Tuesday, May 27, 2014

GDP Growth

American Q1/2014 GDP growth that was to be 3% (when discussed in late 2013) was finalized last week....drum roll; its -0.7% (I presume that the media will blame the weather).  Why is the economy underachieving what everyone believes to be the right way to go?

There are several reasons:  First off, median income continues to fall, America's middle class is seeing real wage contraction and has done so since the mid 1980s.  There is no doubt that the contraction in high paying blue collar jobs is a culprit, personally I blame the financial services that accounted for less than 5% of GDP in 1980 and today accounts for nearly 10%.  This "value added" has to be paid for.

Looking at machinery from cars to telephone via white goods (washer etc) one inescapable truth is that the craftsman is a dying breed.  Two years ago my range oven "died" it was $900 to replace the electronics or $1,200 for a new range oven.  Guess what I did -- I bought a new oven.  Worse part is that you don't need a technician to change the broken parts, a few screws and the motherboard (on an oven) is replaced.  BTW who though that it was good idea to install delicate, heat sensitive electronics on an range oven?

The technically proficient blue collar workers have been replaced by the ignorant "Chinese factory worker" who installs the same component 2,000 times a day the exact same way -- thing of him/her as a cheap robot!

Back to GDP -- how can the economy grow when only the rich are seeing any income growth; they simply consume less (more savings) and therefore the economy cannot grow. Moreover, with an aging population consumption patterns shift -- a young family consumes much more than older (nearer retirement) couples.

We are therefore seeing a number of forces that conspire to keep GDP growth in check:

  1. Median income continues to fall (ACA aka Obamacare may help)
  2. Aging population shift consumption patterns
  3. Higher unemployment and lower skill employment affects earnings potential -- hence spending patterns

The value of investing in education;  A cautionary tail -- Friend's son just took over the sales and administrative responsibility of a consumer goods distribution regional network in Europe.  The retiree got his job when he was 25, had the equivalent of a high school diplomat.  His replacement has a MBA from a second tier European University (still very good), but in 30 years the job that was accomplished (until 3 weeks ago) by a High school graduate has been taken over by a MBA.  The cost of educating the replacement has been astronomical when compared to his predecessor -- what that value for money? 

This is a bit like the GDP growth stories out of China where cement factories are still being built (or cities for that matters) when there is already massive over-capacity (like a couple of hundred time the demand).  Building a $200 million cement plant that is un-needed still counts as part of GDP growth.  Can we make the same statement about education; were university graduates are taking over jobs done until recently by people that had not even finished high school?

I hear horror stories about education standards when young men and women graduate high school virtually unable to read or count -- its actually policy here in Quebec, to graduate from one year to the next in high school you only need a passing grade in half your classes!  

Who is school for the student, the teachers or society.  To me it looks like someone is getting cheater her -- the students for not having a real education and the tax payers that foot the bill.  I cannot speak about the teachers because such insane rules doesn't issue from professors...


Monday, May 12, 2014

Sometimes its de denominator that counts!

Last week StatsCan announced that jobs were down 29,000 in Canada for the month of April!  That's not good news with Quebec and the Atlantic province suffering the most.  In  fact, Quebec accounts for 110% of all job losses in Canada -- the province actually lost 32,000 jobs -- but the rest of Canada made up the difference. This is not good, and in fact, will probably probably cause the Loonie to drop some more over the next few days (which it did).

Sometime not only is the Nominator in the equation an issue, sometime its the denominator that has an impact.  As an example, Europe has seen no real changes to its economic fundamentals, France's government budget deficit is going to be huge, again!  Greece has seen no reduction in its overall debt burden, in fact it continues to worsen.  Italy that has a new government (and seem to want to tackle some hard issues), the market has given an unusual sign of confidence with historical low borrowing rates, but there too the overall debt burden -- that was apparently unsustainable 48 months ago, is no longer an issue.    

The reality is that the debt level of Europe's PIIGS are still as high as they were in 2010 when the European crisis started, in fact, in most of these economies there has been economic contraction, so that the debt burden is now a greater percentage of GDP!  Still all is well, the Euro is trading around 1.40 to the dollar.

By 2060 Japan's population (128 million today) will have shrunk to about 78 million.  There is a high degree of certitude as to this outcome, since Japan is a near perfect model of a closed economy (with regards to immigration).  It is virtually impossible for non-Japanese to emigrate to the country.  The reality of Birth/Death statistics (even taking into consideration advance in medical science) leads to an absolute decline in Japan's population.

The above table shows that by 2100, japan's population will be back to the level it was prior to 1900.  However, the make-up of this population will be very different.  In 1940, almost 40% of Japan's population was below the age of 14 and nearly 95% of the population was below the age of 65. In 2010, 25% of the population was above the age of 65, and only 13% of the population was bellow the age of 14.  By 2060, nearly 35% of that country's population will be over 65.  The turning point occurred in 2007 where Japan's population shrank for the first time.  In 2013 population contracted by 255,000.  The change in the denominator is important, while you can have a near stagnant economy (as in Japan) the number of participants are dropping -- notionally everyone else in Japan is a little better off!

Greece faces the same kind of problem, while its debt burden is unchanged (the biggest change is the creditor -- which has moved from pension funds and banks to the ECB) the reality is that Greece's economy is now nearly 25% smaller than it was in 2010.  Making it that much harder to find a solution that doesn't involve either exit from the Euro (very non-optimal) or some form of debt forgiveness (I'm sure Portugal, Spain, Ireland and Italy are watching that closely).  The only other option is either transfer payment from Europe to Greece, so that it can repay its loan or wage/cost deflation to make Greece more competitive.

Population shift has lead to a drop in the unemployment because the labor force has declined -- some would say, especially in the US, that ACA (a.k.a. ObamaCare) has had a huge impact on people's work need perception.  Some have dropped from the labor force because the only reason they kept working was to receive medical benefits.  Shifting demographics means that last year while unemployment rolls dropped off more quickly because people simply left the labor force.  The trend that is evident in Japan now, is slowly emerging in post babyboomer America (its important to note that America has probably the best worker/retiree numbers in the OECD -- Italy is the worse and only second to Japan...).

The same is true for Canada, while jobs were lost, the number of workers looking for work dropped even more, which means despite job losses Canada showed improved unemployment numbers.

Now you know