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Government jobs are by far the best-paying



Public sector workers are very highly compensated relative to their private sector counterparts, according to the latest figures from BLS, and this issue promises to be a major focus not only of the November elections but for all the state and local governments that are facing sharply deteriorating finances. Mark Perry has done such a great job in bringing this issue to people's attention that he deserves special recognition, and one way to do that is to recreate his chart and help spread the message here. As he notes,

Government employees are compensated 44% more on average per hour than private-sector employees, with 34.1% higher monetary wages and 66.4% more in benefits. On an annual basis, government workers make almost $80,000 on average with benefits (assuming a 40-hour week for 50 weeks), $24,000 more per year than the average private-sector worker ($55,460 annual compensation).
One of the biggest differences between private and public employees is the "retirement" portion of benefits. Government workers are paid $3.16 in retirement benefits for each hour worked, and almost 90% of these retirement benefits are in the form of "defined benefits" and the other 10% are for "defined contribution." In contrast, private sector employees receive only $0.96 in retirement benefits for each hour worked, and more than 57% of this coverage is for "defined contribution" and less than 43% for "defined benefits." 
The fact that retirement benefits for public workers are more than three times as generous as those paid to private sector workers, and the fact that almost all pension programs for government workers are "defined benefits," helps explains why the fastest growing group of millionaires is..... government workers.

I would add that public sector employees earn on average $4.52 per hour in the form of health insurance benefits, which is over twice as much as the $2.08 that private sector employees make. Plus, public sector employees earn on average $3.00 per hour in the form of paid leave (vacation, holiday, sick and personal), 60% more than private sector employees get.

Combine these amazing statistics with the traditional job security enjoyed by public sector workers, and you wonder how much longer taxpayers are going to put up with this.

Export activity continues to be strong


Outbound container traffic from the Ports of Los Angeles and Long Beach (which account for about 40% of U.S. container traffic) continue to reflect a significant rebound in U.S. goods exports. Indeed, outbound containers shipped from Los Angeles last May were only a few thousand shy of their level of May '08—almost a complete recovery (container traffic is not seasonally adjusted) from the global trade collapse of late 2008. Long Beach shipments, however, were still 13% below May '08 levels, but they do appear to be gaining ground rapidly. Strong export activity is not only good for U.S. growth, it also reflects health in the economies of our trading partners.

Retail sales remain strong




Retail sales were unexpectedly down 1.2% in May, but as these charts show, month-to-month volatility is to be expected, while year over year growth in sales is strong, running at 7-8%. Part of the reason sales fell was lower gasoline prices, and that is hardly a cause for concern. I don't see any reason to believe that the weakness in May was the start of a slowdown in the economy. To me it looks like a weak May was simply "payback" for a very strong (+2.1%) March. Real retail sales are running at a 4-5% pace, which is consistent with a moderate recovery. 

Swap spread update: systemic risk is fading


As further followup to my posts on the European credit crisis and swap spreads (here and here), I note that U.S. 2-yr swap spreads have now fallen almost by half since their May 25th high. European 2-yr swaps are down from a high of 90 bps to just under 77 bps. Europe still has some significant problems, but increasingly it appears that the risk of contagion in the U.S. market is low. Without contagion effects, the eventual impact of the Euro debt crisis is likely to be relatively small. More good news on the margin: the Vix index fell to 30.6 today, down from its May 21st high of 48.

Federal budget outlook is improving on the margin



Believe it or not, since January of this year the financial health of the U.S. government is no longer deteriorating. The top chart shows federal spending and revenues on a nominal basis, while the second chart shows spending and revenues as a % of GDP. Revenues (on a rolling 12-month basis) have increased by $50 billion since January (monthly receipts this year have exceeded those of the same month last year on balance), while spending has declined by about $40 billion. The deficit has thus dropped, to just under $1.4 trillion (next chart).


This is not to say we're out of the woods however. Spending remains very elevated by any measure and that is very likely to slow the pace of recovery, since government spends money less efficiently than the private sector. Also, with increased government spending comes increased regulation and control over the activities of the private sector, which is ultimately the main source of growth. Above all, massive spending ultimately requires massive tax burdens, and markets have been struggling to discount these potentially higher tax burdens ever since early last year. Art Laffer made the threat of higher tax burdens very clear in his WSJ op-ed the other day, but I read that more as a warning shot across the bow (i.e., an attempt to persuade the electorate and politicians to avoid allowing the Bush tax cuts to expire) than a flat-out prediction of impending disaster. Finally, spending is likely to move higher in coming years if no action is taken to trim government outlays and cut back entitlement programs. (Though I am hopeful that this will occur thanks to what appears to be a significant rightward shift in the mood of the electorate.)

But for now there is clear improvement in the area of tax collections, with revenues behaving in a manner which is consistent with the early years of prior business cycle recoveries. On a cyclical basis, revenues should continue to pick up and outlays should tend to be relatively subdued for at least awhile, since the economy is growing (and generating higher incomes) and the employment situation is improving (and generation fewer expenditures on things such as unemployment insurance).

The fiscal threat to recovery is still large and ominous, but on the margin it is receding—thank goodness for small favors.

Why households would benefit from higher interest rates



Today the Federal Reserve released its first quarter '10 estimates of U.S. Households' Balance Sheets. As shown in the bottom chart, Household Net Worth rose by $1 trillion during the period, driven mostly by a rise in equity prices. I note that there was yet another reduction in Household Debt, which has been declining for the past three years, and a marginal $27 billion reduction in the value of real estate holdings, which has declined by over $7 trillion since its peak in 2006. Separately, it is comforting to see that disposable personal income reached a new all-time high ($11.1 trillion). On balance, the data reflect a year-long improvement in the financial health of the nation's households.

I've disaggregated the Fed's data in order to estimate how much exposure households have to fixed and floating rate debt (top chart). The most important result is that households have far more floating rate assets (e.g, about $10 trillion of bank CDs and money market funds) than floating rate liabilities (e.g., about $2.6 trillion of adjustable rate mortgages and about $2 trillion of other short-term debt subject to rising rates). If interest rates were to rise as a result of an unexpected Fed tightening, household cash flow would immediately benefit because the increase in interest received would exceed the increase in interest paid out.

As for exposure to fixed interest rates, households would suffer somewhat from higher interest rates, since they have about 20% more exposure to fixed rate assets (mainly in the form of bonds whose price would decline as prices rise), than they do to fixed rate debt (mainly in the form of fixed rate mortgages that would be immune to higher interest rates). However, this loss would be only on a mark-to-market basis, since cash flows would be largely unaffected.

I should note that aggregate exposure to changes in interest rates is mostly a zero-sum game. Households would benefit from higher interest rates because of their very large cash holdings, but institutional investors and foreign holders of Treasury debt that have little in the way of cash, for example, would lose.

When you stop paying people who don't work, more people end up working



I first brought this up in a post last February: the untold story behind today's unemployment, and it's worth bringing up again because the data are now moving in a positive direction. So far this year there has been a reduction of over 2 million in the number of persons receiving unemployment insurance. This may go a long way to explaining why there has been an increase of 1.3 million in the number of people working this year in the private sector. I'll repeat here what I said last February, since it is still meaningful today:

The number and proportion of persons receiving unemployment insurance today is far greater than anything we've seen before. Even though this recession's highest unemployment rate of 10.1% was lower than the highest unemployment rate (10.8%) of the 1981-82 recession, the portion of the workforce receiving unemployment compensation today is 63% higher than it was at the peak of the 1982 recession. Fully 78% of those looking for a job today are receiving unemployment insurance, compared to only 38% at the height of the 81-82 recession.

Never before have we seen anything even close to today's largesse and compassion for those without a job. While not wanting to argue whether this is right or wrong, I would however argue that the aggregate desire of the unemployed to find a job today is undoubtedly much less than it was during the depths of the 81-82 recession.

And so we have here one more reason why this recovery is proceeding more slowly and painfully than we all would like to see. Not only are employers reluctant to hire because of all the legislative, political, and tax uncertainty out there, but the incentive for workers to seek out the jobs on offer is weaker than ever, especially for those jobs that don't come equipped with salaries exceeding their current exceptional benefits. Congressional compassion has its costs, and they are not just measured in terms of expenditures, but also in a slower recovery.

The trade picture looks bright


Exports fell a bit in April, but upward revisions to past data meant that the April figure was still higher than the previously reported March number. In any event, month-to-month variations in the data are to be expected; the important thing is the trend, and that is solidly positive. Exports have been growing at a 20% annualized pace for the past six months, and have now recovered 60% of the decline that occurred from July '08 through April '09. Trade is getting back on track, and smartly so. Strong growth in exports adds significantly to GDP growth, and strong growth in imports reflect a rebound in the health of U.S. consumers.

That the trade deficit persists is of no particular concern. It's less than it was a few years ago, but that has a lot to do with the lower price of crude oil. It's important to understand that the difference between the import and export of goods and services is completely offset by a corresponding flow of capital. The U.S. deficit in tradeable goods and services is matched by an inflow of foreign capital that ends up purchasing our assets (e.g., stocks, bonds, bank CDs, real estate). If foreigners were to decide they no longer want to purchase our burgeoning Treasury debt, then they would have no choice but to spend their export earnings on stocks, real estate, bank CDs, or to buy more of our exports. It would be better, of course, if the federal government weren't spending and borrowing so much, but that only means our recovery will be weaker than otherwise (because the government spends money less efficiently than the private sector). It doesn't mean that we are at the mercy of foreign lenders.

A rapidly expanding trade sector is an excellent sign of U.S. health, and it also means that the economies of other countries are also on the mend.

Weekly claims make scant progress, but that's not bad news



Weekly unemployment claims have been in a relatively flat trend this year, averaging 462K per week, only slightly more than the 456K reported for the most recent week. Does this mean the jobs market is stalling? That's what many doom-and-gloomers would have you believe. Alan Reynolds has a nice op-ed in today's WSJ, in which he pokes fun at those who twist and turn the data to make things look worse than they really are: Don't Believe the Double-Dippers. I generally agree with Alan on most things, and this time is no exception.

Although there has been no appreciable decline in claims so far this year, there is also no evidence of any deterioration. And as I noted last Friday, the household survey says there have been about 1.3 million jobs created in the private sector so far this year—that trumps flat claims in my book. Moreover, as the second chart shows, the number of claims relative to total payrolls continues to inch down, and is not particularly high to begin with, when viewed from a long-term historical perspective. And speaking from an historical perspective, it is not unusual at all for claims to be flat even as the economy is expanding.

Dollar update: still somewhat weak


I've shown this chart periodically because I think it is arguably the best measure of the dollar's true value against a large basket of currencies. It's not only trade-weighted, but also inflation-adjusted. The Fed recently released data through April, and I've estimated where the line would be in June based on the dollar's recent rise against most major currencies. Although the dollar is king of the hill on the margin these days, from a long-term, inflation-adjusted perspective it is still below average and only about 10% above its all-time lows.

For the curious, the dollar was the all-time champ from 1982-1985, and for good reason. The U.S. had lowered marginal tax rates significantly, at the same time the Federal Reserve was pursuing very tight monetary policy. Lower tax rates helped turbo-charge the economy, while tight money brought inflation down from double-digits to just 4%. This combination meant that demand for dollars soared (everyone wanted to invest in the U.S.) while the supply of dollars was restrained; not surprisingly, the price of dollars surged. That same period also saw the price of gold collapse from $700 to $300/oz.

The dollar then collapsed from 1985 to 1987, due to a concerted effort by the Fed and the world's central banks to bring it down. The Fed did its part by increasing the amount of bank reserves by over 50% in just under three years. It's also worth noting that the marginal appeal of lower tax rates was exhausted by 1987, as the effective capital gains tax surged from 16% to 23%. So in effect the dollar suffered from the double whammy of easier monetary policy and higher tax rates, which in turn boil down to more money supply and less demand for it.

Today the dollar is not collapsing, despite super-accommodative monetary policy and higher expected tax rates, because all currencies are in the same dismal boat.

Moral: when you look for explanations of the really big changes in macroeconomic variables such as the value of the dollar, you don't have to search very far.

Chinese export boom


News that China's exports surged 50% in the 12 months ended May have helped to energize the market today. Although the data is not yet official, I've indicated on this chart of China's exports (with a red arrow) where the May data would be based on the report. May '10 exports are now 10% higher than they were in May '08 (this data is not seasonally adjusted), before the global slowdown hit. This news strongly suggests that China's economy has made a complete recovery, and that has to be good news for the global economy as well.

Systemic risk still high in Europe, but not too bad in the U.S.


Two weeks ago I highlighted the spike in swap spreads both here and in Europe, noting that they indicated deep-seated fears of banking risk in Europe, and the possibilty that this could end up tipping the U.S. economy into a double-dip recession. Europe is still in the grips of that fear, as 2-yr swap spreads hover around 80 bps, with 30-40 being a more normal level. (The main driver of wider spreads in Europe is an unprecedented—for Europe—flight to quality, as evidenced by plunging yields on German government debt: 2-yr German govvies now yield a mere 0.5%, while 10-yr Bund yields have fallen to 2.5%, by far the lowest level I can recall.) But U.S. markets have become much less concerned about banking risk, since 2-yr swap spreads have backed off to just over 40 bps, which happens to be equal to their 20-year average, and OIS spreads (overnight swap rates minus 3-mo. T-bill rates) are only marginally higher than average.



This next chart collects the three major indicators of market fear and uncertainty in the U.S. A few things stand out. For one, the current fear episode is much less severe than the panic of late 2008. Two, fear is concentrated in the equity market; the Vix index has backed off its recent highs, but is still significantly higher than average and well above "normal" levels of 10-15.

Putting all the pieces together, these market-based indicators are telling us that the U.S. market's main concern is with the possibility of a double-dip recession, which in turn might be triggered by a banking crisis in Europe. It's very hard to find However, most of that fear is based on events that have not yet happened. To date there have been no signs of a developing recession in the U.S. or in Europe, and there have been no defaults yet in Europe. Commodity prices are down from their recent highs, but not by nearly enough to warrant the conclusion that global demand is shutting down.


I wouldn't be surprised to learn that the unusually wide spreads and the general sense of a banking panic in Europe are being driven more by speculation than by fundamentals. For example, note in the above chart that it is industrial metals and petroleum products (which can be driven by commodity speculation) that have moved the most—both up and down—whereas the more obscure commodities (e.g., cotton, burlap, polyester, hides, rubber, tallow, plywood, and red oak) that are in the Textile and Misc. subindices of the Journal of Commerce Index are still trending higher. Speculators, fresh from studying how the 2008 banking crisis and economic collapse in the U.S. unfolded, are surely eager to profit from a what they expect will be a similar chain of events in Europe.

Speculative attacks can be self-fulfilling prophecies, of course, but in this case they are occurring against a backdrop of strength (global recovery in demand, rising production, accommodative monetary policies), whereas in 2008 the panic grew out of the unravelling of the housing market and its myriad derivative securities that was several years in the making, and it all reached a climax with the government's fatal mishandling of Lehman. Spreads soared—both here and in Europe—because people were running for the exits. Spending collapsed because of fears of a global banking collapse, and because many borrowers were unable to fund themselves and/or were forced to sell positions at firesale prices. The problem in Europe is much less broad, involving only a handful of borrowers and vastly smaller sums of money. Perhaps spreads are wide at least in part because of speculative short-selling, rather than broad-based panic. In any event, as I've mentioned before, buying Greek CDS or otherwise betting on a banking or sovereign default is an expensive proposition, especially now that spreads are so wide. The more time passes without a default, the less interested speculators will be in holding positions which are currently costing anywhere from 250 to 800 bps per year. And since U.S. spreads are not nearly as wide as they are in Europe, the market is implying that the risk of contagion is much less this time around.

This may be unscientific of me, but I'm reluctant to buy into the fears of double-dip recession. If for no other reason, it seems there are just too many people running around predicting the collapse of Europe. A friend sent me a lengthy piece from BMO Capital Markets in Canada, with the title "Go to Cash — In Plain English." It points out all the things that could go wrong in Europe and recommends that investors sell ALL equity positions and hide out in cash, which by the way is paying virtually nothing. This is the kind of recommendation that will pay off only if disaster strikes. The last disaster caught nearly everyone unaware and unprepared, and that was a big reason it was so destructive; but we can hardly expect a widely-anticipated European banking crisis to be as bad.

Commodity prices have not collapsed


Lots of talk these days about how commodity prices have collapsed and are therefore predicting an imminent double-dip recession. Just to put that in perspective, here's an updated version of one of my favorite commodity price indices, the CRB Spot. Many of its components (see fine print in chart) are just basic industrial stuff, and not subject to futures-related speculation. Yes, the index has fallen since April, but it is only down 7% from its recent, all-time high. It is still up about 40% from its low at the end of 2008, and up 102% from its low in late 2001, which is when most commodities hit bottom—that works out to an annualized gain of almost 8%, which is not too shabby considering that the S&P 500 has not advanced at all during that same period. Just looking at the chart tells me that commodities have had a tremendous runup, and the recent correction is nothing more than that—just a correction. The message here continues to be that global demand is strong and prices are also being supported by easy money. This is a reflation signal, not a double-dip indicator.

All currencies are weak relative to gold


With gold today hitting a new all-time against the dollar, and the world fixated on how the euro is "plummeting," I thought a bit of perspective was in order. As this chart shows, the euro (as the extension to the DM) and the dollar have been moving pretty closely together relative to gold. That is to say, both have depreciated by almost the same amount since 1978, with the dollar for the most part leading the way. You might say that the euro's current weakness is more in the nature of "catch-up" to the dollar than anything else. Recently, the euro was trading at a nice premium to the dollar, but that premium is no longer justifiable given eurozone credit concerns and the bailout of Greece.


As the second chart shows, the euro—relative to its purchasing power parity vis a vis the dollar—has not changed much at all since 1978. It was slightly overvalued then as it is now. In other words, relative to 1978, one euro today will buy you about the same basket of goods and services in Europe as it would in the U.S. So the message of these charts is that both the euro and the dollar have fallen by more or less the same amount relative to gold. The yen is the only currency that is worth more today, in terms of gold, than it was in 1980.

Regardless, the movements of major currencies relative to each other is now dwarfed by the movement of all currencies relative to gold. Put another way, the biggest thing happening today in the currency markets is the collapse of all currencies relative to gold (or should I say the rise of gold against all currencies?). If gold is still the timeless standard against which to measure currencies as it has been for centuries, then today it can be said that the relative valuation of one major currency relative to another is an order of magnitude less important than the relative valuation of all currencies relative to gold.

If all major currencies are losing value relative to gold, that is a good sign that the world's supply of money exceeds the demand for it, and that is a necessary precursor to rising inflation. We should expect to see inflation rising in just about every country, and it ought to show up first in lesser-developed countries, since their economies are generally more exposed to international trade and have a lot less inflation "inertia" than the U.S. economy.

I continue to believe that it makes a lot more sense to worry about inflation than it does to worry about deflation, given the significant rise in gold over the past 10 years.

Impressive strength in the used car market


The Manheim index of used car prices has surged 23% since its year-end 2008 low, and has made yet another all-time high. This provides strong evidence of a resurgent U.S. economy, while at the same time highlighting the fact that there appears to be no shortage of money. As Manheim notes, "Pricing strength in the wholesale used vehicle market remained broad-based as an improved labor market and increased credit availability boosted the demand for the limited supply of wholesale units." Contrast the action in the past year or so to the action in the market for two years following the 2001 recession: back then there was a lot of downward pricing pressure, thanks to very tight monetary policy in prior years. Today that is simply not the case—money is in plentiful supply, which explains why gold is hitting a new all-time high today and the dollar is trading in the lower end of its historical range against other major currencies, and is only about 7% above its all-time lows against a large basket of currencies on an inflation-adjusted basis.

And if nothing else, it's very hard to reconcile the strength in used car prices with all the talk about an imminent double-dip recession.

German manufacturing orders look strong


Despite the drumbeat of pessimism that seems just about everywhere, good news can still be found. This morning it was news that German manufacturing orders rose by a surprising 2.8% in April, far more than the 0.4% decline that was expected. Over the past 12 months, orders are up fully 30%. As the chart shows, you might say that German manufacturing orders are experiencing a V-shaped recovery.

That brings up a subject I've wanted to address for some time. What exactly constitutes a V-shaped recovery? Could it simply be a chart that looks something like this one? What about the slope of the right side of the V: how steep does it have to be to qualify as V-shaped?

Here's one proposal that makes sense to me. To begin with, just about every economy in the world suffered a recession of sorts that drove actual output below its long-term trend. According to my calculations, for example, U.S. real GDP appears to be about 10% below its long-term trend (or call it full-employment output). The long-term trend growth rate of our economy is roughly 3%. We won't have a full recovery until real GDP returns to trend, and that will require that real growth exceed 3% a year for some period.

So I'm going to propose that a V-shaped recovery is growth that, if it continues, will eventually restore the economy to its full-employment level of output. In the case of the U.S., that would be annual real GDP growth of more than 3%. If growth is only 3%, then we will be permanently below full employment and the unemployment rate will be forever very high, and the mood of the country will be sour, if not worse. That's what I would call an L-shaped recovery--it's not really a recovery at all.

The chart above would be a good illustration of a V-shaped recovery, since if the current trend in German manufacturing continues, then activity will return to its long term trend in a few years.

The key to whether a recovery is V-shaped lies in whether the slope of the right side of the V is greater than the economy's trend rate of growth. If it is, then it's a V. If it's not, then it's an L.

Federal debt is not even close to 100% of GDP


It's lately become fashionable to worry about federal debt soon (by the end of this year) exceeding GDP. As much as I abhor Washington's utter disregard for fiscal sanity, we are still a long way from seeing federal debt exceed GDP. Those who claim we are close are exaggerating, because they use "Total Debt Outstanding," which happens to include $4.5 trillion of "Intragovernmental Holdings," otherwise known as debt that we owe to ourselves (e.g., Treasury securities held by the Social Security Adminstration). That is not really debt, it is just a promise that one arm of the government will deliver money to another arm. The proper amount of current federal debt, which can be found here, is "Debt Held by the Public," which is just under $8.6 trillion today. That is debt that our federal government is obligated to pay to individuals and institutions both here and abroad.

Using reasonable assumptions about the next six months of debt and nominal GDP growth, net federal debt by the end of this year will likely be about 60% of GDP. That's more than anything we've seen since the early 1950s, but it's not yet of catastrophic proportions.

It's going to be rising fairly rapidly, of course, especially if federal spending is not checked and the economy experiences a weak, "new normal" recovery, as most seem to expect. But still it's not likely to exceed 100% of GDP for at least 4-5 years, and even then it won't be anywhere near the levels that have existed in Japan for many years already.

Debt and deficits are on an unsustainable path, to be sure, but we are not yet beyond the point of no return. There is still time to make a mid-course correction; there is still room for optimism. We are following in Greece's footsteps, but we are still way behind them. That's no reason to cheer, but it is a reason to try to fix things before they reach the breaking point, and that's what I'm hoping will happen in the wake of the November elections.