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.

When are you gonna get job?

Following my previous post on the diminishing probability for a younger person to get rich here I would like to show the back side of this process. The rate of unemployment for younger people has a positive trend. See figure below.  No comments needed.


 

When are you gonna become rich?

Overall, the portion of American population having incomes distributed by the Pareto law (~1% to 5%) has not been significantly changing since 1947.  This portion is a working definition of being rich. When a person gets income above the Pareto threshold - s/he is able to reach any other level with a probability falling as a power of income.  

However, the age when a person  can get into the Pareto has been increasing. (see the paper with our model for explanation) For younger, it is getting harder and harder to get rich.  Figure 1 compares several probability density functions (PDF) describing the  age dependence (as expressed by working experience) of the portion of rich people. In 2011, the peak age is approximately 57 years. In 1990, it was 46 years of age.

Another sad news - old people drop out of the rich population exponentially. Much faster than get into it.    

Figure 1. PDF for several years.
 

January-April 2000, the highest rate of partcipation in labor force ever

Four first months of the 21st centure gave the record high rate of participation in labor force. It was 67.3% (seasonally adjusted). Currently, it is at 63.5% or 4% down from the record. Actually, it is back to 1979. And this low level does not look like the end of the story. The trend is definitely strong and negative.