Greenlees says the name “hedonic” was an unfortunate choice, since the technique has little to do with making judgments about pleasure

TO BE NOTED: From Financial Armageddon:

"By the Numbers?

Although I believe that our government has every incentive to make the economy look better, employment appear stronger, and inflation seem weaker than they really are, I'm not a statistician or an economist (for what it's worth, some might view that as a good thing).

Hence, while I can't sit here and say for certain that our government manipulates the data in such a way that it has become meaningless, common sense tells me, for instance, that the Bureau of Labor Statistics' assumption that start-up businesses accounted for 43,000 new construction jobs in May is reason enough to doubt whatever Washington is telling us (for a bit more color on this particular statistic, check out "May Employment Report Not Believable" at ChrisMartenson.com)

With that in mind, it's not hard to side with the views of the statistical gadfly cited in the following SmartMoney report, "True or False: U.S. Economic Stats Lie."

How’s the economy treating you? Chances are, your answer is colored largely by three things: whether you’re working (if you want to), how much you’re making and how quickly your expenses are rising. Economists rely heavily on the same factors to judge the nation’s health. At last count, 9.4% of the workforce is jobless. Compared with a year ago, the goods and services we produce are worth 5.7% less while the ones we buy are 0.7% cheaper.

Two bright people might see sharply different things in those numbers. To one, the shrinking economy is a healthy unwinding of past excess, for example, while to another it’s a dangerous downturn that calls for bold government action. But what if the numbers themselves are something we should be debating? In the alarming view of a vocal few, America’s economic measures are misstated -- rigged, really.

The accusation goes like this: Surveyors collect the nation’s data and statisticians compile and report it. Politicians naturally want the numbers to show improvement. Not being able to change the facts, they focus on the handling of facts, pressuring statisticians to change their measurements. It’s not quite one grand conspiracy but decades of minor ones compiled. Today’s reports are so perverted, the theory holds, that the numbers have detached from common experience.

Pollyanna Creep

If the theory has a chief architect, it is John Williams, a semi-retired grandfather of five living in Oakland, Calif. The son of a chainsaw importer, Williams sold the family business in the 1970s and began consulting for corporations, recalculating government economic data to arrive at what he says were more reliable measures, and with them, truer forecasts. Today Williams runs Shadow Government Statistics (ShadowStats.com) from his home. For $175 a year subscribers get economic data and analysis adjusted to back out the accumulated effects of what Williams has dubbed the Pollyanna Creep -- Pollyanna being the orphan protagonist of the 1913 children’s book who learns to play the “glad game” to find cheery perspectives on life’s sorrows. In other words, he provides figures he feels are properly miserable, to offset government ones he says are too prettied-up.

If Williams is right, unemployment is over 20%, gross domestic product is shrinking by 8% and consumer prices are jumping by nearly 7%. His forecasts border on apocalyptic. The government is creating so much new money, he says, that the all but inevitable result is hyperinflation, where “your highest denomination, the $100 bill, becomes worth more as toilet paper than money.” Buy physical gold, he advises.

Whether we believe the forecasts or not, the possibility of a Pollyanna Creep has serious implications. Social Security payments are just one benefit adjusted each year for increases in the cost of living. If the figures hadn’t been corrupted, says Williams, checks might be close to double what they are.

Williams has managed to attract plenty of press. A year ago, Harper’s magazine featured a cover drawing of a grinning Uncle Sam fondling numeral-shaped party balloons, with the headline, “Numbers Racket: Why the Economy is Worse Than We Know.” The story centered on Williams’ data. The San Francisco Chronicle followed with “Government Economic Data Misleading, He Says.” Last fall in the London Times: “Forget Short-Sellers and Manipulators, Pollyanna Creep Could Be the Culprit.”

Government statisticians are frustrated. “Economic Data Seems Accurate” doesn’t make for a catchy headline, so the press, they say, are too quick to give credence to conspiracy theories. “We go out of our way to be transparent,” says Thomas Nardone, who during 32 years at the Bureau of Labor Statistics helped implement many of the changes in calculating the unemployment rate. “We’d be remiss if we didn’t make changes,” he says. “I’ve never seen measurement changes that were politically motivated.”

Katherine Abraham served as commissioner of BLS during the Clinton administration. Commissioners, unlike the statisticians who work for them, are political appointees. Now a professor at University of Maryland, Abraham says she did see political pressure, but rarely, and never with results. Once, she says, a prominent lawmaker told her the BLS might get more funding if it would agree to propose changes that reduce the appearance of inflation. Abraham says she rebuffed the offer.

Decide for yourself. Here’s a roundup of measurement changes at the heart of Williams’ claims, along with responses from people who work closely with the measurements. I’ll focus on unemployment and inflation, but not GDP, since the chief flaw with it, according to Williams, is how problems with the inflation measure overstate real, or after-inflation, growth. (There’s a different case to be made -- that GDP measures some fairly undesirable things, like the cost of war and divorce lawyers, and so isn’t a great proxy for economic well-being -- but I’ll save that subject for another day.)

Disappearing Jobless?

About 13 million people were unemployed during the Great Depression, or around 25% of the work force, but those are fairly recent estimates. At the time, the government simply didn’t track data like it does today, which made it difficult to judge whether things were getting better or worse. Two main developments in the 1930s made tracking unemployment feasible. The first was an improvement in the way statistics are used to turn a relatively small sample into a faithful representation of the larger population. That allowed for the use of surveys. The second was the notion of basing one’s status as part of the unemployed work force on actions. Whether someone wants to work, after all, is a subjective thing. Whether they’re looking for work is not.

Today the BLS reports six measures of unemployment, called U-1 through U-6, for which the definition of unemployment gradually broadens. For example, 4.5% of the work force has been unemployed for 15 weeks or longer and is actively looking for work (U-1), while 15.8% is unemployed if we count those who say they want work but aren’t looking, and those who work part-time for lack of full-time options (U-6).

Williams takes issue with a 1994 change that coincided with a shift to computerized data collection from pencil and paper. Until then, a discouraged worker was someone who wanted to work but had given up looking because there were no jobs. The BLS tightened the restrictions with additional questions, which reduced the ranks of discouraged workers by half. As Williams puts it, “The Clinton administration dismissed to the non-reporting netherworld about five million discouraged workers.” Add those in, he says, and unemployment approaches Great Depression levels.

Nardone, the longtime BLS economist who today serves as assistant commissioner for current employment analysis, says the 25% unemployment rate often cited for the Great Depression is based on research that corresponds with today’s U-3, the unemployment rate most commonly reported by the media. It stands at 9.4%, recall -- not close to Depression-era levels. The 1994 changes did reduce the ranks of discouraged workers, but also introduced a new category: the marginally attached, who want jobs but aren’t looking for reasons like transportation problems and child-care requirements. The most commonly watched measure (now U-3, before the change U-5) is mostly unaffected, since it doesn’t include discouraged workers. The benefit of the changes, explains Steven Haugen, a BLS economist, is a less subjective measure of discouragement, and some additional ways to judge whether the nation is not only working, but working up to its ability. Williams says the change reduced the broadest measure of unemployment in a way that “doesn’t match with public perception, and for good reason.”

For a BLS paper describing changes to its unemployment measure, see here.

Rent, Geometry and Hedonism

The same agency that reports unemployment, the BLS, also reports the consumer price index. It tracks changes in the prices of more than 8,000 goods and services, from apples in New York to gasoline in San Francisco. There are several variants of the CPI index. For example, CPI-W weights things like fuel more heavily to better reflect the commutes of workers, and is the basis for Social Security adjustments. CPI-U, the measure most often reported in the media, includes items a typical urban consumer might buy, and determines adjustments to inflation-indexed Treasury bonds. Note that “core” inflation, which excludes food and fuel, isn’t used as the basis for any federal spending program (and isn’t called “core” by the BLS, which reports but doesn’t seem to especially prize the measure).

Most CPI criticism is based on three changes that affect all indexes. In 1983 the BLS replaced house prices with something called owners’ equivalent rent to measure the cost of shelter. Williams and other critics say it understates the cost, since house prices, until recently, had outpaced rents. John Greenlees, a BLS economist, says the new method is the most widely used among developed nations and is meant to fix a flaw in the old one. The CPI is supposed to measure things people buy to use, not things they invest in. For many people, houses are a little of both. The new measure attempts to isolate the portion of housing expenditures that best reflects the cost of living. Williams says the purchase price of housing is an important factor in determining a constant standard of living, and he doubts the ability of “the government to accurately calculate how much a person would pay to rent his own house.”

Another change: In 1999 the BLS adopted a geometric mean formula to replace its arithmetic mean one. The new method weights goods less as their prices rise, and is supposed to reflect patterns of consumer substitution. Critics say that treats consumers as if they’re no worse off when they switch to hamburger from steak. Greenlees says the analogy is flawed; the methodology allows substitution only between similar goods in the same region -- from steak in Chicago to a different type of steak in Chicago, and not to hamburger. The old measure was really an overstatement of price increases, one that assumed consumers don’t react at all to higher prices, he says. Also, the impact is relatively small. The BLS has continued to calculate prices under both methodologies and says over five years ended 2004 the new measure reduced CPI growth by 0.28 percentage points a year. Williams says geometric weighting has moved the CPI away from measuring a constant standard of living. He says that when the effects are combined with those of other changes, like increased price surveying among discount stores (which he contends offer poorer service and thus a lower standard of living than the shops they replaced) the overall impact is larger than the BLS states.

Finally, in 1999 the BLS began using what it calls hedonic adjustments. Williams explains the approach with a dash of sarcasm: “That new washing machine you bought did not cost you 20% more than it would have cost you last year, because you got an offsetting 20% increase in the pleasure you derive from pushing its new electronic control buttons instead of turning that old noisy dial.” He calls the impact on CPI “substantial.” Greenlees says the name “hedonic” was an unfortunate choice, since the technique has little to do with making judgments about pleasure. It’s designed to measure the quality difference between goods when one is discontinued and must be replaced in the index with another that’s not quite the same. Adjustments can push the index in either direction, but Greenlees says the overall impact since the change has been a tiny increase in the CPI -- about 0.005% a year. Williams says some hedonic adjustments are indeed necessary, like when the size of a box of crackers changes from 12 ounces to 10 ounces. But more theoretical adjustments, he says, “overstate the quality of what the public is buying."

The BLS has published a 17-page paper countering what it calls misconceptions about the CPI. Find it here.

Williams suspects his charges motivated the paper, and has issued a response — a rebuttal to the rebuttal, if you like — here.

deflation as a threat to the U.S. economy on the expectation of continuing unemployment and consumer deleveraging

TO BE NOTED: From dshort.com:

Four Bears and Inflation
April 17, 2009

Earlier this week the Bureau of Labor Statistics (BLS) announced a Consumer Price Index number for March that showed an annualized negative number. It was tiny, a mere -0.38%. But it was the first negative annualized rate since August of 1955. Is it a hint of more to come?

Deflation has been a chronic problem in the Japanese economy since the Nikkei 225 topped out in 1989, and it was a debilitating problem during the Great Depression. There are a few economists who see deflation as a threat to the U.S. economy on the expectation of continuing unemployment and consumer deleveraging.

But the consensus seems to believe that monetary easing by the Federal Reserve is more likely to trigger the reverse problem — higher inflation. Some even foresee a return to the sustained inflation of the seventies and early eighties. This is yet another topic that demonstrates the heightened "Uncertainty Factor" in today's economy and its imperfect reflection in the markets.

And speaking of the markets, most people think only in terms of nominal price values with little consideration of real (inflation-adjusted) performance. But over longer periods inflation and deflation are major factors. The thumbnails to the right offer a quick comparison of our Four Bad Bears chart in nominal, real, and alternate-real formats. In nominal prices, our current bear has begun to pull away from the treacherous slope that led to the Great Depression. That's not the case in real prices, mostly because (ironically) the deflation of the earlier period makes the 1929-32 decline seem less grave. If the ShadowStats Alternate CPI adjustment has any credence, the real comparison is even more bizarre. The ShadowStats claim of understated inflation since 1982 makes the Tech and current declines significantly more severe.

Click on the small charts for a series of larger versions. Use the blue links at the top to navigate among them.

"

State Unemployment

TO BE NOTED: From EconomPic Data:

"State Unemployment Spike

For the detail of all states, go to the BLS site.



Source: BLS

Posted by Jake at 10:29 AM

The index has decreased 0.4 percent over the last year, the first 12 month decline since August 1955.

TO BE NOTED: From EconomPic Data:

"CPI Mixed (March)

BLS details:

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in March, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The index has decreased 0.4 percent over the last year, the first 12 month decline since August 1955.

Source: BLS

Posted by Jake at 5:40 AM 0 comments

30% of CPI was showing a pretty hefty increase when, in reality, rents and home prices were falling dramatically

TO BE NOTED: From Don Fishback’s Market Update:

"Evidence: CPI Understates Deflation

In this L.A. Times article, they note that rents in L.A. County fell 4%. They also point out that rents in Orange County and in the Inland Empire also fell. At the other end of the spectrum, the Bureau of Labor Statistics database shows that rent in this area of the country went UP +3.8% during the same time frame.

This article provides anecdotal evidence that rents in New York are headed lower, with some landlords offering rent discounts just to keep tenants from leaving. That sure doesn’t jibe with the BLS data that shows the cost of renting a New York area apartment going UP the first two months of this year.

And it’s not just geographically isolated. According to this article, national rents fell 1.1% in the last quarter. BLS data, on the other hand, has rents RISING the first two months of the year (March data will be released next week).

While rent makes up about 6% of the CPI, rent has another consequence with a far greater impact. Remember, BLS doesn’t use actual housing price data to calculate the cost of a owning or purchasing a house. It uses “Owners’ Equivalent Rent”, which is based on rent. For instance, in the same BLS database that showed LA-area rents going up +3.8% in 2008, BLS showed LA-area home prices going up +3.3%. And OER has a 24% weighting in CPI, which means that a full 30% of CPI was showing a pretty hefty increase when, in reality, rents and home prices were falling dramatically.

– Don

See: Update on House Price Inflation, Is Deflation Understated by CPI?"

[Chart data—TXT] In the United States, hourly compensation costs for all employees in manufacturing were $30.56 in 2007.

TO BE NOTED: From

"U.S. Bureau of Labor Statistics

TED: The Editor's Desk

March 30, 2009 (The Editor’s Desk is updated each business day.)

Manufacturing compensation costs in foreign countries and U.S., 2007

In 2007, 13 of the 19 European countries covered had higher hourly compensation costs than the United States, in most cases more than 20 percent higher. Average costs in the United States were higher than those in most of the economies covered outside of Europe.

[Chart data—TXT]

In the United States, hourly compensation costs for all employees in manufacturing were $30.56 in 2007. Hourly compensation costs in Denmark ($47.54), Germany ($50.73), and Norway ($55.03) were especially high when compared to the United States — 56 percent higher, 66 percent higher, and 80 percent higher, respectively.

Compensation costs in Europe, on average, were almost $9 higher on a per hour basis than in the United States. However, there was great variation in the level of compensation costs among the European countries covered. For example, hourly compensation costs in Europe ranged from $7.69 in Poland to more than seven times that level in Norway — the highest labor cost country in these comparisons.

Outside of Europe, only Canada and Australia had compensation costs higher than the United States when measured in U.S. dollars. In 2007, the lowest compensation costs relative to the United States were in Mexico ($3.91) and the Philippines ($1.37) — 13 percent and 4 percent of the U.S. level, respectively.

These data are from the International Labor Comparisons program (formerly called the Foreign Labor Statistics program). To learn more, see "International Comparisons of Hourly Compensation Costs in Manufacturing, 2007," (PDF) (HTML) news release USDL 09-0304.

For citation purposes, this TED article is archived at:
www.bls.gov/opub/ted/2009/mar/wk5/art01.htm"

Productivity declined 0.4 percent in the nonfarm business sector in fourth-quarter 2008, as output fell faster than hours

TO BE NOTED:

"Productivity and Costs, Fourth Quarter and Annual Averages, 2008 Revised

Internet address:      http://www.bls.gov/lpc/         USDL 09-0223
Historical, technical                                  TRANSMISSION OF THIS
information:          (202) 691-5606                  MATERIAL IS EMBARGOED
Current data:          (202) 691-5200                  UNTIL 8:30 A.M. EST,
Media contact:         (202) 691-5902                  THURSDAY, MARCH 5, 2009



                            PRODUCTIVITY AND COSTS
               Fourth Quarter and Annual Averages, 2008 Revised
              
              
       The Bureau of Labor Statistics of the U.S. Department of Labor today
reported revised fourth-quarter seasonally-adjusted annual rates of
productivity change--as measured by output per hour of all persons--and
revised changes for calendar year 2008.  Percent changes in business and
nonfarm business productivity were:

                                       Fourth          Annual averages
                                       quarter           2007-2008
                                      
Business sector                         -0.4                 2.7
Nonfarm Business sector                 -0.4                 2.8


       Productivity growth for the fourth quarter of 2008 was revised down by
3.5 percentage points( !!! DON ) in the business sector and 3.6 percentage points ( !!! DON )in the
nonfarm business sector from the estimates published February 5.  In both
sectors output was revised down by 3.2 percentage points and hours were
revised up by 0.1 percentage point.  Productivity growth during calendar year
2008 was not revised in either sector. 

       In the manufacturing sector, percent changes in productivity were:

                                       Fourth          Annual averages
                                       quarter           2007-2008
                                      
Manufacturing sector                    -4.0                 1.5
 Durable goods manufacturing          -14.8                 1.6
 Nondurable goods manufacturing         7.6                 1.0


==============================================================================
Data in this release reflect annual benchmark revision of BLS Current
Employment Statistics program data on nonfarm employee hours, and revised
seasonal adjustment of those data.  Also, hours of other nonfarm and farm
workers based on the BLS Current Population Survey incorporate new seasonal
adjustment factors.  Due to these revisions, hours measures for all major
sectors were revised back to the first quarter of 2004 and appear in detail
in tables 1 through 6 and appendix tables 1 through 6.  See Revised
Measures.
==============================================================================


       In the manufacturing sector, productivity fell 1.0 percentage point
more than was reported Feb. 5, as a 1.0 percentage point downward revision to
output was partially offset by a 0.1 percentage point downward revision to
hours.  Annual average growth in manufacturing productivity from 2007 to 2008
was revised up by 0.2 percentage point.  Output and hours in manufacturing,
which includes about 12 percent of U.S. business-sector employment, tend to
vary more from quarter to quarter than data for the aggregate business and
nonfarm business sectors. Fourth-quarter productivity and related measures
are summarized in table A and appear in detail in tables 1 through 5. 
Preliminary and revised fourth-quarter and annual data appear in table C.


------------------------------------------------------------------------------
Table A. Productivity and costs: Revised fourth-quarter 2008 measures
(Seasonally adjusted annual rates)
------------------------------------------------------------------------------
                                                            Real
                                                 Hourly     hourly      Unit
                Produc-                          compen-    compen-     labor
Sector           tivity    Output     Hours       sation     sation      costs
------------------------------------------------------------------------------
                       Percent change from preceding quarter
                      
Business          -0.4     -8.4      -8.0          5.0       15.6         5.4
Nonfarm Business  -0.4     -8.7      -8.3          5.3       15.9         5.7
Manufacturing     -4.0    -17.7     -14.2         10.1       21.2        14.7
  Durable        -14.8    -26.9     -14.2         10.1       21.2        29.1
  Nondurable       7.6     -7.7     -14.2         10.1       21.3         2.3
------------------------------------------------------------------------------
                       Percent change from same quarter a year ago
                      
Business           2.2     -1.8      -3.9          4.0        2.5         1.8
Nonfarm Business   2.2     -1.8      -4.0          4.1        2.5         1.8
Manufacturing     -1.1     -8.0      -6.9          5.6        4.0         6.8
  Durable         -3.5    -10.6      -7.4          6.0        4.4         9.8
  Nondurable       0.8     -5.3      -6.1          4.9        3.3         4.1
------------------------------------------------------------------------------


       The data sources and methods used in the preparation of the
manufacturing series differ from those used in preparing the business and
nonfarm business series, and these measures are not directly comparable. 
Output measures for business and nonfarm business are based on measures of
gross domestic product prepared by the Bureau of Economic Analysis of the
U.S. Department of Commerce.  Quarterly output measures for manufacturing
reflect indexes of industrial production prepared by the Board of Governors
of the Federal Reserve System.  See Technical Notes for further information
on data sources.


Business

       Productivity in the business sector decreased 0.4 percent in the
fourth quarter of 2008, as output decreased 8.4 percent and hours of all
persons decreased 8.0 percent (seasonally adjusted annual rates).  The decline
in output was the largest since the first quarter of 1982 (-8.6 percent) and
the decline in hours was the largest since the first quarter of 1975 (-12.1
percent).  When the fourth quarter of 2008 is compared to the fourth quarter
of 2007 output per hour increased 2.2 percent (tables A and 1).

       Hourly compensation grew at a 5.0 percent annual rate in the fourth
quarter.  This measure includes wages and salaries, supplements, employer
contributions to employee-benefit plans, and taxes.  Real hourly compensation
increased 15.6 percent in the fourth quarter.  This measure takes into
account changes in consumer prices, which fell at a 9.2 percent annual rate
in the fourth quarter.

       Unit labor costs, which reflect changes in hourly compensation and
productivity, increased 5.4 percent during the fourth quarter, after rising
3.3 percent in the third quarter.  The implicit price deflator for business
sector output edged down 0.1 percent in the fourth quarter of 2008, but
increased 1.7 percent from the same quarter a year ago.


Nonfarm Business

       In the nonfarm business sector, productivity decreased at an annual
rate of 0.4 percent in the fourth quarter of 2008, as output decreased 8.7
percent and hours of all persons--employees, proprietors, and unpaid family
workers--decreased 8.3 percent.  As in the business sector, the decline in
nonfarm business output was the largest since the first quarter of 1982 (-8.7
percent) and the decline in hours was the largest since the first quarter of
1975 (-12.0 percent).  Productivity increased 2.2 percent during the last
four quarters (table 2).

       Hourly compensation grew 5.3 percent in the fourth quarter of 2008. 
Real hourly compensation rose steeply, 15.9 percent, when the 9.2 percent
decrease in consumer prices was taken into account.  This was the largest
increase in the real hourly compensation series, which begins in the second
quarter of 1947.  As in the business sector, real hourly compensation rose
2.5 percent during the past four quarters.

       Unit labor costs increased 5.7 percent in the fourth quarter and 1.8
percent over the last four quarters.  The implicit price deflator for nonfarm
business increased 0.5 percent in the fourth quarter after increasing 4.7
percent in the previous quarter.

               
Manufacturing

       Manufacturing productivity, output, and hours all declined in the
fourth quarter of 2008; output per hour fell 4.0 percent, output dropped 17.7
percent, and hours fell 14.2 percent.  These were the largest declines for
each of these series, which begin with data for the second quarter of 1987. 
From the fourth quarter of 2007 to the fourth quarter of 2008 manufacturing
productivity decreased 1.1 percent, output fell 8.0 percent and hours fell
6.9 percent (table A).

       In the durable goods manufacturing sector, productivity dropped 14.8
percent in the fourth quarter of 2008, as output fell 26.9 percent and hours
declined 14.2 percent.  These were the largest decreases in output and output
per hour for the entire series beginning in the second quarter of 1987.  In
the nondurable goods sector, productivity rose 7.6 percent in the fourth
quarter as hours fell faster than output; output declined 7.7 percent and
hours fell 14.2 percent. 

       Hourly compensation of all manufacturing workers increased 10.1
percent during the fourth quarter of 2008, and after taking into account the
9.2 percent decrease in consumer prices, real hourly compensation in
manufacturing rose a series-high 21.2 percent.  Hourly compensation also rose
10.1 percent in durable and nondurable manufacturing; real hourly
compensation increased 21.2 percent and 21.3 percent, respectively.

       Unit labor costs in manufacturing increased 14.7 percent in the fourth
quarter of 2008.    These cost increases were concentrated in durable goods
manufacturing where unit labor costs rose 29.1 percent; unit labor costs rose
2.3 percent in nondurable goods industries.  Over the last four quarters
manufacturing unit labor costs increased 6.8 percent.


       
                       ANNUAL AVERAGE CHANGES, 2007-2008
                      
                      
Business and Nonfarm Business

       When annual averages for 2008 were compared with annual averages for
2007, labor productivity increased 2.7 percent in the business sector and 2.8
percent in the nonfarm business sector (table B).  In both sectors, the
productivity gains were the largest since 2004, due more to declines in hours
than the small gains in output, and were larger than the 2.5 percent average
annual increase during the 2000-2007 period.

       In 2008, hourly compensation increased 3.6 percent and 3.7 percent in
the business and nonfarm business sectors, respectively.  Because consumer
prices increased more, 3.8 percent, real hourly compensation fell slightly. 
The annual decline in this measure of purchasing power was the first since
small declines occurred in three consecutive years--1993, 1994, and 1995.

       Unit labor costs rose just 0.9 percent in both the business and
nonfarm business sectors during 2008, as hourly compensation growth was
largely offset by productivity growth.  Unit labor costs had increased 1.4
percent from 2000 to 2007 in both sectors.


------------------------------------------------------------------------------
Table B. Productivity and costs: Revised 2008 annual averages
(Seasonally adjusted annual rates)
------------------------------------------------------------------------------
                                                            Real
                                                 Hourly     hourly      Unit
               Produc-                           compen-    compen-     labor
Sector          tivity      Output    Hours       sation     sation      costs
------------------------------------------------------------------------------
                       Percent change from previous year
                      
Business          2.7        0.8      -1.9          3.6       -0.2         0.9
Nonfarm Business  2.8        0.8      -1.9          3.7       -0.1         0.9
Manufacturing     1.5       -2.5      -3.9          4.0        0.2         2.5
 Durable         1.6       -2.6      -4.2          4.2        0.3         2.5
 Nondurable      1.0       -2.4      -3.4          3.8        0.0         2.8
------------------------------------------------------------------------------ 


Manufacturing

       In the manufacturing sector, labor productivity rose 1.5 percent in
2008 as output fell 2.5 percent but hours fell faster, 3.9 percent (table B). 
Durable manufacturing output per hour increased 1.6 percent as output fell
2.6 percent and hours fell 4.2 percent, while in nondurable goods industries
productivity increased 1.0 percent, output fell 2.4 percent and hours fell
3.4 percent.  Total manufacturing productivity had grown at a 3.7 percent
average annual rate from 2000 to 2007.

       Hourly compensation of manufacturing workers increased 4.0 percent in
2008, which is the same as the average annual rate of growth from 2000 to
2007.  The gain in hourly compensation was offset by the 3.8 percent increase
in consumer prices, and real hourly compensation edged up 0.2 percent.  Unit
labor costs in manufacturing increased 2.5 percent in 2008, as hourly
compensation increased more than productivity.  These costs had increased at
a 0.3 percent average annual rate from 2000 to 2007. 

                                              
------------------------------------------------------------------------------
Table C. Previous and revised productivity and related measures:
Fourth-quarter 2008, third-quarter 2008, and annual averages 2008
(Seasonally adjusted annual rates)
------------------------------------------------------------------------------
                                                              Real
                                                    Hourly    hourly    Unit
                       Produc-                      compen-   compen-   labor
Sector                  tivity    Output   Hours     sation    sation    costs
------------------------------------------------------------------------------
                       Percent change, fourth quarter 2008
                      
Business:                                              
 Previous                3.1      -5.2     -8.1        4.7     15.3       1.5
 Revised                -0.4      -8.4     -8.0        5.0     15.6       5.4
Nonfarm Business:                                              
 Previous                3.2      -5.5     -8.4        5.0     15.6       1.8
 Revised                -0.4      -8.7     -8.3        5.3     15.9       5.7
Manufacturing:                                         
 Previous               -3.0     -16.7    -14.1        9.8     20.9      13.3
 Revised                -4.0     -17.7    -14.2       10.1     21.2      14.7
------------------------------------------------------------------------------ 
                       Percent change, third quarter 2008
                      
Business:                                              
 Previous                1.7      -1.8     -3.5        4.2     -2.3       2.5
 Revised                 2.3      -1.8     -4.0        5.7     -1.0       3.3
Nonfarm Business:                                      
 Previous                1.5      -1.9     -3.4        4.2     -2.4       2.6
 Revised                 2.2      -1.9     -3.9        5.7     -0.9       3.5
Manufacturing:                                          
 Previous               -3.3      -8.8     -5.7        4.9     -1.7       8.4
 Revised                -2.2      -8.6     -6.5        5.4     -1.3       7.8
------------------------------------------------------------------------------
                       Percent change, 2007 - 2008
                      
Business:                                              
 Previous                2.7       1.0     -1.7        3.3     -0.5       0.6
 Revised                 2.7       0.8     -1.9        3.6     -0.2       0.9
Nonfarm Business:                                              
 Previous                2.8       1.0     -1.8        3.4     -0.4       0.5
 Revised                 2.8       0.8     -1.9        3.7     -0.1       0.9
Manufacturing:                                         
 Previous                1.3      -2.4     -3.7        3.9      0.1       2.5
 Revised                 1.5      -2.5     -3.9        4.0      0.2       2.5
------------------------------------------------------------------------------ 


Revised Measures


       Quarterly and annual measures for all sectors were revised back to
2004 to incorporate the annual benchmark adjustment and updated information on
seasonal trends from the BLS nonfarm payroll series (table C and appendix
tables 1-5).  Hours and related measures for the business and nonfarm
business sectors were revised to incorporate updated information on seasonal
trends in Current Population Survey data on hours worked.  Full quarterly and
annual historical series are available on the BLS website,
http://www.bls.gov/lpc/#data .
      
       Previous and revised productivity and related data for the third
quarter, fourth quarter, and full year 2008 for business, nonfarm business,
and manufacturing are displayed in Table C.  In the business and nonfarm
business sectors, productivity declined 0.4 percent in the fourth quarter of
2008, rather than increasing as reported Feb. 5.  In both sectors, this
resulted from a 3.2 percentage points downward revision to output, with hours
little changed.  Also in both sectors, the downward revisions to productivity
and the 0.3 percentage point upward revisions to hourly compensation resulted
in upward revisions to unit labor costs of 3.9 percentage points.
      
       In the manufacturing sector, fourth-quarter productivity growth was
revised down from -3.0 percent to -4.0 percent, due to the 1.0 percentage
point downward revision to output; hours were revised down slightly.  The
combination of the downward revision to productivity and a small upward
revision to hourly compensation led to an upward revision in unit labor costs
from 13.3 percent to 14.7 percent.
       
       Productivity growth was revised up in the business and nonfarm
business sectors for the third quarter, due solely to downward revisions to
hours; output was not revised.  In the manufacturing sector, productivity
declined less than previously reported, reflecting a downward revision to
hours and a slight upward revision to output.  Unit labor costs were revised
up in the business and nonfarm business sectors for the third quarter, while
they were revised down in the manufacturing sector. 
      
       For the year 2008, productivity grew at the same rates reported Feb. 5
in both the business and nonfarm business sectors--2.7 percent and 2.8
percent, respectively.  Because hourly compensation was revised up in these
two sectors, unit labor costs were revised up as well.  In the manufacturing
sector, an upward revision to productivity was offset by an upward revision
to hourly compensation, leading to unit labor costs not being revised.


      
Revised measures: Nonfinancial corporations
     
       Measures for the nonfinancial corporate sector also were revised today
to incorporate new information regarding output and compensation in the third
quarter of 2008.  Productivity growth was revised up from the preliminary
estimate due to an upward revision to output and a downward revision to
hours.  Hourly compensation had an upward revision which, when paired with
the upward revision to productivity, led to a slight upward revision to unit
labor costs. 
                      
      
------------------------------------------------------------------------------
Table D.  Nonfinancial corporations:  Previous and revised productivity and
cost measures
Quarterly percent changes at seasonally adjusted annual rates
------------------------------------------------------------------------------
                                         Real 
                                Hourly   hourly   Unit               Implicit
       Produc-                  compen-  compen-  labor   Unit          price
       tivity  Output  Hours    sation   sation   costs   profits    deflator
------------------------------------------------------------------------------
                               Third quarter 2008
                              
Previous  5.5     2.1    -3.2     5.1     -1.5     -0.4      26.8        3.8
Revised   6.4     2.3    -3.9     6.1     -0.6     -0.3      26.5        3.8
------------------------------------------------------------------------------
      
     
                               Next release date

       The next release of Productivity and Costs is scheduled for 8:30 A.M.
EDT, Thursday, May 7, 2009, and will present preliminary first-quarter 2009
measures for business, nonfarm business, and manufacturing.  Fourth-quarter
2008 and annual average data for 2008 for nonfinancial corporations will be
released at that time.

"is it true that Americans are fundamentally spenders? "

Accrued Interest with some good points:

"2009 Forecast: That bad huh?

For most of my career, with an exception here and there, there have been two persistent trends. One is that in the debt markets, the fundamental outlook has generally been good. You had persistently low inflation, mostly low volatility, and a growing economy. Sure, some bonds went bad, but for the most part, the fundamental picture was good. The problem was always valuation. You'd look at a corporate bond and see a whopping 100bps spread or something and it would seem like all downside, no upside risk. But of course, you had to buy something, so you'd hold your nose and buy it.


Now its just the opposite. The fundamental outlook is piss poor, but the valuations look extremely cheap across all risk sectors.( I AGREE )


Risk assets are pricing in Armageddon( I AGREE ). As long as no one spies any horsemen running around, those risk assets ought to pay off well for investors in the very long term. But that's the real trick isn't it? When to jump in?


I think the key to bond investing in 2009 is two fold.


1) Protect your liquidity. Professional investors, whether leveraged or not, never know when their clients will need cash. And the cost of turning bonds into cash has never been higher than now. Non-pros tend to underestimate the probability of needing cash, and frankly, non-pros don't have as many resources for producing liquidity in bonds. No offense, but its true.


I believe that liquidity has probably bottomed( I AGREE ), or put another way, that liquidity won't get any worse than it is now. But when I say probably I mean like 65%. There is still a decent chance of another blow-up causing another spate of deep illiquidity.( PLEASE NO )


That being said, bid/ask levels are going to remain very wide, probably for the next several years. We've seen improved liquidity in high-quality sectors, like agencies and munis, but even there, I expect liquidity to wax and wane with buyer demand. Remember that dealers used to be the guardians of liquidity. That's gone and it ain't coming back.


2) Buy what you can hold. This isn't to say you can't put money into a bond as a trade, but given how wide bid/ask is, and given that you don't know when bids are going to suddenly disappear, you can't assume you can flip a position. So when buying a bond, ask yourself: would I hold this bond for the next year? Two years? To maturity? Is this credit strong enough that, if I had to, I'd hold this bond indefinitely?


I argue that you shouldn't buy anything in 2009 where you can't answer that question with a confident yes.


So with all that being said, here is my basic economic forecast for 2009. I'll follow this post up with thoughts on some of the major bond sectors. As always, I'll discuss a most likely scenario along with a less likely but possible scenario.


Growth
Most Likely: Sharply negative real growth in 4Q 2008, continuing (at a less severe pace) at least through 1H 2009. 2H 2009 likely near zero. Meaningful recovery doesn't start until 2Q 2010.

Less Likely: Government fumbles stimulus, and growth is negative through 2010 and possibly into 2011, with a deeper trough.

I think the immediate period after the Lehman/AIG/GSE/WaMu/Wachovia failures resulted in a massive pull back in economic activity( YES ). We saw it in Existing Home Sales in October/November, in auto sales activity, bank lending, everything.

That took what was already going to be a recession and turned it into something much worse( I AGREE ). I had thought that mortgage foreclosures could bottom in mid-2009, because that seemed like long enough for the bad loans to burn out. But the sharp contraction in 4Q 2008 will result in much higher unemployment, I suspect around 10% by the end of 2009, and thus the foreclosure party will continue on.

And it will take a slowdown in foreclosures for housing prices to bottom. I suspect it will be government intervention( NECESSARY ) that is the catalyst for this. We've already seen the government move to lower mortgage rates, which really should give us pretty good affordability. And while part of the initial problem with housing was over-building, but that ship has sailed. Housing starts have plummeted, and now all starts are pretty much multi-family or made to order.

Anyway, you need demand to outstrip supply in order for prices to start rising. As long as foreclosures are rising, that means supply is rising. Demand is going to be tepid until the employment picture improves. Rising supply and unchanged demand equals falling prices.

So I see home prices falling throughout 2009, absent direct government intervention either buying foreclosed properties or subsidizing banks to prevent foreclosures. Obama & Co. may actually take these steps, but I'd say it'll take several months for such a thing to pass Congress, then several more months to actually be implemented. So we're still looking at late 2009 at best.

GDP growth will probably be worst in 4Q 2008, then more modestly negative in 1Q and 2Q 2009. Beyond that is difficult to say. My base case is for 2H 2009 to be about zero real GDP growth, with a meaningful but tepid recovery in beginning in 2Q 2010.

The risk to this forecast is that the government bungles the bailout attempts, most likely by letting another financial institution fail( GOD NO ). It currently doesn't look like that's their strategy, but then again, after Bear Stearns it didn't seem like they wanted to let another institution fail. But then came Lehman.( YEP )

Another risk to this forecast is...

Inflation
Most Likely: Inflation? What inflation? The Fed will spend most of 2009 fighting deflation, although by 3Q or 4Q it will be apparent that the Fed will indeed win the battle. Headline CPI will print negative multiple times in 1H 2009, predominantly on falling food and energy prices.

Less Likely: We fall deeper into deflation, most likely because the less likely growth scenario comes to pass.

I've written a few times on deflation, which is truly the primary concern of the Fed right now. The Fed has plenty of tools to fight it, and Ben Bernanke is the right man for the job, having spent his academic life studying how the Fed blew it in the 1930's.

I don't see Japanese-style deflation taking hold, at least not for the same reasons as it took hold in Japan. The Bank of Japan maintained a ZIRP policy for many years to no avail. They still suffered from deflation. Why? Because you can't get consumer inflation without consumer spending. I argued this multiple times when energy prices were rapidly rising. Energy doesn't "create" inflation, rising money supply does.( I AGREE )

But even in the face of rapidly rising money can't create inflation unless consumers are spending. Right now, money is contracting and consumers are pulling back. In fact, those two things are usually correlated. But in the case of Japan in the 1990's, consumers refused to spend despite massive fiscal and monetary stimulus.

But here is where I think the U.S. differs from Japan. The Japanese are fundamentally savers. Americans are fundamentally spenders.( I AGREE )

Unemployment is going to be bad in 2009, heading toward 10%. But the other 90% of Americans will keep spending their income. Now they won't be able to spend their home equity, as in the past, but basically we're a nation of spenders( I AGREE ). Once the American stimuli take hold, consumer spending will advance anew. That's not to mention the fact that the U.S. Fed has been far more aggressive far earlier than the BoJ ever was.

Eventually this leads to some inflation problems( TRUE ), probably not till 2H 2010. To suggest that the Fed will provide just enough stimulus to avoid deflation but not create a significant inflation problem down the road is ridiculous( SO ARE MY FORECASTS ).

Key to the Fed's success is the progress on quantitative easing. The TALF is the quintessential example of QE, where the Fed targets interest rates away from overnight bank lending rates. There will be no limit as to how far the Fed goes to fight deflation. They could buy corporate bonds, municipal bonds, commercial mortgages, anything( TRUE ). Beware what you short!

However, if we get another big leg downward in economic growth, resulting in even tighter consumer lending conditions, then the deflation fight becomes more difficult. I'd still see the Fed eventually winning, but such an outcome would result in a much longer period of ZIRP and eventually much bigger inflation spike.

In the next couple days, I'll be discussing my investment strategy around this forecast."

Now Paul Kedrosky:

"Interesting contention over at Accrued Interest:

The Japanese are fundamentally savers. Americans are fundamentally spenders.

Is it always and forever true that Americans are spenders? I’ll concede upfront that the Japanese are savers, and that Americans have for more than fifteen years been crummy savers, but is it true that Americans are fundamentally spenders? Is it not possible that we could see a state change here given what has happened in stock markets and housing, etc.?( IT IS POSSIBLE, BUT I WOULD SAY ONLY AS A RESULT OF A REALLY BAD RECESSION OR DEPRESSION. OTHERWISE, WE ARE A NATION OF SPENDERS. )

I’m unconvinced that it can’t change. I could cite the recent uptick in spending in the U.S., post stimulus, with BLS showing U.S. savings rates up to 2.8% or so, which is a big increase in a short amount of time. I’m on record as saying the U.S. personal savings rates hits 7% in short order, and stays there, at least for a while.( I SEE MORE LIKE 3-5 %. BUT SHORT TERM MEANS A REVERSION TO OUR NATURAL STATE AS SPENDERS. )

Feel free( THAT'S WHY NOTHING IS WRITTEN ) to take the other side."

"he statistical seasonal adjustment process doesn’t handle abnormalities in the data very well."

Some good advice from Rebecca Wilder on News N Economics:

"For now, stick with the non-seasonal numbers when it comes to the BLS employment report

Seasonal adjustments sometimes make an very weak labor market conditions less onerous; this was the case for this week's initial unemployment claims report, and will be for the employment reports in December and January. The statistical seasonal adjustment process doesn’t handle abnormalities in the data very well.

Next week, when the Bureau of Labor Statistics (BLS) releases the December employment report (and for January as well), I suggest following the non-seasonally adjusted data, rather than the seasonally adjusted data. The normal seasonal patterns are not present, and the seasonally adjusted data will paint a slightly more benign picture of the job loss that will be reported in the nonfarm payroll.

An example: seasonal adjustments cannot predict statistical anomalies in unemployment claims report

The Department of Labor released a shockingly strong weekly initial unemployment claims report last Thursday:

In the week ending Dec. 27, the advance figure for seasonally adjusted initial claims was 492,000, a decrease of 94,000 from the previous week's unrevised figure of 586,000. The 4-week moving average was 552,250, a decrease of 5,750 from the previous week's unrevised average of 558,000.

The advance seasonally adjusted insured unemployment rate was 3.4 percent for the week ending Dec. 20, an increase of 0.1 percentage point from the prior week's unrevised rate of 3.3 percent. The labor market is improving – at least on a weekly basis, right? Wrong. The insured unemployment rate rose to 3.4% over the week, a signal that the national unemployment – currently at 6.7% - rate will rise.

The weekly claims fell simply because of the statistical process the BLS uses to rid the data of normal seasonal activity. Here is Bloomberg’s take on the report: The number of Americans filing first-time claims for unemployment benefits tumbled last week, skewed by the shortened Christmas workweek, while total jobless rolls reached a 26-year high, signaling a worsening labor market as the economy heads into the second year of a recession. That is incorrect reasoning because Christmas occurred on a workday (Mon. through Fri.) four out of the last five Christmas weeks, which should be (at least partially) accounted for in the seasonal adjustment process( TRUE ). Normally, the statistical process used to compensate for seasonal patterns works quite well. However, this process cannot compensate for anomalies in the data, or strange events that normally do not occur in December.

The chart illustrates the seasonally adjusted and non-seasonally adjusted data since Christmas of 2003, where I highlighted the comparable report for each of the preceding five years. Every year the number of claims filed in the last week of December rises, and on average, the NSA data rises by 75,233.

The seasonal adjustments extract this cyclical pattern (always rises in December) from the data, leaving only the trend that exceeds (or falls short of) the seasonalities. New claims filed beyond what normally happens in December (the seasonal adjustment) signals a weaker-than-normal labor market, while claims filed below what normally happens in December signals a stronger-than-normal labor market.

On December 27, 2008, the NSA number of claims filed rose by just 1,892, which is 73,331 below the average. The seasonal adjustment process sees this as a good thing, and reports a stronger-than-normal labor market, -94,000 new claims filed. But what happened on December 27, 2008 was clearly not normal, as every other indicator signals an contracting labor market.

It is more plausible that a negligible amount of seasonal hiring actually occurred in November and December. Therefore, the last week of December saw very few firings, and a negligible number of initial unemployment claims were filed. Seasonal adjustments would miss such a statistical anomaly.

Beware of the seasonal adjustments in this cycle; this applies to the Bureau of Labor Statistics employment report as well.

The chart illustrates nonfarm payroll since 2004. Like clockwork the seasonal pattern is this: firms hire in October and November for the holiday season; they start firing in December; and then they slash jobs in January.

This year, firms didn't hire in October nor in November - nonfarm payroll fell by 320,000 and 533,000, respectively. Therefore, the seasonal firing pattern through December and January will not exist and the seasonal adjustements will not apply.

In December and January, the seasonal adjusted series will show a stronger labor market than actually exists. Holiday workers will not be fired in December and January because they were never hired in October and November, and the seasonal job loss will be less than the non-seasonal job loss. The non-seasonally adjusted numbers will paint a more accurate picture of the labor market.

Rebecca Wilder"

This is very good advice, but I'm looking at productivity and what I call buying power as well. The Productivity will help determine if I am right about a proactive laying off of workers being a main cause of the loss of jobs, not driven by demand( Fundamentals ), but out of the Fear and Aversion to Risk. The buying power will determine if people who are still employed are, in fact, getting wealthier. This will help the diminution of the Fear and Aversion to Risk going forward.

"If true, expect this figure to drop significantly below the -4% level seen in the recessions of the 1970's or early 1980's."

A good post from EconomPic Data:

"Real GDP Per Capita

Per capita real GDP was slightly negative 'year over year' through the 3rd quarter.

Many forecasts project this recession to be the worst since the Great Depression. If true, expect this figure to drop significantly below the -4% level seen in the recessions of the 1970's or early 1980's.



Note that the ten year rolling annual average real GDP growth per capita has slipped to 1.3% as of September 2008, which is the lowest print since 1984.

Source: BLS / BEA"

These dire predictions might well occur, but I still don't see it.

"So the hangover theory, which I wrote about a decade ago, is still out there."

Paul Krugman with a good post:

"Somehow I missed this: via Steve Levitt, John Cochrane explaining that recessions are good for you:

“We should( THERE IS NO SHOULD ) have a recession,” Cochrane said in November, speaking to students and investors in a conference room that looks out on Lake Michigan. “People who spend their lives pounding nails in Nevada need something else to do.”( CREATIVE DESTRUCTION )

So the hangover theory, which I wrote about a decade ago, is still out there.

The basic idea is that a recession, even a depression, is somehow a necessary thing, part of the process of “adapting the structure of production.” We have to get those people who were pounding nails in Nevada into other places and occupation, which is why unemployment has to be high in the housing bubble states for a while ( TO THE EXTENT THAT THEY WERE EMPLOYED IN CONSTRUCTION, THAT COULD SIMPLY BE THE CASE ).

The trouble with this theory, as I pointed out way back when, is twofold:

1. It doesn’t explain why there isn’t mass unemployment when bubbles are growing as well as shrinking — why didn’t we need high unemployment elsewhere to get those people into the nail-pounding-in-Nevada business( BECAUSE THEY WOULD IMMEDIATELY BE EMPLOYED )?

2. It doesn’t explain why recessions reduce unemployment across the board, not just in industries that were bloated by a bubble.( FEAR AND AVERSION TO RISK. IN ALL RECESSIONS, THERE IS SOME PROACTIVE AND UNNECESSARY FIRING OF WORKERS )

One striking fact, which I’ve already written about, is that the current slump is affecting some non-housing-bubble states as or more severely as the epicenters of the bubble. Here’s a convenient table from the BLS, ranking states by the rise in unemployment over the past year. Unemployment is up everywhere( HENCE, MY POINT. THE FUNDAMENTALS CAN'T BE THE SAME EVERYWHERE ). And while the centers of the bubble, Florida and California, are high in the rankings, so are Georgia, Alabama, and the Carolinas.

So the liquidationists are still with us. According to Brad DeLong,

Milton Friedman would recall that at the Chicago where he went to graduate school such dangerous nonsense was not taught

But now, apparently, it is.( THERE WILL PROBABLY BE RECESSIONS, BUT WE SHOULD TRY AND STOP THEM. )

Update: Not to mention the idea that employment is dropping because workers don’t feel like working."

That's not what the post says. I argue that Productivity is Higher because Demand is higher than the firings warrant, due to the Fear and Aversion to Risk.

In any case, since we should adequately help people through a recession with our social safety net spending, it hardly makes sense to wish for one, if you want the government to stay out of the economy. Recessions and Crises always increase the size of government.

I believe that we will probably always have recessions, bubbles, and unemployment, not for lack of trying, but for lack of knowledge. Once again, we should try and eliminate them, even if that's true.

"In the last three months, real wages did in fact rise at a 14.8 percent annual rate"

Dean Baker points out something that should be obvious, that, if prices on goods go down, and your wages remain the same or go up, your buying power increases:

"Suppose Real Wages Rose by 15 Percent and No One Noticed

Well, you don't have to suppose. In the last three months, real wages did in fact rise at a 14.8 percent annual rate, and no one in the media noticed, or if they did, they didn't bother mentioning it.

The basic story is simple. Nominal wages have continued to grow at a modest 3.2 percent annual rate. Meanwhile prices have plunged, mostly importantly the price of oil. This implies rapidly rising real wages. That is very good news for the folks who still have a job.

Reporters should have been talking about the surge in real wages, but they seem to have largely missed it. Here's a column I wrote on the topic."

There are some winners in Deflation. However, whether long term Deflation would effect some of these current winners negatively, is a good question. I wouldn't like to bet on it.

Felix Salmon, once again, has something to say:

"Dean Baker sees the upside of the recession:

You probably didn't see this in the newspapers, but real wages rose at an incredible 14.8% annual rate over the last three months. The basic story is straightforward. While nominal wages have continued to grow at a modest 3.2% annual rate, prices have plummeted, hugely increasing the value of the paycheques of those workers lucky enough to still have a job...
The real lesson that the public should learn from recent experience is how the income of one segment of society is a cost to others. The wealthy understand this point very well...
If they can get low-paid workers to tend their gardens, serve them meals in restaurants, paint their homes and serve as nannies for their children, it raises their standard of living...
In the same vein, when the rich lose wealth it is a gain to everyone else. In short, they have our money.

This doesn't feel right to me. Yes, it's true that the working classes saw their standard of living stagnate during the years when the income and wealth of the rich was soaring. But it's also true that the single event which most soured working-class Americans on Republican pro-rich economic policies was not the rich getting richer but rather the rich getting poorer when the stock market plunged in October. ( I HAVE A SLIGHTLY DIFFERENT PERSPECTIVE, WHICH IS THAT NO ONE CARES ABOUT THE RICH IF THERE'S A RISING MIDDLE CLASS AND A DECREASING LOWER CLASS, BUT THEY DO IF THE RICH GET WEALTHIER AND THE OTHER CLASSES STAGNATE OR SUFFER. MY PERSPECTIVE IS THAT ONLY A SOCIETY WITH A GROWING MIDDLE CLASS AND DECREASING LOWER CLASS IS SUSTAINABLE IN THE LONG RUN, AND IS THE ONLY REAL HOPE FOR A SOCIETY WITH A MUCH SMALLER GOVERNMENT, WHICH IS NO LONGER FELT TO BE AS NECESSARY. )

What's more, it's not easy to come up with examples of any country where the poor have seen a sustained increase in their standard of living as the rich have gotten significantly poorer. And if you're a low-paid waiter or painter or nanny, you're unlikely to feel better off when you're fired by your formerly-rich patron.( IF THE POINT IS THAT THERE WILL ALWAYS BE WEALTHY PEOPLE IN A FREE SOCIETY, THEN THE ANSWER IS YES. )

Baker's solution to this last problem is simple:

This just points to the urgency of a large government stimulus package. We need to replace the consumption of stockholders and homeowners with some other form of demand( I AGREE, BUT DISAGREE WITH HIM ON HOW TO DO IT. I BELIEVE IN SOCIAL SAFETY NET SPENDING AND INFRASTRUCTURE SPENDING THAT'S NECESSARY ON ITS MERITS, BUT I ALSO BELIEVE IN TAX CUTS. MY SOLUTION WOULD HAVE BOTH, BECAUSE I'M MAINLY FOCUSED ON ATTACKING THE FEAR AND AVERSION TO RISK. ). The government has the capacity to spend enough money to replace this demand (as Fed chairman Ben Bernanke said, we can always print more money( I AGREE).

This obviously isn't a permanent solution, and I wonder whether it's feasible even on a temporary basis( I BELIEVE THAT IT IS ). Does anybody have a ballpark number for how much the consumption of the rich has declined? I suspect that the drop-off in real-estate consumption alone is greater than any stimulus plan which we're likely to see.

But the real gain of the workers at the expense of the wealthy will come only if rents start declining. I'd love to see some numbers on the average rent paid by non-homeowners: does anybody collect that data?

Update: An email correspondent sends in some historical perspective:

In the US and much of Western Europe 1950-1980 the rich stagnated while the real standard of living of the rest improved.
In Revolutionary France the seizure of the assets of the aristocracy and the church and the elimination of many tolls, the emancipation of remaining surfs, and ending of the oppressive tithe system improved the standard of living of the middle and poor at the expense of the rich, at least those who did not die as cannon fodder.

Here's Casey Mulligan:

"Real Personal Income is Higher than Ever

[all of the statistics below are seasonally adjusted by the BEA or BLS]

Today the Commerce Department released its estimate of November nominal personal income, 12.1638 trillion dollars (at annual rates).

ECONOMICS 101: DIVIDE BY CPI

The press is emphasizing that the figure is 0.2 percent less than in October. But let's not forget that the BLS reported that consumer prices were down 1.7% over the same time frame. That means a real personal income INCREASE of 1.5% in just one month! ( TRUE )

We can argue about how exactly to deflate, but no resolution of that argument is going to change this 1.5% gain into a measure that screams disaster.

I'm not sure why the Commerce Department does not report real personal income, although at the bottom of its report it does show real disposable personal income, which was 1.0 percent HIGHER in November than in October. That's their calculation -- not mine -- so don't blame me from ruining your "economic disaster" parade.

Today's Commerce Department shows data back to April: over that time frame, personal income deflated by CPI was highest in November. I am pretty sure that makes November higher than ever!( COULD BE )

REAL PER CAPITA

If you like things in per capita terms, November real personal income (at a monthly rate) was $3311.61 per person. That's the second highest ever, with the first highest being $3311.79 per person in May. That's right, we missed the real per-capita record by 18 CENTS per person. Enough said! ( TRUE )

GUESS AT Q4 REAL GDP

The experts are saying that real GDP (at quarterly rates) will be more than 1 percent lower Q4 than Q3. Are any experts reading this? Can they explain to us why they have that expectation, given that October real personal income (quarterly rate) EXCEEDED the Q3 real personal income by 1.2 percent and November EXCEEDED it by 2.8 percent? Are you predicting that real personal income will fall more than 10% in just one month, in order to bring the Q4 average down that far? Or are you predicting a huge departure between the growth rates of real personal income and real GDP?

I am admittedly an amateur at high frequency forecasting (it has less to do with the basic economic forces I have been emphasizing, which may take a couple of quarters to work out), but there are enough significant inconsistencies with the experts' forecasts that I have to issue my own:

• Q4 real (and seasonally adjusted) personal consumption expenditure will fall less Q3-Q4 than it did Q2-Q3.
• Q4 real (and seasonally adjusted) GDP will fall less than 1.0% (that is: less than 4.0% at annual rates) Q3-Q4, and may rise.
• Q4 labor productivity will be higher than Q3's (that is, productivity growth Q3-Q4 will not be negative)."

I have to admit to being with Casey on this, so I pray that he's correct.

Here's Robert Frank from the WSJ about the decline in the fortunes of the wealthy:

"By ROBERT FRANK

Economic inequality has become a hot-button issue on the presidential-campaign trail, with Sens. John McCain and Barack Obama sparring about spreading the wealth in America. Yet even as the rhetoric about inequality is rising, inequality itself is falling, economists say.

The reason: The financial crisis is draining the rich of some of their riches.

Over the past week, the McCain campaign attacked Sen. Obama as "the wealth spreader" for his now-famous remark to "Joe the Plumber" that, "I think when you spread the wealth around, it's good for everybody." Sen. McCain also likened his Democratic rival's tax plan to socialism, because it would raise taxes on those making more than $250,000 and lower taxes, or keep them level, for the middle class.

"You see," Sen. McCain said in a recent radio address, "he believes in redistributing wealth, not in policies that help us all make more of it."

Sen. Obama, who made the growing U.S. wealth chasm a pillar of his campaign from the start, argues for more-progressive tax policies that would shrink that gap and allow more Americans to share in the country's economic gains. Campaigning in Florida last week, he said Sen. McCain's tax plans -- like President George W. Bush's -- would "give more and more to those with the most, and hope prosperity trickles down to everyone else."

But the debate over rich versus poor ignores the changes likely to result from the financial crisis. If history is any guide, the upheaval already is shrinking inequality and could continue to narrow the wealth gap.

The share of income held by the richest 1% of Americans has declined during each of the past three downturns. Between 2000 and 2002, their share fell to 16.9% from 21.5%, according to Internal Revenue Service income data compiled by economists Emmanuel Saez and Thomas Piketty.

Their share also fell during the 1990 recession, hitting 13.4% in 1992 compared with 15.5% in 1988. The steepest decline was during the Great Depression, when the richest 1% saw their share of income plunge to 15.5% in 1931 from 23.9% in 1928.

"The Depression may be the best analogy for today when it comes to what will happen with income shares," said Mr. Saez, an economics professor at the University of California, Berkeley. He predicts that the share of income held by the top 1% will probably fall to 18% or 19% in the next year or two -- down from an estimated 23% or 24% in 2007.

Getty Images

Sen. Barack Obama walks with Sen. John McCain and wife Cindy.

During the Depression, the assets of the wealthy declined along with their incomes. In 1928 the richest 1% held 36.5% of the nation's wealth; by 1932 it shrank to 28%. Studies by other economists and researchers show similar declines.

The main reason for the declines: falling stock values. The wealthiest Americans have a greater share of their wealth concentrated in stocks and financial assets. When stocks plunge, as they have lately, the rich are hit disproportionately.

The wealthiest 1% of Americans held more than half the nation's direct holdings of publicly traded stocks in 2004, according to the Federal Reserve. Stocks accounted for 11% of their wealth, compared with less than 3% for Americans in the 50th to 90th percentiles. The rich also earn more of their incomes from stock options.

Of course, the rest of America also is losing wealth and income -- from falling home prices, rising unemployment and declining 401(k) accounts. But rising inequality has largely been fueled by surges at the top, and without capital gains or soaring business profits, those gains will reverse.

Robert J. Gordon, an economist at Northwestern University, says job losses in finance -- which accounts for an outsize share of wealthy income earners relative to other industries -- also will shrink the income and wealth share of the rich. Government limits on compensation imposed by the economic-rescue plan also could have a mild impact, he said.

So could a narrower wealth gap become the silver lining of the crisis? "Only if you don't like rich people," says Len Burman of the Tax Policy Center. "It's not like their share decline brings improvements for the middle class or the rest of America."

The bigger question is whether the falling fortunes of the rich and the coming decline in inequality will alter plans to tax the wealthy more. Some Democrats in Congress are urging Sen. Obama to go further with his plan to raise taxes on the wealthy if he becomes president.

"Inequality became the central argument for raising taxes on the wealthy," says Alan Reynolds, senior research fellow at the conservative Cato Institute. "Now that's obviously wrong. To the extent that there were perceived excesses in CEO pay, a lot of those were from the investment banks. Now the investment banks don't exist. And some of those CEOs have lost their shirts."

Adds Edward Wolff, an economist at New York University: "Now that the top has taken this hit, I think the whole issue of inequality is going to move to the back burner. The political momentum to do something about inequality may be gone -- at least for now."

Some economists say it would be wrong to abandon efforts to restrain inequality based on a momentary fall.

"Inequality cannot be totally undone by the financial bust," Mr. Saez says. "Policy makers now have a golden opportunity, like Roosevelt, to do something more permanent."

Mr. Saez says the next president should follow the example of President Franklin D. Roosevelt and impose crisis measures -- tax increases for the wealthy, massive public-works and jobs programs -- that helped usher in more than 40 years of more even wealth distribution.

The fall in inequality is unlikely to last. Immediately after the 1990 and 2000 recessions, wealth and income shares of the top 1% resumed their upward march. The share of income held by the top 1% rebounded after the 2001 downturn to 22.8% in 2006 -- the highest level since 1928.

When the stock markets return, so will inequality."

There you go. The question is what happens to the wealth of the Middle and Lower Classes.

"it's possible that some states will weather the labor storm better than they did in the 1980s."

Rebecca Wilder on News N Economics with a good analysis of the data:

"State unemployment rates: growing but not jointly surging

The Bureau of Labor Statistics (BLS) released its November regional and state employment report. Not surprisingly, the news was generally poor: the unemployment rate is rising across the 50 states (including D.C.). The national labor cycle will likely rival the carnage that occurred in the 1980’s, but a different pattern is emerging at the state level: it's possible that some states will weather the labor storm better than they did in the 1980s.

Here are some of Friday’s headlines following the BLS report:
California posts 8.4% jobless rate, third highest in U.S.
State's unemployment rate hits 25-year high (South Carolina)
Tiny State, Huge Pain R.I. Has Lost Jobs 11 Months in a Row
State's unemployment rate took hit in November (Indiana)
State Unemployment Figures Remain Steady (Ohio)
And for a static view of state-level unemployment rates, click here?: Unemployment state by state

In November, Michigan had the highest unemployment rate, 9.6%, while Wyoming had the lowest unemployment rate, 3.2%. But this is just November's data; a more thorough data set would include statistics across states AND time. However, a pretty 51-column table including each state’s unemployment rate since 1976 (the beginning of the series) is hard to come by. It is a cumbersome process to sift through the massive state-level data; but don't worry, I did this (partially) for you all."

Read the rest on her site.

"But I see no signs that a recovery is about to begin."

James Hamilton with some similar graphs to the ones that we've already seen, but I want to feature this post and his blog because it's so good:

"Comparing recessions

Last week was a tough one for the optimists.

In addition to dreadful numbers for auto sales, last week the Institute for Supply Management reported that its manufacturing PMI index fell to 36.2 in November. A value below 50 indicates that more facilities are reporting deterioration rather than improvements in categories such as orders, production and employment. The index never fell below 39 in either of the previous 2 recessions.

Source: FRED.

ISM's related index of business activity constructed from a survey on nonmanufacturing establishments fell to 33.0 in November. We don't have a long enough track record of that index to know what it requires to get a reading that low.

Source: FRED.

But the real attention last week was on the loss of 533,000 jobs during the month of November reported by the Bureau of Labor Statistics on Friday. That's a 0.4% drop, the biggest percentage drop in 28 years, and part of broader employment picture that Ian Shepherdson called "almost indescribably terrible." Notwithstanding, Dave Altig did his best to describe it, perhaps as something not so terrible after all, by comparing the decline in employment since December with what was seen on average during previous postwar recessions.

Horizontal axis: months before or after the business cycle peak. Vertical axis: ratio of nonfarm employment to the value at the business cycle peak. Green line: average postwar recession. Blue line: 2007-2008. Source: Macroblog.

By that measure, this looks a little worse than the average postwar recession, in part, Dave notes, because it's already lasted one month longer than the postwar average. If you compare the current recession with the two longest and most severe postwar recessions (1973 and 1981), we're maybe not quite as badly off now as we were then, at least if you trust the preliminary data.

Horizontal axis: months before or after the business cycle peak. Vertical axis: ratio of nonfarm employment to the value at the business cycle peak, for the recessions beginning in November 1973 (green), July 1981 (red), and December 2007 (blue). Source: Macroblog.

But there's another comparison we can look at along these lines that's much less reassuring. One of the developments that helped get us out of previous downturns is that the Fed responded to the recession by lowering interest rates. The blue line in the graph below shows the average behavior of the fed funds rate in the months following the recessions of 1957, 1960, 1969, 1973, 1990, and 2001. I've left out the somewhat anomalous 1980 and 1981 recessions, in which rapidly changing inflation expectations played a key role. The red line shows the fed funds rate during the current recession. The Fed cut rates more quickly and farther this time around than in any of the other 6 comparison downturns.

Horizontal axis: months after the business cycle peak. Vertical axis: change in fed funds rate since the peak. Data source: FRED.

Why does that trouble me? It means that the Fed did everything it could from the very beginning this time, and it wasn't enough. The average fed funds rate in November was 0.39%, meaning that even if the Fed cuts its official "target" for that interest rate to 0.5% or even 0.25%, it's not going to do anything for anybody. The main weapon we've always used in the past in this kind of situation is now out of bullets.

If a recovery begins soon, Dave's diagrams indicate that this wouldn't be regarded as all that serious a recession. But I see no signs that a recovery is about to begin."

We've already looked at the comparison to other recessions and seen no clear evidence of where we're going in the near future. The Fed policies are a series of actions that need to be gone through to see if they can turn the tide. Some of their decisions have been poor, and some good. But they're currently fighting an incredible fear and aversion to risk and the accompanying flight to safety that might well be a terribly hard nut to crack. I'm surprised by its thickness myself. But we do have more nutcrackers to try, and always will. Of that I'm sure.

I see signs of recovery in the eyes of the people I encounter everyday. Thank God for them. As Jackson says:

The road is filled with homeless souls
Every woman, child and man
Who have no idea where they will go
But theyll help you if they can
Now everyone must have some thought
Thats going to pull them through somehow
Well the fires are raging hotter and hotter
But the sisters of the sun are going to rock me on the water now