Let’s admit that the monthly non-farm payroll report is among the most difficult for economists to forecast.  There are not many reliable inputs as it is the first piece of real sector data for a new month. 

Nevertheless, it is an important piece of economic data, and which, as we saw earlier in the year, a significant downside miss could freeze the Fed.  

Let’s admit that the monthly non-farm payroll report is among the most difficult for economists to forecast.  There are not many reliable inputs as it is the first piece of real sector data for a new month. 

Nevertheless, it is an important piece of economic data, and which, as we saw earlier in the year, a significant downside miss could freeze the Fed.  

There are four data points that suggest that a strong September jobs report, to be released on October 7. 

1.  Weekly initial jobless claims have fallen about 10k whether using a four-week moving average or comparing the survey weeks. 

2.  There were about 50k more people than average who missed work in August due to the weather.  The lion’s share will likely have returned. 

3.  The Conference Board’s measure of consumer confidence showed the gap between jobs plentiful and hard to get rose to 6.3 (from 4.0) and is the highest since August 2007. 

4.  Income tax withholding in September is running almost 6% on average higher than in August. 

Some other details of the jobs report may also be constructive.  The average weekly hour’s works are expected to rise by 6 minutes, which does not sound like a lot, but when there are 157 mln workers, it turns out to be 457k full-time equivalents.  Average hourly earnings are expected to rise 0.2% for a 2.6% year–over-year rate, which is the upper end of the where it has been since 2010. 

The under-employment rate has steadied around 9.7%.  It remains well above pre-crisis levels when it was closer to 8%.  There does appear to be a structural shift in the economy, not just in the US but globally.  Less educated and less skilled workers are at a clear disadvantage.  There are various reasons why this might be the case, including global competition and technology.

Consider that unemployment for those with a college degree in the US stands at 2.5%.  With a high school degree, but no college, the unemployment rate is more than double at 5.5%.  Those without a high school diploma, the unemployment rate are more than three-fold higher than for college-educated (7.7%). 

We read the recent FOMC statement and the dot plot to mean that the bar to a December rate hike is low.  The data does not have to improve much for the Fed to act.  Our back of the envelope calculation suggests the US economy created a little more than 200k jobs in September.  The jobs report we expect will be more than sufficient for the Fed to hike rates this year.   

That said, we think the odds of a November hike are next to nothing, even though Bloomberg calculation puts it at 17% today.  There is no precedent for a rate hike a week before a national election.  We think that the partisan claims that the Fed has not raised interest rates because of its politics are wide of the mark.  The arguments offered by Governors Brainard and Tarullo and Chicago Fed President Evans for even more caution than the Federal Reserve has shown are based purely on economic analysis.

Quick Look at Why the September Jobs Data will Likely Be Strong is republished with permission from Marc to Market

The post Remember September (for Jobs Data) appeared first on Economy Watch.

The pessimists have claimed that the US is generating low paying jobs. Nearly every monthly jobs report is followed by what seems to be a canned retort.  The media picks up on the story and continues to regenerate it.  Earlier in the recovery, the argument made sense.  It makes less sense now. 

The pessimists have claimed that the US is generating low paying jobs. Nearly every monthly jobs report is followed by what seems to be a canned retort.  The media picks up on the story and continues to regenerate it.  Earlier in the recovery, the argument made sense.  It makes less sense now. 

This Great Graphic comes from the NY Federal Reserve.  It shows US jobs growth in two periods. From 2010-2013, the US created more jobs with low pay that high wage jobs or middle wage jobs. However, that changed in the 2013-2015 period.  Middle paying jobs grew sharply.

Taking the 2010-2015 period as a whole, employment growth was nearly equally distributed. Low wage jobs accounted for 35% of the 10.8 mln jobs created.  High wage jobs accounted for a full third of the jobs growth.  Middle wage jobs accounts for 32% of the new jobs. 

This is not to deny the significance of the disparity of income or wealth in the US.  The point is to understand what is happening.  The disparity may be a function of educational achievement. Consider that the unemployment rate for people 25-year or older with a Bachelor’s degree is 3.0%, after falling to 2.3%, this past April.  It peaked in July 2010 at 5.3%.

This suggests a structural shift is taking place, with lower skilled and/or less educated people being replaced by technology and foreign workers.   It appears that when a US company builds production facilities offshore, unskilled or low skilled workers compete directly with unskilled and low skilled Americans.

However, hiring foreign skilled workers compliments rather than competes with skilled American workers.

Great Graphic: What Kind of Jobs is the US Creating? is republished with permission from Marc to Market

The post Are Quality Jobs being Created? appeared first on Economy Watch.

On Labor Day, politicians have traditionally paid lip service to the plight of the worker, whom the national holiday is meant to honor. With working-class struggles taking center stage in this year’s election, we will likely hear from them more than usual talking about the steps they will take to reduce income inequality or end three decades of wage stagnation.

Some of them will go one step further and voice support for unions and collective bargaining, both of which have declined at the same time wages have stagnated.

On Labor Day, politicians have traditionally paid lip service to the plight of the worker, whom the national holiday is meant to honor. With working-class struggles taking center stage in this year’s election, we will likely hear from them more than usual talking about the steps they will take to reduce income inequality or end three decades of wage stagnation.

Some of them will go one step further and voice support for unions and collective bargaining, both of which have declined at the same time wages have stagnated.

They do so for good reason. Not only have American workers made it clear they are fed up with being left behind as the economy prospers, there is a growing body of evidence that union decline is one of the key causes of wage stagnation and income inequality.

The solution, however, isn’t to bring back the unions of yesterday. We need to create stronger business-labor partnerships for tomorrow.

Employers can get ahead by investing in their workers, with higher wages. Rebecca Cook/Reuters

Slide of union power

As far back at the mid-1980s, our research at MIT showed that collective bargaining was no longer capable of using the threat of strikes or other forms of pressure to get businesses to match negotiated wage increases.

Previously, strike threats and the fear of getting organized led companies to match wages negotiated in key bargains. For example, in the late 1940s, General Motors and the United Auto Workers negotiated a wage formula linking wage hikes to increases in productivity and the cost of living. Unionized businesses had to follow suit or risk a strike. Even companies without unions had to do the same if they wanted to avoid their workers getting organized.

Recent research shows that the decline in union bargaining power observed in the 1980s has persisted and has now taken a big toll on union and nonunion workers alike. A just-released report from liberal-leaning think tank the Economic Policy Institute, for example, estimates that the decline in unions – from 23 percent in 1979 to 11 percent in 2013 – and their collective bargaining power has caused men in the private sector to earn US$109 billion less every year and women to earn $24 billion less.

Other recent research shows that the decline in wages has now spread to the public sector. Teachers have been especially hard hit. In 1979, teachers earned just 2 percent less than comparable college graduates. In 2015, the earnings gap had widened to 17 percent.

Southwest Airlines follows a “high road” economic strategy by investing in its workers. Rick Wilking/Reuters

More than empty rhetoric?

Research like this has convinced more Democratic candidates to call for rebuilding labor unions.

However, is that possible or is it just empty rhetoric?

As I’ve argued before, I believe it is empty for two reasons. First, since 1978 three major efforts to pass labor law reform to make it easier to form a union have been blocked in Congress. In addition, there is no reason to believe this will change.

Second, even if unions started growing again, they would not be able to rely on their past sources of power to drive up wages. There is just too much domestic and international competition, and it is too easy to move capital and jobs to lower-wage countries. That makes it much harder to use strike or unionizing threats to get businesses to lift wages or match negotiated increases.

So what else can be done? In previous articles, I’ve made the case for a new labor policy that not only supports unions but also promotes labor management partnerships. I’ve also suggested extending protection against employer retaliation to more workers, such as fast-food employees fighting for a $15 minimum wage or independent contractors like Uber or Lyft drivers. These changes would help reframe labor policy to fit the modern economy.

However, labor policy can no longer stand alone. A more complete strategy is needed that integrates a revised labor policy with something known as a “high road” economic strategy.

At MIT, my colleagues and I teach this approach to our MBA students, in executive education classes and in our public online courses. We tell current and future business executives that they have a choice in how they compete in the marketplace: They can minimize labor costs and fight to keep unions out of their organizations or they can invest in their workers, drawing on their knowledge, skills and motivation to achieve high levels of productivity and customer service. Then reward those employees with their fair share of the profits they help produce.

Over the past two decades, researchers have discovered how companies employing this “high-road” approach – such as retailers like Costco or Market Basket, airlines like Southwest or health care providers like Kaiser Permanente – do just as well or even better on long-term financial returns, customer service and wages than “low-road” competitors, such as Walmart or Spirit Airlines.

The old manufacturing jobs won’t come back. Instead, the government could help support jobs making tomorrow’s technologies, like wearable tech. Elijah Nouvelage/Reuters

The task ahead

How can we encourage more companies to move in this direction?

As educators, we have an important role to play, but our efforts need to be matched by a well-coordinated effort that cuts across the federal government and business to realize the benefits of a high-road policy. One example is repairing America’s decaying infrastructure through public-private partnerships, to which some business and labor leaders have already committed.

The same deal needs to be struck in implementing a new manufacturing policy. We are not likely to bring back many of the jobs lost to China and other lower-wage countries. The best way for government to help rebuild our manufacturing base is to support investments in next generation technologies, such as light metals, photonics, robotics and wearable fibers that will generate energy and cool our bodies. However, it’s also important to insist the businesses getting federal funding commit to making their products here and investing in their workforces.

So this Labor Day, I believe candidates need to go beyond the empty rhetoric of the past and commit to doing the hard work of recasting labor policy in ways it might be possible to enact.

Then they should follow up with the comprehensive and disciplined administrative actions needed to realize a high-road strategy that puts the economy on a course that will truly work for all.

It’s time we reinvented labor for the 21st century is republished with permission from The Conversation

The post Working (Harder) for a Living appeared first on Economy Watch.

Concern over the employment consequences of globalisation is again driving political debate. Look no further than the United Kingdom’s exit from the European Union and the rise of protectionism in American and Australian politics to see the disenfranchisement of low-skill workers with the effects of international trade. Judging by the dramatic change that has occurred in the global distribution of manufacturing output in the past 25 years it’s easy to see why these workers should be so concerned.

Concern over the employment consequences of globalisation is again driving political debate. Look no further than the United Kingdom’s exit from the European Union and the rise of protectionism in American and Australian politics to see the disenfranchisement of low-skill workers with the effects of international trade. Judging by the dramatic change that has occurred in the global distribution of manufacturing output in the past 25 years it’s easy to see why these workers should be so concerned.

In the early 1990s the United States accounted for 30% of manufacturing output, retaining the position as the world’s leading industrial producer that it had held for almost a hundred years. At that time, China produced only 5% of global manufacturing output.

Today that position has completely reversed. China produces 25% of manufacturing output and the US only 15%.

Differences in labour costs between the US and China explain much of this transition. Many types of manufactured goods mainly require relatively low-skill labour to produce (especially goods such as textiles and footwear, motor vehicles, electronic consumer goods).

Developing countries, where wages paid to low-skill labour are much lower than in developed countries, are able to produce these manufactured goods more cheaply. As developing countries such as China have increased their engagement with international trade this has caused a large-scale switch in the location of production of manufactured goods – from developed to developing countries.

Recent research has found that low-skill workers in the US have been made significantly worse off by the transfer of manufacturing activity to China.

The research estimates that, without the rise in Chinese imports, there would be 560,000 extra manufacturing jobs in the US today. As well, workers in industries most exposed to competition from Chinese imports are found to have experienced an average income decline of over $500 per annum against annual earnings of $40,000. This negative effect on annual earnings has been largest for workers with the lowest earnings.

Another important finding is the role of location in explaining the impact on the US labour market of increased imports from China. Manufacturing industries facing competition from China are concentrated in particular locations in the US (mid-west and southeast). It is in these regions that the impact on low-skill workers has been largest.

The geographic concentration also explains why it is taking workers who have been adversely affected so long to get back into work. A larger number of job seekers chasing the available job vacancies in a region mean longer average times spent out of employment.

Manufacturing workers in the US may have been made worse off by globalisation, but economic theory predicts that there should also have been winners in the US. With increased international trade, the US can produce and export to China more of the goods where it has a comparative advantage as a supplier – such as professional services that require high-skill labour to produce. In other words, China uses the extra income it earns by selling manufactured goods to the US to buy other goods and services from the US.

However, so far there is not much evidence that this has happened. Instead of using its extra income gained from selling manufactured goods to buy more imports from the US, throughout the 2000s China saved that income, maintaining a large trade surplus. The benefits to US workers from globalisation therefore have been muted compared to the prediction of economic theory.

The experience of a rapid rise in imports of manufactured goods from China is, of course, not unique to the US. While much less is known about the impacts on those other countries, what is known is consistent with the US experience.

Other research finds that in the UK in the 2000s, workers in sectors most affected by growth in imports from China spent more time out of employment and experienced a drop in earnings. Again, these effects were most pronounced for low-skill workers.

Australia has shared the experience of rising exposure to international trade with the US and UK. From 1960 to the mid-1970s in Australia, the share of international trade (exports plus imports) in GDP was constant at about 25%.

Since then the role of international trade in economic activity has increased steadily, now being above 40%. While there has not been much research on the topic for Australia, it seems that the recent rise in China’s manufacturing output has had less impact than in the US or UK. There had already been substantial declines in the share of workers in the Australian manufacturing industry in the 1970s and 1980s, so there was less scope for a negative effect.

What Australia has shared with other developed countries is a commitment to being increasingly open to international trade. To a large degree, this policy stance has been motivated by economic theory, which predicts that the gains to the winners from growth in international trade more than offset the costs to the losers. A lack of evidence about the winners from international trade challenges this orthodoxy – or at least suggests that it cannot be taken as an article of faith.

The least-skilled workers are the losers in globalisation is republished with permission from The Conversation

The post With Globalization, You’ll Need Skills appeared first on Economy Watch.

This Great Graphic comes from the Wall Street Journal.  It shows what is happening to the pay of the least compensated in the US.  Their pay is going up at a pace that is exceeding the averages and inflation.

The data is from Q2 16.  Weekly wages for full-time employees in the 25th percentile, earning about $13 an hour, are up about 3.1% from a year ago.  The Labor Department data show that this is the largest increase since 2009.  The pace of increase exceeds the pay of median workers who make about $20 an hour for full-time work.

This Great Graphic comes from the Wall Street Journal.  It shows what is happening to the pay of the least compensated in the US.  Their pay is going up at a pace that is exceeding the averages and inflation.

The data is from Q2 16.  Weekly wages for full-time employees in the 25th percentile, earning about $13 an hour, are up about 3.1% from a year ago.  The Labor Department data show that this is the largest increase since 2009.  The pace of increase exceeds the pay of median workers who make about $20 an hour for full-time work.

While many companies who are giving their lowest paid workers raises are broadcasting it widely and loudly, they seem to have barely re-discovered good business practices that Henry Ford found more than 100 years ago.  Reports suggest that employee turnover at call centers has dropped and employee satisfaction surveys show improvement.  There are reports showing lower employee turnover and a decline in hiring and training costs.

Alan Krueger, a former Obama adviser, was quoted in the WSJ arguing that the pay increases was a “hint” of a corporate shift toward more profit-sharing.  This seems a bit of an optimistic read.  However, more compellingly, he argues that the pay increases show that “wage policy is not fully dictated by the market.”  A strictly market-driven approach would set different wages in different cities.  There would be no national wage policy.

Since 2014, WSJ reports, 26 states have raised minimum wage, as have many cities.  The federal minimum wage has been at $7.25 for seven years and counting.

This is consistent with our macro call for a continued increase in US price pressures.  Our argument sits on three legs:  rents, medical services, and wages.  We anticipate one hike this year, and are penciling in two for next year.

Great Graphic: Low Wages in US Rising is republished with permission from Marc to Market

The post Wages, albeit the Lowest, Appear to be on the Rise appeared first on Economy Watch.

There is something for everyone in today’s US jobs report, and at the end of the day, it is unlikely to sway opinion about the direction and timing of the next Fed move.  The greenback itself may remain range bound after the initial flurry.  On the other hand, the disappointing but noisy Canadian data underscores the risk of a more dovish slant to the central bank’s neutral stance next week. 

There is something for everyone in today’s US jobs report, and at the end of the day, it is unlikely to sway opinion about the direction and timing of the next Fed move.  The greenback itself may remain range bound after the initial flurry.  On the other hand, the disappointing but noisy Canadian data underscores the risk of a more dovish slant to the central bank’s neutral stance next week. 

The 287k nonfarm payroll growth in June (265k private sector) will ease fears that the US is headed for a recession.  That type of jobs growth, and the stronger than expected, service sector ISM earlier this week, are not consistent with a contracting economy.  The manufacturing sector gained 14k jobs, the most since January, recouping most of the 16k positions lost in May.  This bodes well for manufacturing output. 

The participation rate ticked up to 62.7%, but the 0.1% increase translated into a 0.2% increase in the unemployment rate to 4.9%.  The underemployment rate slipped to 9.6%, a new cyclical low.

There were a couple of disappointments.  Hourly earnings did not rise as much as expected.  Still, the 0.1% increase was sufficient to lift the year-over-year rate to 2.6%, which matches the cyclical high.  We already know that auto sales disappointed in June and this will weigh on retail sales.  However, the fact is that more people are working and earning a little bit more.  This should help underpin consumption. 

Another disappointment was the May revision.  The initial 38k increase turned into an 11k gain, though April was revised higher.  Moreover, the private sector lost jobs (6k) in May for the first time since 2009.   

This points to the volatility of the real economy.  Remember that part for the neoliberal promise was that the prices of financial variables could make more adjustments so that the real economy need not. This helped facilitate the Great Moderation, which was characterized by longer business cycles with smaller swings.  The price of financial variables no longer seems to be acting as a shock absorber, and this may be contributing to greater economic volatility.

Canada’s employment report was less robust.  It reported a loss of 700 jobs. The job loss was function of a drop of 40.1k full-time positions and a gain of almost as many part-time posts.  The participation rate fell 0.2% to 65.5%, helping bring down the unemployment rate to 6.8% from 6.9%.

Seasonal distortions are often blamed for the large month-to-month swings in Canada’s full-time employment.  However, a 12-month moving average should smooth it out, it is still an uninspiring 2.6k, and the six-month average is half of that. 

The Bank of Canada is not about to change rates at next week’s meeting.  However, the economy is disappointing, and within its neutrality, look for Governor Poloz to sound somewhat more dovish. The decline in non-oil exports in May, a record trade deficit excluding the US, and a decline in imports, point to economic headwinds.

North American Jobs Report and Implications is republished with permission from Marc to Market

The post Jobs Report Unlikely to Sway the Fed appeared first on Economy Watch.

Initial previews of America’s job market indicate resurgence for workers, but economists remain wary. Jobless claims fell to their lowest point in three months last week, falling to 254,000 versus 270,000 the previous week. That is far below consensus expectations of flat jobless claims, as more Americans find new jobs and return to work.

Initial previews of America’s job market indicate resurgence for workers, but economists remain wary. Jobless claims fell to their lowest point in three months last week, falling to 254,000 versus 270,000 the previous week. That is far below consensus expectations of flat jobless claims, as more Americans find new jobs and return to work.

At the same time, private payroll firm ADP reported that America’s private sector gained 156,000 jobs in April, with most of the gains coming from small businesses, which hired 93,000 employees in April. Large businesses trailed significantly, with just 24,000 new jobs added.

While manufacturing was the only industry to see a decline in jobs, with a loss of 13,000, construction job gains of 14,000 compensated for the loss, while professional and business services led with a gain of 27,000 jobs. Of industries seeing job growth, financial services trailed the rest, with just 4,000 jobs added.

Vice President and ADP Research institute chief Ahu Yildirmaz noted that small businesses remain the primary engine of America’s labor market, and the country’s economy as a whole. “Despite the softest overall monthly jobs added in three years, small businesses remained an engine for job growth in April,” he said, adding that this is largely thanks to the fact that macro headwinds do not impact small businesses as much as they do larger ones. “Smaller businesses are less susceptible to global conditions, such as low commodity prices and the strong dollar, which may have caused larger businesses to ease up on hiring.”

The decline in financial jobs is a continuing trend that has persisted since the Global Financial Crisis of 2007-2009, when many large investment banks shed jobs amidst a liquidity crisis and fears of spreading insolvency throughout the financial industry.

Since then, the financial industry has rapidly shrunk, with large investment banks in both America and abroad routinely shedding thousands of jobs as a cost-cutting measure. Many banks have said they are streamlining operations and looking for more efficient uses of human capital to offset declining profitability and weak demand.

Moody’s Analytics Chief Economist Mark Zandi warns that the job growth is a disappointment, as it represents a 24% decline in the growth rate from March. “The job market appears to have stumbled in April. Job growth noticeably slowed, with some weakness across most sectors. One month does not make a trend, but this bears close watching as the financial market turmoil earlier in the year may have done some damage to business hiring,” he said.

The data comes shortly after a report by Challenger, Gray, & Christmas, a human resources specialist firm, which saw America lose 38,536 jobs in June.

CEO John A. Challenger said job cuts may slow in future months on economic uncertainty, but that will also cause new job growth to slow as well. “We may continue to see low job cut totals throughout the remainder of 2016, as employers take a wait-and-see stance on workforce levels. Several uncertainties, including national elections, the recent Brexit, and global security and economic issues are giving employers pause when it comes to workforce decisions,” he said. “We are seeing it in layoff numbers, as well as the job creation numbers, which have been lackluster in recent months.”

The post Initial U.S. Job Data Strengthens appeared first on Economy Watch.

The US employment data tends to be among the most important economic reports during the monthly cycle.  It often injects volatility into the market.  The report itself tends to be volatile and subject to revisions.  Economists have little input on which to base their forecasts.

The US employment data tends to be among the most important economic reports during the monthly cycle.  It often injects volatility into the market.  The report itself tends to be volatile and subject to revisions.  Economists have little input on which to base their forecasts.

One of the reasons that the US employment data resonates with market participants is that is has policy significance.  Full employment is one three Fed goals (alongside price and financial stability).   However, this time, there is little policy implication, and to the extent there is, it could be asymmetrical.  A disappointing report may have greater impact than a stronger report. 

After two disappointing monthly reports, with 123k rise in April and the shocking 38k in May, it may take more than one report to convince Fed officials that robust job growth continues. The Q1 average was 196k, which is nearly impossible to match in Q2.   Last year’s average was 229k.  

The market expects 170k-185k increase in non-farm payrolls.  The service sector ISM showed a jump in the employment index to 52.7 from 49.7.  Weekly jobless claims eased over the period. While the ADP estimate is in line with expectations, it reported that small businesses expanded their employment more than large businesses and the BLS series does not pick up small business activity as well (hence the birth/death plug factor).

In addition to the headline, with no change expected in the workweek, and some risk that the unemployment rate ticks up to 4.8% from 4.7%, look for the average hourly earnings to draw attention.  A 0.2% rise would be sufficient to lift the year-over-year rate to 2.7%, a new cyclical high.  Several Fed officials have recognized the preliminary signs of upward pressure on wages.

There is little chance of a Fed hike later this month.  The September Fed funds futures contract also shows that participants see little chance of a hike then either.  It may require a strong report today and another one in early August, a better sense that risk from Brexit and China are contained, to get investors to put a September hike back into play. 

The US dollar is narrowly mixed ahead of the jobs report.  The euro is trading inside yesterday’s range, which was inside Wednesday’s range.  The narrow range today is $1.1060 to $1.1090.  Technically, the range can be extended roughly half a cent in both directions without altering the tone.  The greenback has made lower highs against the yen consistently this week.  Resistance is now seen near JPY101.00.  Many look for a break of JPY100. 

Sterling is licking its wounds after having been rejected above $1.30 yesterday.  It rebounded off the $1.2880, perhaps helped by news that the trade balance did not deteriorate in May.  Despite a decline in exports (4.4%), it looks as if the external sector may be a small net contributor to UK growth in Q2.   Meanwhile more real estate funds have closed, but the UK financials are among the strongest sectors today. 

Indeed, outside of the UK’s property sector, there is much focus this week on Italian banks. Officials in Italy and the EU are working toward some new initiative.  Our best guess is that it still in flux, but will be ready by the time of the ECB’s stress test later this month.  The Italian bank share index is up over 6% today.  Today’s gain is, unfortunately, insufficient to bring snap the five-week decline that has seen the index lose more than 35%.  It is off less than 1% for the week near midday in Rome. 

Canada also reports its June jobs data today.   We expect the Bank of Canada to sound a bit more dovish at next week’s meeting, within its neutral setting.  The most important data this week was news that non-oil exports fell.  This suggests Canada is still struggling with its terms of trade shock.  Canada’s employment report tends to be volatile too, but any disappointment will likely encourage expectations for a dovish statement next week. 

Japan reported a slightly larger than expected current account surplus for May, despite a smaller than expected trade surplus.  Bank lending slowed.  The most important economic data point, though, was likely the unexpected decline in labor cash earnings.  The 0.2% fall compares with expectations of a 0.5% gain after a 0.3% rise in April.  Real cash wages rose 0.2%, slowing from the 0.6% gain in April.   The importance is that it is part of the accumulation of data that many expect will lead the BOJ into easing policy at the end of the month. 

While voters in Europe have provided much drama in recent months, and the US pageantry turns into high gear in the coming weeks as the nominee-in-waiting picks a running mate, Japan’s election this weekend is a sedate affair.

Many apparently do not even know about it in Japan, according to a survey.  A low turnout is expected even though, for the first time, 18 and 19 year-olds can vote.  As a little aside, if Cameron took a page from the Scottish playbook to allow 16-year olds to vote, the Conservative Party would not be looking for his successor.

In any event, at stake in Sunday’s election is one-half of the upper chamber’s 242 seats.  At a high level, the issue is not the governing coalition of the LDP and Komeito Party maintains their majority, but how big of a majority.  A two-thirds majority would allow changes to the Japan’s Constitution, which Abe has pressed for that, would allow the further development of the country’s ability to project military force.

As a little aside, if Cameron and other UK leaders had indicated that for such an important decision, that to recommend the overturning of a treaty would require more than a simple majority, people would not be talking about a sub-$1.20 pound. 

Abe has set a low bar.  He wants the governing coalition to win 61 of the 121 seats on Sunday.  If that were achieved, it would represent a two-seat pickup, giving the coalition 135 Senators.   It seems difficult for the coalition to achieve its super-majority, which would entail winning another 25 seats. The opposition in Japan is weak and fragmented.  They cannot capitalize on the lack of support or perceived lack of success of Abe’s economic program.

Several small parties are nationalistic and would support Abe’s constitutional plans.  However, Abe would alienate some supporters.  There are many in the LDP who do are not in favor of the changes. The Komeito Party is opposed.  Nor does it appear to have strong popular support.

US Jobs Data, Little Policy Significance, but may Provide Distraction ahead of the Weekend is republished with permission from Marc to Market

The post The Markets, and Jobseekers, would Appreciate Better Jobs Data appeared first on Economy Watch.

Amid a better if not strong risk appetite, sterling has rallied two cents from yesterday’s lows near $1.28 to poke through the $1.30 level in the European morning.  It was helped by an industrial production report that was better than expected.  Industrial and manufacturing output fell 0.5% in May.  This was around half of the expected decline after a strong April advance (2.1% and 2.4% respectively). 

Amid a better if not strong risk appetite, sterling has rallied two cents from yesterday’s lows near $1.28 to poke through the $1.30 level in the European morning.  It was helped by an industrial production report that was better than expected.  Industrial and manufacturing output fell 0.5% in May.  This was around half of the expected decline after a strong April advance (2.1% and 2.4% respectively). 

Separately, Halifax reported a larger than expected rise in June house prices.  On the other hand, a measure of business confidence sunk to a 4.5 year low.  That the FTSE 100 is doing well is not surprising.  That index is heavily weighted to multinationals, and their foreign earnings are worth more than 10% on sterling’s depreciation since the referendum.  However, the FTSE 250, more domestically focused, is advancing by 1.6% to snap a three-day losing streak. 

However, very little has changed.  The Tory leadership may narrow to two candidates today.  This would signal the start of the next phase of the selection process, where party members cast mail-in ballots with a result expected by early September. 

Asian shares were held by the third consecutive loss in the Nikkei (0.6%).  The MSCI Asia-Pacific Index rose 0.2%, but the MSCI Emerging Market equity index is up over 1% today.  European bourses are also higher, and the Dow Jones Stoxx 600 is 1.3% stronger today, led by telecoms, financials, and energy. 

Even the beleaguered Italian bank stocks are trading higher today. The FTSE Italian bank share index is up nearly 0.8% today, breaking a four-day 10% draw down.  Italy is negotiating with the EC on how it can support its banks, where the post-Brexit environment, of lower interest rates and likely slower growth, hurt an already weakened sector.

The key issue of bailing is subordinated bank bondholders.  Unlike in some other countries, where the bonds are owned by sophisticated institutional investors, in Italy bank bonds were frequently marketed to retail savers.  Wiping out these savers so to allow using their other money, as taxpayers, is problematic economically and politically. 

At the same time, many observers suspect that Germany soon have to provide assistance to at least one of its lenders.  Is it too cynical to expect it to find some extra leeway in the rules?  Separately, following yesterday’s poor factory order data (flat vs. expected 1.0% rise); Germany reported a 1.3% drop in May industrial output.  The median forecast was for a 0.1% decline.  While workday adjustments may have exaggerated the weakness, the takeaway, which the Bundesbank has already acknowledged is that the German economy slowed in Q2. 

It is the New Zealand dollar, not sterling; that is strongest of the major currencies.  It has gained nearly 1% today with the help of the Deputy Governor of the central bank warning about the dangers of lower rates.  However, the new efforts to curb excesses in the housing market may still allow rates to be used for monetary policy purposes.  For that, Q2 CPI due July 18 is important.  Recall in Q1 CPI rose 0.2% for a 0.4% year-over-year pace. 

The Australian dollar is flat.  S&P cut the outlook for Australia’s AAA rating to negative from stable, warning about the growing fiscal imbalance. Australian bonds showed little reaction.  Elsewhere, the construction PMI jumped to 53.2 from 46.7.  The ballot counting continues, and it is beginning to look that the Lib-Nat coalition may be returned.

Rounding out the dollar-bloc, the combination of the better risk appetite, and higher oil prices, following news late yesterday that API estimated that US oil inventories fell (large 6.7 mln barrels) for the seventh consecutive week, is helping buoy the Canadian dollar.

Note that yesterday’s trade figures showed 1) oil and bitumen exports increased despite the Alberta fires; 2) the non-US trade balance deteriorated to a record deficit, and 3) weak imports from the US and the world warns of soft domestic demand.  The US dollar may find support near CAD1.29. 

The US ADP private sector employment estimate is the main US economic report today ahead of tomorrow’s BLS report.  The Bloomberg median call is for 160k after ADP reported 173k gain for May.  There was nothing in the ADP report that prepared investors for the lowly 38k non-farm payroll print.   The employment component of the service sector ISM jumped to 52.7 from 49.7. 

There has been more talk about a recession in the US, and the flattening of the yield curve at lower absolute levels plays into such talk.  However, the service ISM was anything but recessionary.  The headline rose to 56.5 from 52.9.  It averaged 55.0 in Q2 after 53.8 in Q1.  Forward-looking new orders rose to 59.9 from 54.2, and new export orders rose to 53.0 from 49.0. 

Nevertheless, the tone from the FOMC minutes shows that the confidence of many was shaken.  The concerns were four-fold, and can only be marginally impacted by the near-term economic reports.

First, the Fed wants to verify that the pace of job creation remains robust.  It will take more than the June employment report to show this.

Second, the Fed wants confirmation that the forward momentum of the economy has not stalled.  This will require greater insight into the economy’s performance in Q3.

Third, officials want to be confidence that inflation will move toward its target. This too may take some time.  Fourth, the global challenges, in particular, the UK and China, continue to need to be assessed.

The euro is capped near $1.1115.  Support is seen in the $1.1030-$1.1040. The dollar is trading quietly within yesterday’s range against the yen.  The greenback needs to push above JPY101.50 to lift the tone.    The euro is being sold through yesterday’s low against sterling.  A break of GBP0.8475 might begin forcing late momentum traders to the sideline, and point to a correction toward GBP0.8400.

Sterling Bounces Two Cents, but Does not Appear Sustainable is republished with permission from Marc to Market

The post Payroll Data Precedes Jobs Data in the U.S. appeared first on Economy Watch.

Almost all developing countries have policies to promote small and medium-sized firms. The reasons for this choice are clear. Small firms appear to create lots of job with relatively little capital and jobs are desperately needed in sub-Saharan Africa with its growing young population. In contrast, large firms are usually ignored, it being implicitly assumed that their size indicates success.

Several Western companies have made investments in Sub-Saharan Africa in recent years. The iGaming sector accounts for some of the most significant investments in Sub-Saharan Africa’s medium and small-sized firms. Paridirect in Congo is one of the most recent examples of a local betting operator that is financially funded by the foreign company, Veli Services, and built by Congolese software developers. When Western firms engage in Africa, they create a significant number of employment oppertunities and jobs are much needed in Sub-Saharan Africa, which has a fast growing young population.

While Congo is still in the early stages of foreign investment, Ghana has already witnessed the effects on the economy. However, to know how small and large firms compare when it comes to their relative importance in the economy – and to develop policies – it is important to have data. We have put together survey data that enables us to compare small with large firms in Africa. In addition, we have supplemented this with census data. This has enabled us to measure all firms, not just those covered in the survey.

The Ghana Statistical Office has recently made census data available that enables us to show how firms of differing size in the manufacturing sector have performed between 1987 and 2003. The results are rather remarkable.

Small firms, those employing fewer than ten people, have exploded in importance in the economy over the period from 1987 to 2003. On the other hand large firms, those employing more than 100, have grown very modestly.

However, large, not small, firms provide most of the value-added in the manufacturing sector. The very small number of large firms means that growth is limited, as the high productivity sector has been failing to grow nearly as fast as the small firm sector.

What this tells us is that government policies that promote small firms are clearly desirable as small firms do provide many jobs. However, policies to promote large firms would be even better as the jobs created would be much more productive ones. It is an increase in the number of high productivity firms that is the key to rising incomes from better paying jobs. For rapid growth in incomes it is more (many more) jobs in large firms that is required.

In a recent working paper, I set out the data that underlies those conclusions.

The evolution of manufacturing firms in Ghana

Combining the data from the Ghana censuses for 1987 and 2003 with data from the 1962 census it is possible to provide a picture of how firms in Ghana’s manufacturing sector have performed from the years immediately after independence in 1957 to 2003. This is a period when the economy experienced a sustained collapse of its income and, from the mid-1980s, a sustained recovery. Therefore, rather by chance, the three censuses provide a picture of what happened to firms across this period of dramatic changes at the aggregate level.

In 1962 the census recorded 95,158 enterprises for the manufacturing sector, the 1987 census recorded 7,737 and the 2003 census 25,865. What can explain these radical differences? The answer is, in part, geographical coverage and, in part, how firms are defined. Both matter for understanding what has happened to firm size and growth in the period since independence.

The 1987 and 2003 censuses only covered urban areas and they excluded enterprises run by the self-employed, which had employees. As we have information from the population census for such enterprises it is possible to add these to the number of firms as recorded in the census to obtain a picture of the evolution of firms on a consistent basis.

Of the 95,158 firms recorded in the 1962 census, 72,348 were located in rural areas. It is therefore possible by combining the data from the population census with the census for manufacturing firms to provide a consistent description of the evolution of firms in urban Ghana, where a wide definition of firm is used that includes self-employed enterprises with employees. In Figure 1, the evolution of such firms in urban Ghana is shown between 1962 and 2003.

The number of large firms (those employing more than 99) is so small it is hard to see in the figure. In 1962, there were 110, in 1987, there were 189 and in 2003, the number had risen to 255, less than 0.5% of the total number of firms.

The dramatic change in the number of firms in Ghana occurred between 1987 and 2003, and growth in numbers was concentrated in the small firm sector. Here numbers more than tripled from about 20,000 to nearly 80,000.

In understanding which type of firms grew, we need to distinguish those classified as self-employed enterprises and those reported in the manufacturing census. In Figure 2, we see that in both years self-employed enterprises with employees’ type firms were by far the more important, contributing just over 70% of the total of small firms.

This percentage fell slightly between 1987 and 2003 implying that the growth rates of firms, as distinct from self-employed enterprises, was slightly higher. For both types of firms, growth rates were massive at nearly 7% per annum on average over the period from 1987 to 2003.

Ghana Figure 1

Ghana Figure 2

What the explosion of small firms tells us

So what can account for this explosion in the growth of small firms in the period after 1987? The most obvious difference that distinguishes the period after 1987 from the period before is the changed foreign exchange regime, which removed limitations on the purchases of cedis and the far more rapid growth of the economy. Indeed the most recent estimates for gross domestic product suggest that per capita gross domestic product in Ghana fell by 1.6% per annum between 1973 and 1990 and rose by 2.4% per annum between 1990 and 2008. That is a full 4% per annum improvement in the growth rate for the economy.

The evidence rather strongly points to an improved macroeconomic environment that enabled small firms to expand rapidly in numbers but for very modest growth in the number of large firms. This is both surprising and important.

Much policy discussion focuses on the problems faced by small firms in economies like Ghana. The evidence from the census is that small firms do fine in being able to form. Large firms seem to suffer constraints on their growth in numbers.

Why does it matter which sort of firms grow? Surely all growth means more jobs and employment for people desperate for such jobs? Well it matters a lot because small and large firms differ greatly in their contribution to the economy and in their productivity, that is how much value-added each worker produces.

To see just how important these differences are, we show in Figure 3 the contribution of the firms, which includes the self-employed enterprises ones, to value-added, that is a measure of the net output of the firm. Now, far from large firms being hard to see, as was the case in Figures 1 and 2 when we were looking at the number of firms, Figure 3 shows that large firms, despite their very small number, produce far more value-added than small or medium-sized ones. Indeed, in 2003 large firms, which were less than 0.5% the number of firms, produced 56% of value-added.

Another way of presenting just how important large firms are relative to small ones when it comes to producing value-added is to note that the top 1% of firms produced 63% of value-added.

Ghana Figure 3

Ghana Figure 4

So how is it done? The answer is given in Figure 4. Large firms are massively more productive than small ones and this productivity difference seems to have increased quite rapidly over the period from 1987 to 2003. While in 1987 large firms were about twice as productive as small firms were, in 2003 they were nearly ten times as productive.

It is this fact that explains why small firms have exploded in importance in numbers but have remained small players when it comes to providing output for the economy.

Small firms can provide jobs, but big firms are the key to economic growth in Africa is republished with permission from The Conversation

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