Layoffs reach the lowest level EVER
A few weeks ago I pointed out that new claims for unemployment (4 week average) as a share of total employment had reached the lowest level since April 2000. I predicted it would soon beat that record. Now it has; they are at the lowest level ever. Here’s what we know (or at least I suspect) about the new economy:
1. Low interest rates are the new normal.
2. Low layoffs are the new normal.
3. High stock prices are the new normal.
4. Greater income inequality is the new normal.
5. Fewer people moving between states is the new normal.
6. Slow RGDP growth is the new normal, probably due to both slower employment growth and lower productivity growth.
7. The Great Moderation is back after a one year hiatus (mid-2008 to mid-2009). This expansion may last a record 10 plus years, but will still be a lousy expansion. Don’t call it the Great Moderation, call it the Mediocre Moderation. Mediocre labor markets are the new normal.
8. Just as overall economic growth reflects deep institutional realities, the quality of macro policy reflects the quality of institutions doing macro teaching and research. A small country like Canada can easily outperform a big region like the eurozone, if its macroeconomists (Laidler, Rowe, Carney, etc.) are better informed about the realities of monetary economics and AD than those macroeconomists of the eurozone, who don’t even seem too sure of what AD is. But these differences are not carved in stone—Germany was ahead of the English-speaking world in their understanding of monetary economics during the 1970s. As the issues change, the relative strength of each country changes.
Update: The Nikkei Asian Review has published a phone interview of me. I’m told this is a major Japanese paper.
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23. October 2014 at 08:04
By what metric are you calling equity prices high?
23. October 2014 at 08:11
Kevin, I worded that poorly. I’m not saying they are high right now, just that high equity prices will be the new normal. That’s because I believe low real interest rates will be the new normal, by which I mean 1% or less on T-bills. Because I expect interest rates to be low during the 21st century, I expect stock prices to be high by metrics such as P/E, or total market cap as share of GDP, or most other measures. But I am not claiming prices are high now, I’m agnostic on that point
23. October 2014 at 08:28
Scott, by high equity prices do you mean you expect returns will lower than historic returns?
Historic mean p/e is around 15x, while today it’s around 20x, which is high. p/e (or Shiller’s CAPE) isn’t a great predictor of returns, but it seems to be the best available – Vanguard found it explained about 40% of the variation in real returns. https://personal.vanguard.com/pdf/s338.pdf
Some say 20x is not high because accounting rules have changed or due to low real rates. It’s not so high as to be worrisome, but could well presage lower returns than many would like.
BTW, current yields seem to be the best predictor of bond returns (for high quality bonds), so we’re likely looking at lower overall investment returns.
23. October 2014 at 08:40
I’ve been playing around with the relationships between interest rates, risk premiums, and growth. I’m not so sure that low interest rates and low growth expectations will translate into high equity prices or high PE ratios.
Market cap as a share of GDP is probably mostly high because it is a comparison of global corporate value versus domestic production.
Total domestic asset values might continue to be high compared to GDP because of the rise in the nominal value of real estate as real interest rates fall, but I think high equity risk premiums will moderate domestic corporate values.
I don’t mean to nitpick. I just think there are some interesting subtleties to think about. I don’t think the notion that low interest rates lead corporations to engorge themselves on cheap credit is borne out by empirical evidence. Low real interest rates signal a risk aversion that usually has a related effect of increasing risk premiums, so that total returns on capital remain high and firms deleverage as a response to the environment of risk aversion.
23. October 2014 at 08:46
“3. High stock prices are the new normal.”
This is a sentence that will likely come back to haunt.
Stock prices have reached what looks like a permanently high plateau. – Irving Fisher, October 17, 1929.
23. October 2014 at 09:06
A lot of the recent Bernanke remarks have been printed in the same paper: http://asia.nikkei.com/magazine/20141016-The-LED-revolution/Politics-Economy/Ex-Fed-chief-Bernanke-looks-back-on-crisis-ahead-to-future
23. October 2014 at 09:08
Blames slow growth on depressed investment, which he blames on… the trade deficit?
23. October 2014 at 09:12
“He stressed that inflation expectations are hard to change, especially amid Japan’s weak economic conditions following April’s sales tax hike.”
23. October 2014 at 09:56
Thank you for a wonderful blog. You’re doing great work. I send greetings from Krugmanland
23. October 2014 at 12:45
Scott, do you think that an output gap (GDPPOT – NGDP) is the “new normal”?
If real factors, such as slowing technological improvements, limitations on use of fossil fuels, slowing population growth, etc result in lower real output growth, this seems hard to avoid. An output gap, however, seems like something we should be able to avoid and should strive to avoid, i.e., in my view, there is no good reason for an output gap to be part of the “new normal”.
Or is inept monetary policy part of the “new normal”, in which case I suppose an output gap is also part of the “new normal”?
Thanks,
-Ken
Kenneth Duda
Menlo Park, CA
23. October 2014 at 12:50
Did they call, Scott?
http://www.cato.org/news-releases/2014/10/21/cato-institute-announces-new-center-monetary-financial-alternatives
‘…Cato has established a new Center for Monetary and Financial Alternatives, which will focus on development of policy recommendations that will create a more free-market monetary system in the U.S.
‘….George Selgin, a Professor Emeritus of Economics at the University of Georgia and one of the foremost authorities on banking and monetary theory and history, gave up his academic tenure to join Cato as director of the new center.’
23. October 2014 at 12:50
“In China, 10% Boost to Minimum Wage Cuts Jobs By 1%, Paper Says”
http://blogs.wsj.com/economics/2014/10/23/in-china-10-boost-to-minimum-wage-cuts-jobs-by-1
Find the flaw!
23. October 2014 at 13:38
David Henderson is already on it: http://econlog.econlib.org/archives/2014/10/imf_demand_for.html
23. October 2014 at 14:39
It’s so depressingly true.
23. October 2014 at 15:05
I don’t think that low layoffs are a good thing. Low layoffs say to me that we are in a period of economic stagnation. Small but positive GDP growth for as far as the eye can see. That would be consistent with low interest rates.
I am not sure that is consistent with high income inequality. I would expect income inequality to be increasing when things are moving around a bit more. So, if we are in for a long stagnation, I expect those numbers to level out a bit. The top 1% will still control the the bulk of the resources, just slightly less of them.
23. October 2014 at 15:42
Great post Scott. As you acknowledge, your wording could be tighter, but the gist is solid.
23. October 2014 at 15:50
Marcus Nunes wrote this great analysis of inflation expectations 18 months ago……
http://thefaintofheart.wordpress.com/2013/05/23/stocks-inflation-expectations-an-update
23. October 2014 at 15:57
Marcus wrote an update on inflation expectations a week ago: http://thefaintofheart.wordpress.com/2014/10/16/are-we-back-in-old-times
23. October 2014 at 16:12
Kevin Erdmann,
Take a look at this graph:
http://www.cato.org/publications/commentary/shilling-shiller-permabear-press
For the next ten years, I feel it’s reasonable to forecast the S&P 500 P/E ratio (TTM) to average well above 17, maybe even higher than 20.
What is your gut feeling for the appropriate forecast?
23. October 2014 at 19:56
Travis, I left a reply to the comment you left at my blog.
http://idiosyncraticwhisk.blogspot.com/2014/10/september-inflation.html?showComment=1414118916037&m=0#c6772510233229212549
Short answer is I don’t think earnings yield compared to nominal bond rates is very useful. The correlation since the 70s is probably spurious. I do agree that PE ratios could stay higher than the historical average for the foreseeable future.
Although, I did realize upon thinking about it that the zinger of saying Shiller would have kept you out if stocks since 1992 isn’t as much of a gotcha as it seems. Long term bonds have actually done pretty well compared to stocks over that time. There isn’t much of an equity premium over the full period.
24. October 2014 at 04:08
Kevin,
I liked those posts a lot. And very good point the success of long bonds. I think CAPE has helped a lot of investors get their leverage right over the years, even if it hasn’t generated great buy / sell signals. It seems so beloved, I’m sure it’s saved some lives.
24. October 2014 at 04:23
foosion, Yes, I expect lower returns over the next 30 years than over the past 30 years. For shorter periods I don’t have strong views.
Saturos, Thanks for those links.
Ken, I still think there is an output gap, but I also believe it’s considerably smaller than what you’d get by extrapolating 3% RGDP growth after 2007. Output gaps are pretty hard to estimate in real time, but almost all the indicators I focus on (unemployment rate, U-6 unemployment, wage growth, etc), suggest we have an output gap. They also suggest it has been shrinking since 2009, when unemployment was 10%. I think monetary policy can help close gaps, and better policies in other areas (such as fewer restrictions on building) can boost GDPPOT.
Thanks Travis. Glad to hear that George Selgin got that position–he’ll be excellent.
Doug, You said:
“Low layoffs say to me that we are in a period of economic stagnation.”
But historically it’s been exactly the opposite, the previous record low was April 2000, a big boom month. That’s why this is so weird.
Thanks Brian.
24. October 2014 at 04:45
“1. Low interest rates are the new normal.”
Who sets interest rates? In oil markets, the US set the price on the demand side until mid-2008. Since then, China sets the price. Has anyone checked who’s setting the price of credit? It may not be who you think.
“2. Low layoffs are the new normal.”
If you’re going to make this kind of sweeping generalization, well, you better post on it in detail.
“3. High stock prices are the new normal.”
No. Stock prices are subject to all kinds of forces. In general, they appreciate with economic growth. That much can be said.
“4. Greater income inequality is the new normal.”
Disagree. Certainly not internationally. Low interest rates and international labor competition have created a historically unusual gap. Chinese savings are falling, wages increasing, domestic investment increasing. And our labor force will be challenged to provide as many workers as needed in the coming years. The trend favors labor, not capital, over the longer run.
“5. Fewer people moving between states is the new normal.”
Probably. The country is more settled than it used to be. But you could as easily say “lower immigration is the new normal.” It is, until the economy heats up.
“6. Slow RGDP growth is the new normal, probably due to both slower employment growth and lower productivity growth.”
Disagree. The US will be adding more jobs this year than any since 1998. How is this slow employment growth? A normal year over the long term is 1.7 m new jobs; in an up market, the normal is 2.3 m jobs. We’re on track for 2.7 m jobs in 2014. (Did I mention to see my demographics spreadsheet, where this number is calculated for you?)
If I said to you in 2005, don’t worry, we’ll come up with a new oil technology that will improve our current account by 2% of GDP, you would have probably scoffed at the idea. (Well, I would have.) But we did.
The Tesla D, according to Elon Musk, is fully equipped with all the hardware to be self-driving. That bears some thinking about.
If oil prices stay low, and expectations for shale production prove true, this economy is going to get as hot as it was during the Kennedy administration. It is the most neutrally balanced economy since the early 1970s. Low inflation, low interest rates, still some slack in labor markets, seven years off trend in capital formation, current account in order and improving, national budget deficit under 3%, no material asset bubbles. Doesn’t get much better than that. If we can hold the oil side together, I would expect this economy to rock and roll–and it’s clearly already showing some signs of that.
“7. The Great Moderation is back after a one year hiatus (mid-2008 to mid-2009). This expansion may last a record 10 plus years, but will still be a lousy expansion. Don’t call it the Great Moderation, call it the Mediocre Moderation. Mediocre labor markets are the new normal.”
We’ve just established that we have a hot labor market. The Great Moderation: If you’ll check my presentations (for example here: http://energypolicy.columbia.edu/events-calendar/global-oil-market-forecasting-main-approaches-key-drivers), you’ll see the Great Moderation coincided with collapse of oil prices after 1985 and the working off of excess oil supply capacity. It’s not hard to see on a graph. (See slide 31.)
How much can shales do? There is no agreement right now. I certainly expect at least two more good years, but if I believe some of the studies I read, I could make the case for ten more good years with the US becoming the fourth most important net oil exporter in the world.
“8. Just as overall economic growth reflects deep institutional realities, the quality of macro policy reflects the quality of institutions doing macro teaching and research. A small country like Canada can easily outperform a big region like the eurozone, if its macroeconomists (Laidler, Rowe, Carney, etc.) are better informed about the realities of monetary economics and AD than those macroeconomists of the eurozone, who don’t even seem too sure of what AD is. But these differences are not carved in stone””Germany was ahead of the English-speaking world in their understanding of monetary economics during the 1970s. As the issues change, the relative strength of each country changes.”
Canada, net oil exports (at Brent prices):
Q1 2004: $3.2 bn
Q1 2014: $26.6 bn
24. October 2014 at 06:42
Thanks Nick. There should be a return to equity premiums going forward.
24. October 2014 at 08:46
Are initial claims and Layoffs the same thing?
JOLTS involuntary separations,shows that lower layoffs between 2010 and 2014 than it shows for 2002 – 2007
Challenger Grey and Christmas shows the same thing.
24. October 2014 at 14:16
Video: Jeff Madrick, Josh Bivens, Brad DeLong, Ylan Mui: How Mainstream Economic Thinking Imperils America
https://www.youtube.com/watch?v=FAPnX8ZmP1Y
24. October 2014 at 14:47
Isn’t it possible that productivity and employment are growing slowly because RGDP is growing slowly because (NGDP-inflation) is growing slowly?
24. October 2014 at 15:16
Steven, You said:
“Disagree. The US will be adding more jobs this year than any since 1998. How is this slow employment growth?”
So you are predicting a negative unemployment rate by 2020? I’m talking trend growth in the labor force and you are presenting data for the business cycle.
You said:
“In oil markets, the US set the price on the demand side until mid-2008. Since then, China sets the price.”
Nope it’s global oil supply and global oil demand that sets the price.
You said:
“No. Stock prices are subject to all kinds of forces. In general, they appreciate with economic growth. That much can be said.”
Nothing you said here disproves my claim that high prices are the new normal. If prices fell in half next year it would not disprove my claim. I claim prices will normally be high, not always be high.
You said:
“We’ve just established that we have a hot labor market.”
Who just established that? Not me. U-6 unemployment is really high right now. I would not call that “hot.”
Doug, No they aren’t the same, but surely they are closely correlated.
Thomas, The bigger problem is the slow growth in the labor force, employment can be explained by NGDP.
24. October 2014 at 16:42
Hmmm, Krugman sees monopolies everywhere……
“But more seriously, this kind of divergence “” in which high profits don’t signal high returns to investment “” is what you’d expect if a lot of those profits reflect monopoly power rather than returns on capital.
More on this in a while.”
http://economistsview.typepad.com/economistsview/2014/10/market-power-the-profits-investment-disconnect-and-the-mal-distribution-of-income.html
24. October 2014 at 20:32
Prof. Sumner,
You might like some of these:
http://thereformedbroker.com/2014/10/23/ten-insane-things-we-believe-on-wall-street
“Ten Insane Things We Believe On Wall Street”
25. October 2014 at 07:28
Brad DeLong is skeptical of Paul Krugman: “Is There Really a Profits-Investment Disconnect?”
http://equitablegrowth.org/2014/10/25/really-profits-investment-disconnect-late-friday-focus-october-24-2014
26. October 2014 at 04:34
TravisV, I once made a similar argument to Krugman, focusing on IT rather than “monopoly.” DeLong’s response is also good.
26. October 2014 at 05:57
Travis,
I think Krugman accidentally ended up on very libertarian ground in that post. He thought that hunting for monopolies would give him a liberal friendly result, and he seems to feel that’s what he got. But, to me, the most plausible way all of these things could have such strong monopoly power would be copyright and regulatory barriers to entry. Any number of mad Austrian critiques would get you there as well.
27. October 2014 at 05:50
Scott –
My specific forecasts for population, legal and illegal immigration, civilian non-institutional population, labor force participation, employment to population, unemployment rates, and disability rates can all be found on the “Analysis” tab of the Demographics spreadsheet I have linked here twice before.
Cohort participation rates, illegal population and lots of other goodies can be found on other tabs in the spreadsheet.
If you want to criticize me, why not open the spreadsheet and fool around with it a bit. All the historical data is there for you to present your own unified view of US demographics and employment. (Perhaps Kevin would care to take a run at the model.)
27. October 2014 at 06:06
As for who sets the price. Of course, all market participants set the price. But within this, there are key drivers.
Thus, for example, if a neighborhood is gentrifying, then we would assume young professionals–not the elderly, the unemployed or the low income–are setting the price of housing there.
By contrast, in the run-down areas of Detroit, it is the unemployed who are setting the price of housing.
Understanding this difference is key to understanding the difference between DC and Detroit.
It matters if you are interested in specific outcomes.