The Class Struggle

This chart is about what kind of world we live in. It’s drawn from the official source of the US national income accounts – the Bureau of Economic Analysis (BEA).

The chart shows the shares of national income going to compensation of employees and to corporate profits of domestic industries (with inventory valuation and capital consumption adjustments).


Note the vertical axes. On the left, there is the axis for the share for employee compensation – the blue line – which varies from 53-59 percent. The share for profits, which is on the order of 5-10 percent, is on the right vertical axis.

There is a high negative correlation between these two series, approximately -0.85.

Also, the scale of the changes in the shares of each are roughly of the same size, although not exactly.

Finally, the turning points in corporate profits and employee compensation line up in almost every case.

It’s important to note that employee compensation and profits do not simply sum to 100 percent; there are other categories of national income, and these have lower correlations with employee compensation.

There is much lower correlation between employee compensation and the sum of interest plus rents – both key components of property income.

There is also less (negative) correlation between proprietors income, which is about the same size as the corporate profit share, and employee compensation (-0.55). Presumeably, this is because proprietors income includes more sole proprietorships and family businesses; also, because wages for these companies may be lower than the corporate sector.

Of course, corporate profits have gone ballistic since 2008-2009, outpacing the increase in proprietors income.


So what this looks like is that increases in corporate profits come out of the share paid to employees somehow. Shades of Karl Marx!

In titling a post like this, I proceed cautiously, thinking some of my mentors in economics years back – Ray Marshall, A.G. Hart, and, briefly, W.W. Rostow to name a few.

Rostow used to talk of a Social Compact forged between labor and business after World War II. Fewer strikes and more automatic wage increases. That clearly has ended.

Links – early July 2014

While I dig deeper on the current business outlook and one or two other issues, here are some links for this pre-Fourth of July week.

Predictive Analytics

A bunch of papers about the widsom of smaller, smarter crowds I think the most interesting of these (which I can readily access) is Identifying Expertise to Extract the Wisdom of Crowds which develops a way by eliminating poorly performing individuals from the crowd to improve the group response.

Application of Predictive Analytics in Customer Relationship Management: A Literature Review and Classification From the Proceedings of the Southern Association for Information Systems Conference, Macon, GA, USA March 21st–22nd, 2014. Some minor problems with writing English in the article, but solid contribution.

US and Global Economy

Nouriel Roubini: There’s ‘schizophrenia’ between what stock and bond markets tell you Stocks tell you one thing, but bond yields suggest another. Currently, Roubini is guardedly optimistic – Eurozone breakup risks are receding, US fiscal policy is in better order, and Japan’s aggressively expansionist fiscal policy keeps deflation at bay. On the other hand, there’s the chance of a hard landing in China, trouble in emerging markets, geopolitical risks (Ukraine), and growing nationalist tendencies in Asia (India). Great list, and worthwhile following the links.

The four stages of Chinese growth Michael Pettis was ahead of the game on debt and China in recent years and is now calling for reduction in Chinese growth to around 3-4 percent annually.

Because of rapidly approaching debt constraints China cannot continue what I characterize as the set of “investment overshooting” economic polices for much longer (my instinct suggests perhaps three or four years at most). Under these policies, any growth above some level – and I would argue that GDP growth of anything above 3-4% implies almost automatically that “investment overshooting” policies are still driving growth, at least to some extent – requires an unsustainable increase in debt. Of course the longer this kind of growth continues, the greater the risk that China reaches debt capacity constraints, in which case the country faces a chaotic economic adjustment.


Is This the Worst Congress Ever? Barry Ritholtz decries the failure of Congress to lower interest rates on student loans, observing –

As of July 1, interest on new student loans rises to 4.66 percent from 3.86 percent last year, with future rates potentially increasing even more. This comes as interest rates on mortgages and other consumer credit hovered near record lows. For a comparison, the rate on the 10-year Treasury is 2.6 percent. Congress could have imposed lower limits on student-loan rates, but chose not to.

This is but one example out of thousands of an inability to perform the basic duties, which includes helping to educate the next generation of leaders and productive citizens. It goes far beyond partisanship; it is a matter of lack of will, intelligence and ability.

Hear, hear.

Climate Change

Climate news: Arctic seafloor methane release is double previous estimates, and why that matters This is a ticking time bomb. Article has a great graphic (shown below) which contrasts the projections of loss of Artic sea ice with what actually is happening – underlining that the facts on the ground are outrunning the computer models. Methane has more than an order of magnitude more global warming impact that carbon dioxide, per equivalent mass.


Dahr Jamail | Former NASA Chief Scientist: “We’re Effectively Taking a Sledgehammer to the Climate System”

I think the sea level rise is the most concerning. Not because it’s the biggest threat, although it is an enormous threat, but because it is the most irrefutable outcome of the ice loss. We can debate about what the loss of sea ice would mean for ocean circulation. We can debate what a warming Arctic means for global and regional climate. But there’s no question what an added meter or two of sea level rise coming from the Greenland ice sheet would mean for coastal regions. It’s very straightforward.

Machine Learning


Computer simulating 13-year-old boy becomes first to pass Turing test A milestone – “Eugene Goostman” fooled more than a third of the Royal Society testers into thinking they were texting with a human being, during a series of five minute keyboard conversations.

The Milky Way Project: Leveraging Citizen Science and Machine Learning to Detect Interstellar Bubbles Combines Big Data and crowdsourcing.

Prospects for the 2nd Quarter 2014 and the Rest of the Year

Well, it’s the first day of the 3rd quarter 2014, and time to make an assessment of what happened in Q2 and also what is likely to transpire the rest of the year.

The Big Write-Down

Of course, the 1st quarter 2014 numbers were surprisingly negative – and almost no one saw that coming. Last Wednesday (June 25) the Bureau of Economic Analysis (BEA) revised last estimates of 1st quarter real GDP down a -2.9 percent decrease on a quarter-by-quarter basis.

The Accelerating Growth Meme

Somehow media pundits and the usual ranks of celebrity forecasters seem heavily invested in the “accelerating growth” meme in 2014.

Thus, in mid-June Mark Zandi of Moody’s tries to back up Moody’s Analytics U.S. Macro Forecast calling for accelerating growth the rest of the year, writing,

The economy’s strength is increasingly evident in the job market. Payroll employment rose to a new high in May as the U.S. finally replaced all of the 8.7 million jobs lost during the recession, and job growth has accelerated above 200,000 per month since the start of the year. The pace of job creation is almost double that needed to reduce unemployment, even with typical labor force gains. More of the new positions are also better paying than was the case earlier in the recovery.

After the BEA released its write-down numbers June 25, the Canadian Globe and Mail put a happy face on everything, writing that The US Economy is Back on Track since,

Hiring, retail sales, new-home construction and consumer confidence all rebounded smartly this spring. A separate government report Wednesday showed inventories for non-defense durable goods jumped 1 per cent in May after a 0.4-per-cent increase the previous month.

Forecasts for the Year Being Cut-Back

On the other hand, the International Monetary Fund (IMF) cut its forecast for US growth,

In its annual review of the U.S. economy, the IMF cut its forecast for U.S. economic growth this year by 0.8 percentage point to 2%, citing a harsh winter, a struggling housing market and weak international demand for the country’s products.

Some Specifics

The first thing to understand in this context is that employment is usually a lagging indicator of the business cycle. Ahead of the Curve makes this point dramatically with the following chart.


The chart shows employment change and growth lag changes in the business cycle. Thus, note that the green line peaks after growth in personal consumption expenditures in almost every case, where these growth rates are calculated on a year-over-year basis.

So Zandi’s defense of the Moody’s Analytics accelerating growth forecast for the rest of 2014 has to be taken with a grain of salt.

It really depends on other things – whether for example, retail sales are moving forward, what’s happening in the housing market (to new-home construction and other variables), also to inventories and durable goods spending. Also have exports rebounded, and imports (a subtraction from GDP) been reined in?

Retail Sales

If there is going to be accelerating economic growth, consumer demand, which certainly includes retail sales, has to improve dramatically.

However, the picture is mixed with significant rebound in sales in April, but lower-than-expected retail sales growth in May.

Bloomberg’s June take on this is in an article Cooling Sales Curb Optimism on U.S. Growth Rebound: Economy.

The US Census report estimates U.S. retail and food services sales for May, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $437.6 billion, an increase of 0.3 percent (±0.5)* from the previous month.

Durable Goods Spending

In the Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders May 2014 we learn that,

New orders for manufactured durable goods in May decreased $2.4 billion or 1.0 percent to $238.0 billion, the U.S. Census Bureau announced today.

On the other hand,

Shipments of manufactured durable goods in May, up four consecutive months, increased $0.6 billion or 0.3 percent to $238.6 billion

Of course, shipments are a lagging indicator of the business cycle.

Finally, inventories are surging –

Inventories of manufactured durable goods in May, up thirteen of the last fourteen months, increased $3.8 billion or 1.0 percent to $397.8 billion. This was at the highest level since the series was first published on a NAICS basis and followed a 0.3 percent April increase.

Inventory accumulation is a coincident indicator (in a negative sense) of the business cycle, according to NBER documents.

New Home Construction

From the Joint Release U.S. Department of Housing and Urban Development,

Privately-owned housing units authorized by building permits in May were at a seasonally adjusted annual rate of 991,000. This is 6.4 percent (±0.8%) below the revised April rate of 1,059,000 and is 1.9 percent (±1.4%) below the May 2013 estimate of 1,010,000…

Privately-owned housing starts in May were at a seasonally adjusted annual rate of 1,001,000. This is 6.5 percent (±10.2%)* below the

revised April estimate of 1,071,000, but is 9.4 percent (±11.0%)* above the May 2013 rate of 915,000.

Single-family housing starts in May were at a rate of 625,000; this is 5.9 percent (±12.7%)* below the revised April figure of 664,000.

No sign of a rebound in new home construction in these numbers.

Exports and Imports

The latest BEA report estimates,

April exports were $0.3 billion less than March exports of $193.7 billion. April imports were $2.7 billion more than March imports of $237.8 billion

Here is a several month perspective.


Essentially, the BEA trade numbers suggest the trade balance deteriorated March to April with a sharp uptick in imports and a slight drop in exports.


Well, it’s not a clear picture. The economy is teetering on the edge of a downturn, which it may still escape.

Clearly, real growth in Q2 has to be at least 2.9 percent in order to counterbalance the drop in Q1, or else the first half of 2014 will show a net decrease.

CNN offers this with an accompanying video

Goldman Sachs economists trimmed second quarter tracking GDP to 3.5 percent from 4.1 percent, and Barclays economists said tracking GDP for the second quarter fell to 2.9 percent from 4 percent. At a pace below 3 percent, the economy could show contraction for the first half due to the steep first quarter decline of 2.9 percent.

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