> Smoothed recession probabilities for the United States are obtained from a dynamic-factor markov-switching model applied to four monthly coincident variables: non-farm payroll employment, the index of industrial production, real personal income excluding transfer payments, and real manufacturing and trade sales.
Manufacturing and trade and industrial production? The supply chain's a disaster area right now. And real personal income is going to be down because inflation is up (the transfer payments we've been making are of course excluded). Employment numbers are steady, at least.
It's actually the opposite -- if employers raise wages, we can easily get into a wage-price spiral with extreme inflation. The only way to avoid inflation is for employers to just wait until potential employees deplete their savings and extended unemployment benefits, and then hire them at uninflated wages.
Or the Fed could just crank up interest rates and stop allowing any schmuck to get a loan to finance everything. I distinctly remember this happening before...twice...
This is only correct if labor is the largest component of the price of a good. If labor is not a large component, paying more for labor, at the expensive of competitors labor supply, is a good idea, and employers should do it.
Agreed, productivity has been going up faster than wages. Businesses can do less stock buybacks and C-suite bonuses instead of passing all the costs to customers.
There are effects in both directions. Increasing wages increases prices and not having labor available reduces production, which also leads to higher prices.
This is a crazy concept, it would seem to imply that any attempt to increase wages ever would destroy the economy, but what remains is barbarism and serfdom. There's a market in labor just as there is a market in goods (though the former is a market in human beings). If the supply of labor is low, then (under many economic conditions)* raising wages to increase the number of workers willing to do unpleasant jobs is part of the logic of markets. It's a two way street.
* An example of a condition where it might not apply is if everyone were already perfectly sorted into their preferred jobs and there was no remaining pool to encourage new people to become workers from. Then raising wages wouldn't affect the sorting of the economy other than to transfer money from capital to labor (which is a good thing anyway in our age of inequality). I highly doubt we are there.
Not really. It just means that a plumber makes 1e-30 of the new money in a given economy (some small amount, point is, it is relative to the money supply). If he gets a raise (not one individually, obviously) that needs to be canceled out with the new money increasing.
The problem being if you get into a circle raise -> more new money -> goto 1 it may be hard to slow it down.
In reality nobody wants money. They want houses, food, education, children, ... each of those also represent a relatively constant fraction of the money supply of an economy. So you can only get a raise by actually doing more work, or in the case of the government jobs, having more hostages/threats (if you fire me X will happen, X being somewhere between a fight over who replaces you, to new elections, to I guess revolution in some extreme cases).
This is not very visible because plumber wages DO change, for example with the number of plumbers available. House prices do change, for example with migration. But wages do not change, in real terms, because of inflation. A raise is a necessity, merely for you to maintain whatever position you have in society. It is not nice, in that it improves your position in society. A house, ownership, maybe stocks and of course innovation improves your position. Raises and inflation are a smokescreen.
I use the term "new money" because "parked money" does not matter. Only money that was involved in some transaction in the recent past actually matters. We can argue about what measure is the best for this, and economists constantly do that, but other than that it's not simply total money, it is not necessary to have an answer for this point.
That’s unlikely in 2021. Labor is nowhere nearly as strong as it was in the 1970s when unions negotiated automatic 6% automatic wage increases. Conversely real wages have been stagnate for decades.
Most potential employees moved on to better jobs. You're not going to force someone who's moved to say Wyoming to be a windmill tech back into being a waiter at your restaurant like ever. This isn't the days of feudalism either so you have no legal leverage over the 'great reshuffling.' You either accept that you'll be working your existing labor pool harder or you will be paying more to get more labor. There's no third option.
Not really. The working class country wide is awakening to the fact the reasons they don’t have a reliable car, decent home in a well funded community to raise their children in, and affordable healthcare is because of systemic rent seeking.
People are saying no to dead end jobs that cannot afford the people working them a reasonable quality of living. The solution for the workers is to demand enough pay to realize a dignified lifestyle. The solution for the employer is to do whatever scummy things are necessary to fill the roles, long term consequences be dammed. The solution for government is to cool the housing market, implement single payer healthcare, and fix the systemic issues facing underserved communities with massive capital investments that also happen to be great jobs programs.
We're going to have to transition to whatever the new normal is very soon. There is only so much money printing the fed can do to cover up structural problems in the economy. Given the inflation we're seeing, I think we're getting near the end of that rope. We're now, I think, seeing diminishing returns on the helicopter money and artificially suppressed interest rates.
I would edit that to read "a scary disaster area".
We devoted most of this year to designing an entirely new product line for a new startup I am launching. It got delayed due to the pandemic. We decided to restart it around March of this year. We have gone through many prototypes and are now ready to start manufacturing, with the aim of delivering products during Q1 (we have serious orders).
Well, this week I am having meetings with component suppliers to figure out what we have to do in terms of design changes and ready-to-go variants in order to deal with supply chain issues. The variants have to be there in order to be able to deliver product if key components become unavailable.
The approach is requiring us to design something like three versions of each product. Each of these has to go through full UL/TUV/CSA and other regulatory testing. That's why I say "disaster area" doesn't quite cover it. I have lived through massive manufacturing supply chain upsets in the past. This one is different in that it is far more widespread, with multiple product lines suffering shortages and delivery issues for different reasons.
If this pandemic does not teach nations, governments and people why it is so important to have short local and capable supply chains, I don't know what will.
>If this pandemic does not teach nations, governments and people why it is so important to have short local and capable supply chains, I don't know what will.
I don't think a single billionaire or bureaucrat is gonna bat an eyelash. Inflation doesn't affect them. Deflation does. That's why they stripped every single mean from the lower classes being capable of doing so.
Not quite. Inflation makes the value of debts lessen. Most rich people are creditors, that's why the Fed is such an inflation hawk. However, the inflation in consumer products without wage increases just doubly screws the working class, though it could lead to widespread bankruptcy if it gets intense enough. That would affect rich people.
Hoovervilles were not filled with rich people. In fact, in 2008, expensive cars barely saw a dent in sales cause the people that can afford them are heavily resistant to shocks of that caliber. Rich people are most definitely not creditors. Banks are. Rich people don't give out loans like banks. The rich don't get affected by poorer people who declare bankruptcy. The rich lose when poor people think money is greater than whatever BS commodity they're peddling that they can't recoup losses trying to sell it. That's why panics were more common back in the day. They're virtually a thing of the past nowt hat the Fed just prints money making everything think you gotta invest constantly or just lose money to inflation.
Rich people have most of their assets in equities, not loans or fixed-income securities. As a general asset class, business equity is usually a pretty good hedge against inflation.
> If this pandemic does not teach nations, governments and people why it is so important to have short local and capable supply chains, I don't know what will.
I doubt it will. I order a lot of construction materials, so I've been exposed to most of the supply chain issues. Some of the worst and most unexpected delays have been from the local suppliers. Presumedly because they are also constrained on some parts, and they don't prioritize me simply because I'm local. So going forward, I certainly don't see why I would pay a premium for local suppliers..
It's a chain reaction. We don't make almost anything in the US any more. Which means everything in the supply chain has serious external dependencies. From screws and wires to electronic components, tools, machinery and almost every basic material used in industry. We have done an excellent job of destroying entire layers of our industries.
A lot of what we are seeing is rooted in failed economic and foreign policies spanning at least five decades.
To add to my prior statement:
If this doesn't teach people that our politicians are incompetent and selfish, I am not sure what will.
Note I do not make political party distinctions. We have allowed ambulance chasers run our country for decades. The realities of the next few decades are entirely on the voters who never woke up to understand that incompetent, selfish, power-hungry people never produce good outcomes.
I can't think of many politicians I would hire to run a mid size cooking baking operation. That's how bad it is.
The pandemic has caused some short term disruptions but overall the US manufacturing sector is huge and growing. Revenue was $2.3T in 2019. We make a lot of stuff.
No, we don't. We assemble a lot of stuff and somehow manage to call it "US made". Let's not fool ourselves.
Most "Made in USA" product is nearly 100% comprised of components and assemblies made in China (mostly) and other places. I know entire companies that operate this way.
If you read through the ISIC divisions 15-37 categories it is very easy to see that there are entire categories of items could not be made even with 25% US-made content.
Divisions, 17, 18, 19, 25, 26, 28, 29, 30, 31, 32, 33 and 36 are almost certainly either made outside the US or assembled in the US with nearly 100% non-US materials. Take Ikea as an example. Or, for that matter, almost any piece of furniture you can buy from Walmart or most furniture stores.
The other classifications run a range between genuinely US-made, assembled in the US from foreign materials and 100% non-US.
To be clear, I am not proposing that we should have a 100% inshored supply line. That cat is out of the bag. There are entire industries that will never come back. Ever.
We could do better though. Yet this, at a minimum, requires unity and a solid commitment to actually focus on things that really matter. We have not demonstrated being able to do this for quite some time.
A real analysis would require detailed data per ISIC division along with an analysis of the products and their actual US-made content. Having been in manufacturing for some four decades, I can tell you, without a shadow of a doubt, that there are very few things we can truly call "Made in USA", even if the criteria is 75% domestically manufactured content.
A few hours browsing the Alibaba website should give anyone a good sense of where we are. Pick an item. Go find a manufacturer on Alibaba. You are likely to find hundreds of them in China. Now go find manufacturers of the same item in the US or Europe. Good luck.
If I send out for a quote for a part or assembly in China, I'll get 10 to 50 quotes overnight. If I do the same thing in the US I would consider myself lucky if I get one quote in two to four weeks. And when I do finally get it, it costs 2x to 5x more and takes five times longer to get it done. It's that bad. In a lot of cases the US companies are just middle men who get the products made in China.
And then there are real questions about these numbers. Simple example: Are Apple iPhone sales counted as US manufacturing output?
> why it is so important to have short local and capable supply chains
Should it teach that to nations and governments? I get people who want to have access to things they can buy. But did the supply issues affect nations and governments in any way that's larger than annoyance/delay? This is a serious questions - did any country fail some large project with impact larger than the risk of "we're fine, as soon as the supply chain recovers we won't have to deal with this problem for many decades"?
It's not the inflation component which is killing real personal income (ex transfer receipts)...it's the bad modelling which is used to generate current estimates that are subject to revisions.
The revisions show the real picture, and it is not pretty.
Most likely to get out of the US stock and housing market. Stop borrowing money, reduce leverage, etc. If you like risk then short the most bubbly companies around.
I would argue fixed rate debt is your best friend in a high inflation scenario. With the cash being reinvested in staples type stocks (food and basics)
Am I the only one that can't read that blog post? It's seems stream of consciousness and odd grammar that throws me off.
And the bio of the author doesn't engender much confidence: "He is not an economist, which is probably why he's been able to develop a working model of the global monetary system. His research is unique and informative in ways an economist would never consider."
I doubt this means much, the current dynamic with supply chain issues, huge amounts of free government money given out, and other pandemic details makes this metric and the metrics it relies on dubious for future predictions.
Could someone explain how the US could be in a recession? Isn't it that people have more money now and they are looking to spend (which is causing inflation to go up)?
If people have 10% extra money but the costs of food and rent/housing and basic goods is up 50%, the purchasing power eroded and economic activity in real terms will drop.
NBER generally determines the start and end dates for recessions, and real factors are given more consideration:
> Because a recession must influence the economy broadly and not be confined to one sector, the committee emphasizes economy-wide measures of economic activity. The determination of the months of peaks and troughs is based on a range of monthly measures of aggregate real economic activity published by the federal statistical agencies. These include real personal income less transfers, nonfarm payroll employment, employment as measured by the household survey, real personal consumption expenditures, wholesale-retail sales adjusted for price changes, and industrial production. There is no fixed rule about what measures contribute information to the process or how they are weighted in our decisions. In recent decades, the two measures we have put the most weight on are real personal income less transfers and nonfarm payroll employment.
Historically the gold standard for predicting recession, more accurate than any other indicator, is "10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity (T10Y2Y)":
The gray bars are recessions and downward slopes precede recessions. At least all the way back 1976.
Has anything fundamentally changed that makes this no longer accurate?
EDIT: this comment has been downvoted with no explanation why. Perhaps the HN economist who downvoted me would be kind enough to teach us all the flaws of this predictor?
Ultra low to negative interest rates and mass government bond buying. The 10 and 2 year interest rate have not been meaningfully set by the market since 2008.
It is still a red flag, but a well known enough red flag that the treasury and fed will change their issue / buying bond behaviours in order to maintain a positive slope.
Curiously it still "predicted" the early 2020 COVID recession gray bar, but it of course could not have predicted it before Wuhan's patient zero, so I guess it has a way of being sometimes lucky. (Or, if the chart truly is to be believed by its faithful, then the early 2020 recession would have happened even without COVID.)
The 2020 covid recession started in q3 19 - markets were being propped up with extra liquidity, rate hikes by the fed were abandoned earlier in the year and they had started cutting rates again. If you are cutting interest rates that is not a healthy economy, and a late 2019 / 2020 downturn was pretty widely predicted before covid existed.
Without covid, and the truly massive global stimulus that was pumped in, we may have seen just as much downside in stocks without the rapid rebound and valuations half what they are now.
The thing is, GDP was measured around 6.7% previous. The most recent GDP was at 2%, much lower than expected.
To enter recession, you need 2 consecutive quarters of negative growth. Technically covid had a short recession that got immediately erased by 33.8% gdp growth.
If the USA is headed to a recession, it will be april before we find out. It also has to go negative during a xmas spending spree post-covid stuff? That sounds pretty unlikely.
Is inflation going to blow up past GDP? Oh for sure.
54 comments
[ 3.5 ms ] story [ 116 ms ] threadManufacturing and trade and industrial production? The supply chain's a disaster area right now. And real personal income is going to be down because inflation is up (the transfer payments we've been making are of course excluded). Employment numbers are steady, at least.
* An example of a condition where it might not apply is if everyone were already perfectly sorted into their preferred jobs and there was no remaining pool to encourage new people to become workers from. Then raising wages wouldn't affect the sorting of the economy other than to transfer money from capital to labor (which is a good thing anyway in our age of inequality). I highly doubt we are there.
The problem being if you get into a circle raise -> more new money -> goto 1 it may be hard to slow it down.
In reality nobody wants money. They want houses, food, education, children, ... each of those also represent a relatively constant fraction of the money supply of an economy. So you can only get a raise by actually doing more work, or in the case of the government jobs, having more hostages/threats (if you fire me X will happen, X being somewhere between a fight over who replaces you, to new elections, to I guess revolution in some extreme cases).
This is not very visible because plumber wages DO change, for example with the number of plumbers available. House prices do change, for example with migration. But wages do not change, in real terms, because of inflation. A raise is a necessity, merely for you to maintain whatever position you have in society. It is not nice, in that it improves your position in society. A house, ownership, maybe stocks and of course innovation improves your position. Raises and inflation are a smokescreen.
I use the term "new money" because "parked money" does not matter. Only money that was involved in some transaction in the recent past actually matters. We can argue about what measure is the best for this, and economists constantly do that, but other than that it's not simply total money, it is not necessary to have an answer for this point.
People are saying no to dead end jobs that cannot afford the people working them a reasonable quality of living. The solution for the workers is to demand enough pay to realize a dignified lifestyle. The solution for the employer is to do whatever scummy things are necessary to fill the roles, long term consequences be dammed. The solution for government is to cool the housing market, implement single payer healthcare, and fix the systemic issues facing underserved communities with massive capital investments that also happen to be great jobs programs.
We're going to have to transition to whatever the new normal is very soon. There is only so much money printing the fed can do to cover up structural problems in the economy. Given the inflation we're seeing, I think we're getting near the end of that rope. We're now, I think, seeing diminishing returns on the helicopter money and artificially suppressed interest rates.
I would edit that to read "a scary disaster area".
We devoted most of this year to designing an entirely new product line for a new startup I am launching. It got delayed due to the pandemic. We decided to restart it around March of this year. We have gone through many prototypes and are now ready to start manufacturing, with the aim of delivering products during Q1 (we have serious orders).
Well, this week I am having meetings with component suppliers to figure out what we have to do in terms of design changes and ready-to-go variants in order to deal with supply chain issues. The variants have to be there in order to be able to deliver product if key components become unavailable.
The approach is requiring us to design something like three versions of each product. Each of these has to go through full UL/TUV/CSA and other regulatory testing. That's why I say "disaster area" doesn't quite cover it. I have lived through massive manufacturing supply chain upsets in the past. This one is different in that it is far more widespread, with multiple product lines suffering shortages and delivery issues for different reasons.
If this pandemic does not teach nations, governments and people why it is so important to have short local and capable supply chains, I don't know what will.
I don't think a single billionaire or bureaucrat is gonna bat an eyelash. Inflation doesn't affect them. Deflation does. That's why they stripped every single mean from the lower classes being capable of doing so.
I doubt it will. I order a lot of construction materials, so I've been exposed to most of the supply chain issues. Some of the worst and most unexpected delays have been from the local suppliers. Presumedly because they are also constrained on some parts, and they don't prioritize me simply because I'm local. So going forward, I certainly don't see why I would pay a premium for local suppliers..
A lot of what we are seeing is rooted in failed economic and foreign policies spanning at least five decades.
To add to my prior statement:
If this doesn't teach people that our politicians are incompetent and selfish, I am not sure what will.
Note I do not make political party distinctions. We have allowed ambulance chasers run our country for decades. The realities of the next few decades are entirely on the voters who never woke up to understand that incompetent, selfish, power-hungry people never produce good outcomes.
I can't think of many politicians I would hire to run a mid size cooking baking operation. That's how bad it is.
https://www.macrotrends.net/countries/USA/united-states/manu...
No, we don't. We assemble a lot of stuff and somehow manage to call it "US made". Let's not fool ourselves.
Most "Made in USA" product is nearly 100% comprised of components and assemblies made in China (mostly) and other places. I know entire companies that operate this way.
If you read through the ISIC divisions 15-37 categories it is very easy to see that there are entire categories of items could not be made even with 25% US-made content.
https://unstats.un.org/unsd/publication/seriesm/seriesm_4rev...
Start on page 44.
Divisions, 17, 18, 19, 25, 26, 28, 29, 30, 31, 32, 33 and 36 are almost certainly either made outside the US or assembled in the US with nearly 100% non-US materials. Take Ikea as an example. Or, for that matter, almost any piece of furniture you can buy from Walmart or most furniture stores.
The other classifications run a range between genuinely US-made, assembled in the US from foreign materials and 100% non-US.
To be clear, I am not proposing that we should have a 100% inshored supply line. That cat is out of the bag. There are entire industries that will never come back. Ever.
We could do better though. Yet this, at a minimum, requires unity and a solid commitment to actually focus on things that really matter. We have not demonstrated being able to do this for quite some time.
A real analysis would require detailed data per ISIC division along with an analysis of the products and their actual US-made content. Having been in manufacturing for some four decades, I can tell you, without a shadow of a doubt, that there are very few things we can truly call "Made in USA", even if the criteria is 75% domestically manufactured content.
A few hours browsing the Alibaba website should give anyone a good sense of where we are. Pick an item. Go find a manufacturer on Alibaba. You are likely to find hundreds of them in China. Now go find manufacturers of the same item in the US or Europe. Good luck.
If I send out for a quote for a part or assembly in China, I'll get 10 to 50 quotes overnight. If I do the same thing in the US I would consider myself lucky if I get one quote in two to four weeks. And when I do finally get it, it costs 2x to 5x more and takes five times longer to get it done. It's that bad. In a lot of cases the US companies are just middle men who get the products made in China.
And then there are real questions about these numbers. Simple example: Are Apple iPhone sales counted as US manufacturing output?
Should it teach that to nations and governments? I get people who want to have access to things they can buy. But did the supply issues affect nations and governments in any way that's larger than annoyance/delay? This is a serious questions - did any country fail some large project with impact larger than the risk of "we're fine, as soon as the supply chain recovers we won't have to deal with this problem for many decades"?
The revisions show the real picture, and it is not pretty.
See https://alhambrapartners.com/2021/07/30/inflation-estimates-...
And the bio of the author doesn't engender much confidence: "He is not an economist, which is probably why he's been able to develop a working model of the global monetary system. His research is unique and informative in ways an economist would never consider."
Although it's puzzling why it only barely reached 40% then
> Because a recession must influence the economy broadly and not be confined to one sector, the committee emphasizes economy-wide measures of economic activity. The determination of the months of peaks and troughs is based on a range of monthly measures of aggregate real economic activity published by the federal statistical agencies. These include real personal income less transfers, nonfarm payroll employment, employment as measured by the household survey, real personal consumption expenditures, wholesale-retail sales adjusted for price changes, and industrial production. There is no fixed rule about what measures contribute information to the process or how they are weighted in our decisions. In recent decades, the two measures we have put the most weight on are real personal income less transfers and nonfarm payroll employment.
https://www.nber.org/research/business-cycle-dating
https://fred.stlouisfed.org/series/T10Y2Y/
The gray bars are recessions and downward slopes precede recessions. At least all the way back 1976.
Has anything fundamentally changed that makes this no longer accurate?
EDIT: this comment has been downvoted with no explanation why. Perhaps the HN economist who downvoted me would be kind enough to teach us all the flaws of this predictor?
It is still a red flag, but a well known enough red flag that the treasury and fed will change their issue / buying bond behaviours in order to maintain a positive slope.
Without covid, and the truly massive global stimulus that was pumped in, we may have seen just as much downside in stocks without the rapid rebound and valuations half what they are now.
The thing is, GDP was measured around 6.7% previous. The most recent GDP was at 2%, much lower than expected.
To enter recession, you need 2 consecutive quarters of negative growth. Technically covid had a short recession that got immediately erased by 33.8% gdp growth.
If the USA is headed to a recession, it will be april before we find out. It also has to go negative during a xmas spending spree post-covid stuff? That sounds pretty unlikely.
Is inflation going to blow up past GDP? Oh for sure.