Current Affairs

What Diesel Fuel Usage Knew in October

This is, admittedly, a very noisy graph, even presented year over year. But it’s worth getting through the noise.

diesel-empl-leg

We’re about to have a new president, one who has promised to bring back our manufacturing jobs. BTW, those words were the most painful for our colleagues in the manufacturing midwest who have lived with the disruption caused by the erosion of manufacturing work in the region; the situation has improved but those on the ground know those jobs are not coming back.

But, as the graph shows, diesel fuel usage tends to lead manufacturing employment, and it really spiked in October. Historically, that would lead to an improvement in manufacturing employment in, you guessed it, early 2017.

So if the manufacturing outlook brightens as we move into the new year, remember those tea leaves were thrown in October, not on inauguration day.

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Coffee into the Waves

For us, a good remedy for the brutal political tenor in the country these days is to read long and hard. You always figure that someone like Stuart Hampshire, who during his high-school years in the 1930s watched the men unemployed by the closing of the Mersey shipyards stamping their cold feet in the streets of Liverpool, while the women sold wildflowers to passers-by. He saw kids without shoes while shoe factories were laying off workers because they couldn’t sell their shoes, and coffee jettisoned into the sea for price controls. He knew those shipbuilders could well remain unemployed unless or until the looming war ramped up demand for ships. When that war did so he went into intelligence work focusing on the espionage efforts of Himmler’s Central Command, and came to believe there is nothing we are not capable of doing, and that a “thin layer of procedural justice” is crucial in balancing competing moralities within a society. He calls such justice more important to morality than courage (we’ll add that’s “acting from the heart”) because, say, a bookish life might require little courage. “Not so for justice, always required.”

Hard to argue with him, and he does a far better job of incorporating Shakespeare throughout his books than we did above.

But we bring Hampshire up because he makes the distinction between restrictive morality, what we must not do, and the immorality that results from a lack of imagination. It’s not being Pollyannaish to say that the posturing that has replaced insight and discussion as we confront the economic issues we face these days had led to a profound failure of imagination, to all of our peril. And all the while the combatants fiendishly defend their negatives, what they believe cannot work.

Oh, and, Hampshire calls, “Which side are you on?” a “fatally over-simple question.”

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Hey, the market is working!

“Finally, our insurance system drives up costs for everyone. Between 1998 and 2015, the cost of cosmetic surgery for top procedures, which is paid by the consumer and not covered by insurance, rose at about half the rate of inflation, while overall health care rose at around double the rate of inflation — more than a threefold difference.”

 

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A Missed Opportunity

We’ve often lamented the low level of capital spending—bad news for productivity and income growth—despite high rates of corporate profitability. Here’s another perspective on that: real rates of return are higher than returns on financial assets, but that hasn’t led to a rush of capital into real investment.

Graphed below are two financial rates of return—the earnings yield on stocks (the inverse of the P/E ratio) and the ten-year Treasury yield—against our measure of nonfinancial corporate profitability (pretax profits from the national income accounts divided by the value of the tangible capital stock from the Fed’s financial accounts). Note that in recent years, returns on real capital have been comfortably higher than financial returns. Since 2012, the earnings yield on stocks has lagged real returns by an average of 1.1 percentage points—not as big as the 1.9-point gap of the late 1990s, when there was a gusher of real investment that produced a serious acceleration in productivity growth, but still wide compared to the -0.3 point average of the full 1952–2015 scope of the graph.

Missed_opp

The gap with Treasury yields is even more striking—4.4 points since 2012, compared to an 0.3 point average in the late 1990s and 0.4 for the full 63-year history presented here.

Profitability is now weakening, so the relative lure (at least on paper, or its silicon equivalent) of real investment is losing some of its charm. But this period of high real returns and low investment is looking like a missed opportunity. That so much corporate cash has been either hoarded, or devoted to buybacks and M&A, is not what long-term prosperity is made from. (Along with mildly tightening standards on C&I loans, the Fed’s recent loan officer survey found weakening demand for them, with “decreased investment in plant or equipment [as] the most commonly cited reason.”) Thirty years ago, as the buyout and buyback booms were just getting going, Peter Drucker wrote: “Everyone who has worked with American management can testify that the need to satisfy the pension fund manager’s quest for higher earnings next quarter, together with the panicky fear of the raider, constantly pushes top managements toward decisions they know to be costly, if not suicidal, mistakes.” It’s amazing how little has changed since the mid-1980s.

 

 

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Telling it like it is in the Great Plains

We thought you all might like this comment on gas prices and overall spending from one of our tax contacts in the Great Plains:

I think of savings on gas as pre-spent money. Spending on gas is inelastic, and the average consumer saves about $1,500 a year [for every dollar drop in price]. For the working-class person that $1,500 may have already been spent. Now, instead of being $150 in the hole each month, they are only in for $25. That would explain why the $500 payment back in 2001 didn’t provide substantial gains, and why we didn’t see an increase in spending when gas prices halved.

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