8/14/13

What is so important in 36-year-olds?

Figure 1 below compares the evolution of employment-population ratio (EPR) and the number of 36-year-olds in the U.S.  What can be so important in this number? I do not understand. Moreover, why this number is not important since 2010, as the projection from the number of 21-year-old shows in Figure 2? 

I do not say the 36-year-olds drive the EPR, but mere coincidence is rather unlikely.


Figure 1.  The employment-population ratio and the number of 36-year-olds  (blue line) between 1950 and 2013.

 
Figure 2. A 15-year ahead  projection (red line) of 36-year-olds from the number of 21-year-olds.

8/13/13

Price of nonferrous metals on a mid-term decline

This is a regular revision. We have been following the evolution of several price indices of metals since 2008. Our general approach is based on the presence of long-term sustainable (linear and nonlinear) trends in the evolution of the CPI and PPI in the United States [1, 2]. The difference between various components of these indices is not a random one but is rather a predetermined process. Using these trends, one can predict consumer and producer price indices for select goods, services and commodities.
 

Yesterday, we revisited the index of steel and iron. In this post, we revisit the trends in the PPI of nonferrous metals. Originally, we reported on this item in 2008 and then revisited in 2010 and February 2012. The index for non-ferrous metals (102) shows an example of the absence of sustainable trends in the difference (see Figure 1). The curve is rather a comb with teeth of varying width. Although varying, the distance between consecutive troughs is several years at least. 

We predicted that the index of nonferrous metals had to fluctuate with large amplitude around the PPI and grew at a lower rate than PPI during 2012 and 2013:  Considering the observation that the rate of growth was approximately 3 points per month since February 2012 one may expect the level of -10 in approximately 10 to 12 months, i.e. in September 2013.” 

In reality, this difference was at -38.5 in June 2013. There was a short term fall during the summer of 2012. Therefore, despite there is three months to grow, the difference is slightly behind the schedule. This delay does not change the trend, however, and we expect the price of nonferrous metals to fall through 2016.  

The producer price index of aluminum base scrap has to follow the same trend up, as Figure 2 shows. The price of aluminum will be decreasing as well.




Figure 1.  The evolution of the difference between the PPI and the index of nonferrous metals from 1985 and June 2013. There are no linear trends in the difference, but its behavior demonstrates a clear periodic structure with relatively deep but short troughs, which reflect the fast growth in the PPI for nonferrous metals.

 


Figure 2.  The evolution of the difference between the PPI and the index of aluminum base scrap from 1985 and June 2013.

Long term problems of the labor force market

A month ago we presented a prediction of the labor force participation rate, LFPR, measured by the Bureau of Labor Statistics. The LFPR (the portion of people in labor force) for the working age population (16 years of age and over) has been on a long-term decline since 1995. We predicted the fall down to 59% by 2025. Here we use a different approximation to project the future evolution of the LFPR. Following the Kondratiev wave approach (the Russian economist Kondratiev introduced long-period (50 to 60 years) waves in economic evolution – see Figure 1) we interpolated the observed LFPR curve by a sinus function with a period of ~70 years. The result is shown in Figure 2. The trough of the model function is 2030 and the bottom rate in 58.5%.
 
Another interesting feature is shown in Figure 3. The rate of unemployment also has some long period (~35 years)  oscillation in amplitude together with short-period ( 7 to 11 years) fluctuations. The period of 35 years is a half of the labor force period. The rate of unemployment is sensitive to the peaks and inflection points of the labor force curve. One may expect the following unemployment peak to be higher than in 2010.  
 
Figure 1. The Kondratiev wave
 
Figure 2. The actual LFPR curve (red) and that predicted by sinus function with a period of ~70 years. 

Figure 3.  The rate of unemployment. 

8/12/13

Price of steel and iron will be declining


Eight months ago we revisited the previously predicted fall in the producer price index of steel and iron in the fourth quarter of 2012 and formulated the hypothesis on the evolution in 2013: “One may foresee the difference to fluctuate around the green line in the near future. The price of iron and steel will likely be declining. It’s time to revisit our prediction.
 

Originally, we reported on the difference between the overall PPI and the PPI of steel and iron in 2008. Then we revisited the difference in 2010, February 2012, and December 2012. We predicted the index of steel and iron to return to the long term trend, which express a higher rate of growth of the producer price index than that of steel and iron. Our general approach is based on the presence of long-term sustainable (linear and nonlinear) trends in the evolution of the CPI and PPI in the United States [1, 2]. The difference between various components of these indices is not a random one but is rather a predetermined process. Using these trends, one can predict consumer and producer price indices for select goods, services and commodities.
 

Figure 1 (the upper panel is from December 2012 and the lower one is its updated version with data through June 2013) compares the difference between the PPI and the index for iron and steel (BLS code 101). The difference is characterized by the presence of a sharp decline between 2001 and 2008. Between 1985 and 2000, the curve fluctuates around the zero line, i.e. there was no linear trend in the absolute difference. In 2008, our main assumption was that the negative trend observed before 2008 should start transforming into a positive one after 2008. In Figure 1, the (expected) new trend is shown by green line. This trend suggests that the PPI grows faster than the index of steel and iron by approximately 2 units of index per year.
 

Figure 2 (same two panels) demonstrates the most recent period and confirms that our prediction for 2013 was correct – the difference has touched the green line. We foresee that the difference will be growing fluctuating around the green line till 2016. The price of iron and steel will be declining further before the difference reach ~10 to 20.
 


 




Figure 1. The difference of the PPI and the index of steel and iron updated (lower panel) for the period between November 2012 and June 2013. 
 






Figure 2. Same as in Figure 1 for the period between January 2005 and June 2013. Green line predicts the evolution of the difference after 2008. Red circles represent the difference between April 2009 and June 2013.

Americans are getting richer and richer


Americans are getting richer and richer. The share of Gross Personal Income (GPI) in the U.S. GDP has been increasing since 1960 (or 1940) as Figure 1 shows. People get a larger portion of the GDP as personal income and pay more taxes on it. But the overall tax rate on production and imports (as defined by GDP or Gross Domestic Income) has not been changing over last seventy years as Figure 2 demonstrates. We may consider the rise in GPI share as a mere taxation play with a zero gain. Formally, the GPI takes some more income from GDP but pays for it as if this money is still the same portion of GDP.

Table 1 shows major ingredients of the GPI as defined by the Bureau of Economic Analysis. Some items are decoded into smaller components. Let’s take a look at some components and find out which part has been the driver of the observed income growth (see Figure 3). We normalize all components to the measured GDP in order to illustrate significant changes in proportions over time. “Wage and salaries” have been on a negative trend since 1970: dropped by ~8%. At the same time, the increase in “Government social benefits to persons” more than compensated the fall in wages and salaries. This is redistribution in action. Figure 1 shows also the ratio of money income estimated by the Census Bureau where “salaries and wages” as well as “government social benefits to persons” are two major parts. The change in their proportion does not affect the portion of money income in GDP since 1960s. This is an important message – the portion of money income in GDP has not been suffering any decline since the 1960s. The estimates of GPI and CPS are very similar in this regard. What are the drivers then?

Two principal gainers are “Personal income receipts on assets” and “Personal current transfer receipts” which added since 1945 10% and 15% of GDP, respectively. Together, they added 25% of GDP to the GPI since 1945. What do these names mean?

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Excerpt from BEA documents.

Personal income receipts on assets. Personal interest income plus personal dividend income

 

Personal current transfer receipts. Consists of income payments to persons for which no current services are performed and net insurance settlements. It is the sum of government social benefits and net current transfer receipts from business.

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There are two losers as well: “Proprietors' income with inventory valuation and capital consumption adjustments” and “Rental income of persons with capital consumption adjustment” which lost altogether 10% of GDP since 1945.

Overall, the GPI gain was 10% of GDP from the 1940s. This GPI gain was almost fully accumulated by the richest 1% of population by mechanisms external to income definition given by the Census Bureau.

If the current positive trend in GPI/GDP ratio is extended into the 2020s, the top 1% will receive all the benefits through “Personal interest income plus personal dividend income”.  

Table 1. Components of Gross Personal Income

  Compensation of employees, received
    Wage and salary disbursements
      Private industries
      Government
    Supplements to wages and salaries
      Employer contributions for employee pension and insurance funds
      Employer contributions for government social insurance
  Proprietors' income with inventory valuation and capital consumption adjustments
    Farm
    Nonfarm
  Rental income of persons with capital consumption adjustment
  Personal income receipts on assets
    Personal interest income
    Personal dividend income
  Personal current transfer receipts
    Government social benefits to persons

 

 
Figure 1. The GPI, the IRS income estimate, and the money income estimated by the Census Bureau (CPS) normalized to GDP.
Figure 2. Taxes on production and imports normalized to GDP. From 7.6% in 1946 to 7.3% in 2012.





 Figure 3. Components of GPI normalized to GDP.

Principal idea of capitalism: the people only work because and so long as they are poor

This is an excerpt from "The Protestant Ethic and the Spirit of Capitalism"  by Max Weber Another obvious possibility, to retur...