Mish's Global Economic Trend Analysis

Costco vs. Walmart and Reader Responses Over Minimum Wage
Richmond Fed Manufacturing Index Negative Second Month
Deconstructing and Debunking Shadowstats

Costco vs. Walmart and Reader Responses Over Minimum Wage

Posted: 28 Apr 2015 04:04 PM PDT

I received lots of emails and blog comments to my article Reader Question: Is the Minimum Wage Really a Maximum Wage?

In regards to living wage Tesla responded ...

"You clearly have never run a business. if your employees are not able to live , or more importantly , just having living problems in general : they are 1) not going to work hard for you sometimes 2) might steal from you 3) might destroy your business property or otherwise not protect it from other thieves."

Quite frankly, that is ridiculous. If you are concerned your employees will steal from you or destroy your property, you should not hire them in the first place.

And if someone is worth more than the minimum wage and you are afraid they will go elsewhere, then you pay more than the minimum wage.

Look at McDonalds's or Walmart. Did they suffer massive theft or property destruction by employees?

Both recently raised their base pay scale. Why? Because they could not attract a good work force at the wage they were paying. This is how it should work, not by living wage nonsense.

Carl responded ...

"Another important thing to remember about the minimum wage is that it removes from the workforce all those that are not worth the minimum wage. With a minimum wage, such persons automatically become government dependent."

Yep, exactly.

Ron ...

Reader Dave asks ...

"Hi, Mish. Costco does pay more than Walmart as a big box business. It also gives employees all holidays off. How do they do it and WMT can't?"

The answer is Costco has a different model. It charges higher prices and its stores are generally in more upscale areas.

Walmart employs about 2.1 million.

Costco employs 192,000.

OK - let's have Walmart pay the same as Costco. To do it will compete in the same space as Costco so it will immediately fire 1.9 million people and close thousands of stores.

Happy with that outcome?
Perhaps not.

So let's just mandate $15.00 an hour higher benefits like Costco, across the board for every US company. Then let's watch another 4 million jobs vanish.

This is all so obvious that it's ridiculous to be even discussing. Yet here we are.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Richmond Fed Manufacturing Index Negative Second Month

Posted: 28 Apr 2015 10:18 AM PDT

The Fed manufacturing surveys continue to disappoint. Today, the Richmond Fed reading came in at -3 matching the lowest guess on Bloomberg.

The headline index is in the minus column for the second month in a row, at minus 3 vs March's minus 8. New orders are in the negative column for the 3rd month in a row, at minus 6, while backlog orders, at minus 8, continue to extend their long negative streak. Shipments are negative, at minus 6, and capacity utilization is negative, at minus 4.

Yet despite the weakness in orders and despite the weakness in shipments, employment in this report, as it curiously has been in other manufacturing reports as well, is up, to plus 7 vs plus 6 in March. This must reflect confidence that ongoing weakness is only temporary and that order and shipment momentum is certain to build.

Other details include depressed price readings, consistent with other reports as well. The manufacturing sector is being held down by weak exports and trouble in the oil & gas sector, but it's not keeping firms from hiring.

Misplaced Confidence?

The Richmond Fed reports Manufacturing Sector Activity Remained Soft; Employment and Wages Grew Mildly

Overall, manufacturing conditions remained soft in April. The composite index for manufacturing moved to a reading of -3 following last month's reading of -8. The index for shipments and the index for new orders gained seven points in April, although both indicators finished at only -6. Manufacturing employment grew mildly this month. The indicator gained one point, ending at a reading of 7.

Manufacturers looked for better business conditions in the next six months. Survey participants expected faster growth in shipments and in the volume of new orders in the six months ahead. Producers also looked for increased capacity utilization and anticipated rising backlogs. Expectations were for somewhat longer vendor lead times.

Survey participants planned more hiring, along with moderate growth in wages and a pickup in the average workweek during the next six months.

It's important to note that a single firm hiring one person will counterbalance another firm firing 50. It's entirely possible employment is not as strong as it looks (not that 7 is a particularly strong number in the first pace).

Finally, I suspect confidence is on the high side looking ahead. Given strength in the US dollar and a clearly slowing China, I see no reason to believe there is going to be a big second quarter recovery, or if there is one, that it will last.

This isn't all due to the weather.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Deconstructing and Debunking Shadowstats

Posted: 28 Apr 2015 09:31 AM PDT

An interesting article came my way today courtesy of a friend "BC". The article is Deconstructing ShadowStats. Why is it so Loved by its Followers but Scorned by Economists? by Ed Dolan.

Mish readers likely know that I believe inflation to be understated, and that I also believe Williams' ShadowStats is wildly on the high side. For example, please consider GDP, Real GDP, and Shadowstats "Theater of the Absurd" GDP.

I have also mentioned food inflation on many occasions. While food prices (especially beef) did jump in the last year or so, I recently bought chicken breasts for $.99 a pound and very lean center cut pork chops for $2.49. Sale prices on center cut pork chops have generally ranged from $1.79 to $2.49 for 15 years! Not on sale, I have seen them as high as $5.49.

So I buy pork chops on sale, and freeze them. Same with chicken and beef. While non-sale prices have gone up more, ShadowStats calculations seem absurd.

Want to combat food inflation? Buy a big freezer, buy food on sale, and freeze it.

I never dove in into Williams' numbers to see where he may have gone wrong. Ed Dolan just did that, with convincing tables, graphs, and commentary.

Here is a snip.

A can of tomato sauce that cost $.25 at Piggly Wiggly in 1982 cost $.79 at my local market in early 2015. Starting from the 1982 price, the CPI predicts that it should cost $.61 in 2015 while ShadowStats predicts that it should cost $2.64. Starting from the 2015 price and working backwards, the CPI predicts that it should have cost $.32 in 1982 while ShadowStats predicts that is should have cost $.08. Based on these calculations, we see that the CPI underestimates inflation, as measured by the Tomato Sauce Index: The ratio of the 2015 predicted price of $.61 to the 2015 actual price, $.79, is .77, an underestimate of 23 percent. The ratio of the ShadowStats prediction to the actual price is 3.32, an overstatement of 223 percent. For tuna, both indexes overestimate inflation, the CPI by 34 percent and ShadowStats by 478 percent, and so on.

Has Williams Simply Made a Mistake?

The fact that the ShadowStats inflation rate fails every crosscheck makes one wonder whether Williams has simply made some kind of mistake in his calculations. I believe that he has done just that. The mistake, I think, can be found in a table given in a post that represents Williams' most complete explanation of his methodology.

... Williams' use of a running total of inflation differentials to compute a "cumulative inflation shortfall" of 5.1 percentage points exaggerates the true impact of the methodological changes made by the BLS. A better way to estimate the cumulative inflation shortfall would be to look at the differences between CPI-U-RS and CPI-U before 1983, the year when the BLS implemented the first of the changes that it incorporates in the CPI-U-RS series. That approach is not quite as precise when we use real-world numbers, as Williams does in his original table. As explained earlier, the actual data include statistical noise caused by changes in weighting and in relative price changes among sectors. However, we can approximate the true inflation shortfall by averaging the numbers for 1981 and 1982 from Williams' table, giving an estimate of -0.45 percentage points.

As mentioned above, Williams' ShadowStats inflation series incorporates an additional 2.0 percentage point correction to reflect methodological changes that are not captured in the CPI-U-RS series. I would like to examine that number more carefully in a future post, but for the sake of discussion, we can let it stand. If so, it appears to me that, based entirely on Williams' own data, methods, and assumptions, the adjustment for the ShadowStats inflation series should be about 2.45 percentage points below CPI-U, rather than the 7 percentage points he uses.

In my view, Williams alternative measure of inflation would be more convincing if he were to make this correction. It would also be less likely to feed the anti-government paranoia of some of his followers, who allege that the BLS is falsifies source data and manipulates reported indicators in the way that Argentina and some other countries appear to do.

If you are a true believer in ShadowStats numbers, I suggest you read Dolan's article in entirety for a convincing rebuttal.

By the way, Dolan was quite polite in his rebuttal, concluding with "I would like to thank Williams for taking the time to make detailed comments on an earlier draft of this post. Our private dialog has not yet led to a complete resolution of the issues I have raised here, but I hope that he will address them in future public comments. The search for alternative inflation indicators goes on."

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Mish's Global Economic Trend Analysis

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