Here’s a rough sketch of the variables influencing US inflation, which has been remarkably low for two years running:
1) The remaining labour market slack, including a staggering and resilient long-term unemployment problem. The amount of slack remains tough to know given the difficulty of measuring the cyclical vs secular components of the fall in the labour force participation rate. Much more on this later.
2) The output gap. This isn’t a well-defined idea, we know, but few people would argue that the US economy is producing at potential. The US economic recovery does appear to have accelerated in the final two quarters of last year (the December jobs report notwithstanding), and the conditions for growth look better than they have in years. If the nascent acceleration proves sustainable, then the labour market may well tighten up and push wages higher. Obviously this is related to the first point about labour market slack, and plenty of caveats are needed given the head-fakes of the last four winters. Read more
Several engaging and erudite pieces on US wage trends have nabbed our attention lately, and with apologies for oversimplification we would summarise them as follows: Read more
Well, some of them at least. One of the big determinants of whether ‘Abenomics’ manages to pull Japan from its deflationary spiral is through wage growth. Inflation can’t really kick off or arguably even begin without rising wages. One can argue about how important wage growth is, or where it fits in causality-wise — and we’ll come to that later. But it is — or will be — an important signal as to whether this three-pronged approach of the new-ish Japanese government is working.
And actually, it might be catching on. Read more
Or peripheral pain in terms of growth/shrinkage in compensation per employee. It offers a striking illustration of why both Greeks and Germans have reason to feel peeved… Read more
Anyone who has watched the 2011 Adam Curtis documentary series “All watched over by machines of loving grace” will remember the bit about Alan Greenspan becoming confused about America’s exceptional growth in the 1990s.
At the time, the data didn’t seem to fit the prevailing reality. The incredible and seemingly unstoppable growth Greenspan was seeing on the ground was at odds with his economic models, which instead were signalling an imminent rebalancing on the back of wage pressures and implied inflation. Read more
The US manufacturing PMI released by the Institute of Supply Management (ISM) on Monday beat expectations, coming in at 53.4. But that’s not what we really want to talk about here. Instead, we want to ask the question that the team at Bank of America Merrill Lynch asked themselves in an impressive 73-chart, 43-page report last week. Namely: is US manufacturing in the early stages of a renaissance?
There is a popular image of the sector as being in perpetual decline due to offshoring. However, at least some of the alleged decline had more to do with other sectors growing and thus decreasing manufacturing’s share of GDP as a percentage. Read more
Even as it was becoming clear that first-quarter growth had decelerated, there were plenty of signs that the manufacturing sector remained an exception.
Factory production in the first three months of the year grew by 9.1 per cent (annualised), freight and rail volumes grew, jobs growth in the sector has been steady, the monthly ISM surveys have been positive, and earnings by companies like Caterpillar and the Detroit carmakers have beaten consensus handily. Read more
Indonesia is reaping the benefits as South Korean companies broaden their focus beyond their traditional production bases, spurred by growing wage demands in China and their search for new growth opportunities, reports the FT. In one of the largest indications of interest to date, Posco, South Korea’s biggest steelmaker, on Wednesday signed a $6bn deal to build a plant in Indonesia with PT Krakatau Steel.