became more open, and then a member of, group B.

    But there are a lot of factors that go into shaping and perpetuating our ideological positions, some logical, most experiential, and many a product of the reactive machinery of instinctual tribal affiliations, and basic drives to compete and win that pre-date written language. In the modern era, I think these do manifest in a variety of ways, and social (peer) pressures can and do change or affect people’s ideological positions. I don’t think Krugman consciously decided (I will abandon this so I can now be this), or that his positions are pretense, and I suspect he may not even emotionally feel that there has been any serious change since he won his Nobel prize. But where you are and what you do for a living shapes you, and incentives (as any economist can tell you) drive the market . . . even a market of one.

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  24. @Brent: “The PL-ers are convinced that this raise happened because states increased their MW laws.”

    Thus, my ongoing problem with severe ideologues. The only explanation for good things is blind conformity to my beliefs! There are no other inputs!

    Undoubtedly, the raise happened in some small part because of states increasing MW. It makes sense when making a big financial decision like this that Wal-Mart would look at what’s happening, and add it to their pro/con list as one factor the milieu.

    But the idea that Wal-Mart looked at a few states raising MW and said: “Well, that’s it. We’ve got to raise what we’re paying our employees now, because of that. And only that. That’s the only reason, and this would never have happened if those states hadn’t done it.” . . . that’s just retarded.

    Apologies for my lack of political correctness.

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  25. @jnc4p: “Which is fine, but Krugman doesn’t get to invoke his authority as a Nobel prize winner in service of his polemics.”

    Seesh. Then what’s the point of winning a Nobel prize?

    If someone gave me a Nobel prize, I’d swing that thing like a sledgehammer. “Objectively, 1980s Flash Gordon is the best movie ever. Because I say so, and I’ve got a f***ing Nobel prize, bitches!”

    Like

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