Mish's Global Economic Trend Analysis

Reader Question: Is China a Currency Manipulator?
China Joins Currency War With Surprise Devaluation, Biggest One-Day Move on Record
Productivity Remains Weak; Spotlight on Retail Store and Trucking; Are Productivity Measurements Accurate?
Household Spending Projections Decline Again: Does the Fed Believe Its Own Surveys?

Reader Question: Is China a Currency Manipulator?

Posted: 11 Aug 2015 03:59 PM PDT

In reference to China Joins Currency War With Surprise Devaluation, Biggest One-Day Move on Record reader Martin writes ...

Hi Mish,

I don't fully understand from your latest post what is the significance of congress labeling China a currency manipulator? Does it matter? Also you say they shouldn't, aren't they obviously a manipulator?
Can you elaborate?

Thanks for all the great insights!
Martin

Significance

The significance of Congress labeling China a currency manipulator is the likelihood that president Obama would have to hike tariffs on a number of Chinese imports. This would likely result in a tit-for-tat response by China.

No one wins trade wars. Instead trade suffers.

Manipulators

China does manipulate currency to force yuan down.
The US has undergone QE to force the dollar down.
The US and China both manipulate interest rates for the same reason.
The EU manipulates interest rates and also launched an inane QE policy.
Japan does all three: Currency interventions, QE, Interest rate manipulation.

No one should point fingers here. They are all guilty

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

China Joins Currency War With Surprise Devaluation, Biggest One-Day Move on Record

Posted: 11 Aug 2015 10:19 AM PDT

Surprise Devaluation

In a move sure to heighten trade tensions with protectionists in US Congress, Surprise China Devaluation Marks Escalation of Currency War.

According to conventional wisdom, wars are easy to start and difficult to end. Similarly Beijing's devaluation, the biggest one-day currency move since 1993, represents the latest skirmish in an emerging battle which, analysts warn, may be hard to reverse.

"This shows how desperate the government is over the state of the economy," said Fraser Howie, a China analyst and co-author of Red Capitalism. "If they were trying, as the central bank said it was, to bring the exchange rate back into line with market expectations then they have failed miserably as the market is now just expecting further devaluation."

In late March, Chinese Premier Li Keqiang told the Financial Times: "We don't want to see further devaluation of the Chinese currency, because we can't rely on devaluing our own currency to boost exports.

"We don't want to see a scenario in which major economies trip over each other to devalue their currencies," Mr Li continued. "That will lead to a currency war, and if China feels compelled to devalue the RMB in this process, we don't think this will be something good for the international financial system."

Another problem is that depreciation is likely to exacerbate capital flight, which has already become a serious issue this year for the first time in more than a decade.

"The devaluation in the renminbi is not large enough to improve China's export competitiveness, but it is large enough to create a sense that Beijing may have fundamentally shifted its currency policy," said Stuart Allsopp, head of country risk and financial markets strategy at BMI Research.

"The risk now is that investors see the yuan [another term for the renminbi] as a one-way bet weaker and start to position against the currency, raising the prospect of more substantial yuan weakness and more economic uncertainty."

Yuan vs. US Dollar

That may not look like much but it is a surprise 2% move. And it comes amidst a persistent trade deficit with China.

I talked about the trade deficit on Sunday, in China's Exports Plunge 8% in July; Spotlight on US Trade Imbalance With China.

Will protectionists in US Congress again threaten China with potential legislation to label China a currency manipulator?

They shouldn't, but I expect the howls any minute now from Congress, the steel industry, and others.

By the way, this desperate move by China's central bank is more proof of the weakness of the entire global economy.

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

Productivity Remains Weak; Spotlight on Retail Store and Trucking; Are Productivity Measurements Accurate?

Posted: 11 Aug 2015 09:26 AM PDT

Economists expected bounce in productivity, and got one, but it was a bit weaker than than the Bloomberg Consensus Estimate of 1.6%.

A bounce back for output gave first-quarter productivity a lift, up a quarter-to-quarter 1.3 percent vs a revised decline of 1.1 percent in the first quarter. The bounce in output also held down unit labor costs which rose 0.5 percent vs 2.3 percent in the first quarter.

Output in the second quarter rose 2.8 percent vs a depressed 0.5 percent in the first quarter. Compensation rose 1.8 percent, up from 1.1 percent in the first quarter, while hours worked were little changed, up 1.5 percent vs 1.6 in the first quarter.

Looking at year-on-year rates, growth in productivity is very slight at only plus 0.3 percent while costs do show some pressure, up 2.1 percent in a reading, along with the rise in compensation, that will be welcome by Federal Reserve officials who are hoping that gains in wages will help offset weakness in commodity costs and help give inflation a needed boost.

Productivity vs. Unit Labor Costs

Productivity Dry Spell

MarketWatch reports Productivity Dry Spell Looks Worse in Latest Report

The dry spell of productivity in this economic expansion is even worse than previously thought, according to new data released Tuesday.

The average annual rate of productivity growth from 2007 to 2014 was revised down to 1.3% per year from the prior estimate of 1.4%, the Labor Department said Tuesday.

This is well below the long-term rate of 2.2% per year from 1947 to 2014.

Productivity in 2013 was especially weak, revised down to unchanged from the prior estimate of a 0.9% gain. Productivity even dipped below zero for three quarters in 2013. That hadn't been seen since 1982.

Former Fed chairman Alan Greenspan said Monday that weak productivity is the most serious problem that confronts the U.S.

Federal Reserve Chairwoman Janet Yellen has also called productivity since the recession "disappointing," even before the downward revisions.

The flipside of the weakness in productivity growth is that it is one reason for the Fed may be eager to get starting raising interest rates in September because weaker productivity lowers potential growth and it doesn't not take much to generate inflation.

There is widespread debate among economists about the causes of weak productivity. Some blame the lack of capital investment. Some question the government's measuring skills.

Joel Naroff, president of Naroff Economic Advisors, said productivity is low because workers have learned that in this expansion working harder doesn't get them anything in return.

"If firms want to drive up productivity, they will have to do it the old fashioned way, by providing incentives to work harder," Naroff said.

Workers Learn Not to Work Hard?

The above comments on productivity are incredibly funny. The most ridiculous notion is the Fed will hike because low productivity means higher inflation.

Good grief. The Fed wants higher inflation. And inflation (as measured by the CPI) has consistently been under the Fed's 2% target.

Of course the CPI measurement is a piss poor measure of inflation in the first place, but it is what the econo-clowns at the Fed believe in.

And what about notion "workers learn not to work hard"? That seems ridiculous as well. What if the workers simply are not any good, or are good and cannot get much better?

Retail Store Productivity

Have retail stores expanded so much that companies have to hire marginal workers just to staff them? How many in retail have totally useless college degrees and a lack of real skills?

What skills are even needed to take an order for a burger, or scan an item at the register? That question we can answer: almost none.

Productivity would go up if a scanner could ring up an entire basket at one, and the person behind the register was made redundant.

Trucker Productivity

On June 21, I noted the Most Common Job in 29 States is Trucking.

The NPR claims the most common job in 29 of 50 US states is truck driving. This seems a bit overboard, and depends on how jobs are categorized, but here is the chart.

As with retail, short of automating trucks and firing truckers, there is scant room for increased productivity.

Software mapping of the best routes is not likely to get much better. When trucks are fully automated, productivity will soar, but the industry will lose millions of jobs.

Are Measurements Accurate?

Many question the measurements. So do I. But which way do they go? Up or down?

With so many working in retail and trucking, until masses of people are fired, productivity just may stagnate.

Alan Greenspan said Monday that weak productivity is the most serious problem that confronts the U.S.

I disagree. The most serious problem clearly is a debt overload everywhere one looks (students, households, subprime auto loans, corporations going into debt to buy back their own shares, etc.)

For that blame the Fed. One can also blame the Fed for its loosey-goosey monetary policy and nonsensical 2% inflation target.

Increases in productivity are inherently price-deflationary: More goods produced quicker should result in falling prices as well as higher standards of living. That's a good thing.

But the Fed does not want falling prices. It wants unit labor costs to rise. The catch is the higher the unit costs, the more incentive there is to get rid of workers.

The Fed just may not want the next major advancement in productivity because of what it will do to jobs and prices. But that is just around the corner led by fully automated trucks, buses, and cabs.

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

Household Spending Projections Decline Again: Does the Fed Believe Its Own Surveys?

Posted: 11 Aug 2015 01:28 AM PDT

Economists in general, but especially those at the Fed, continue to state a belief that the current economic weakness is transitory.

And the near-universal economic forecasts predict increases in consumer spending due to wage increases and low gasoline prices.

However, if you ask consumers what they believe they will spend, that answer is in sharp contrast to what economists expect.

As I did in May, I downloaded household spending projections from New York Fed's Survey of Consumer Expectations. Here is a chart from the downloaded data. Let's take a look.

Household Spending Projections

click on chart for sharper image

Month to Month Changes

Consumers at the low end of projection (those living paycheck to paycheck, forecast a mere 0.62% increase in their spending, down from 1.28% last month.
The median forecast is 3.46%, down from 4.29% last month.
The high end forecast is 9.01%, down from 9.62% last month.

The absolute numbers are not that important because month-to-month numbers swing a bit.

Yet, it's easy to see a change starting late last year in the median and low projections. The high end projections have been in decline for even longer.

These trends are very recessionary looking, but the Fed does not believe its own surveys.

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

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Mish's Global Economic Trend Analysis

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