Saturday, November 4, 2017

Jobs growth is disappointing, but the tax plan is encouraging

Monthly jobs data are by nature volatile, and they can be revised significantly for up to two years, so you can't give one or even several months of numbers much importance. I like to track the trend in jobs growth over 6- to 12-month periods, since the monthly volatility tends to wash out. By that standard, private sector jobs growth has slowed from 2.5% three years ago to about 1.5% now, and shows no sign of improving despite lots of good news from the stock market. If it weren't for a modest uptick in labor productivity (which has picked up from a low of -0.4% in the year ending June 2016 to 1.5% in the year ending last September), the economy would not be keeping pace with the 2.2% annualized growth rate that it has experienced since the recovery began in mid-2009 (in the year ended last September, the economy registered only 2.26% growth). In effect, a recent, modest increase in productivity—which remains miserably low—is offsetting a slowdown in jobs growth, and the result is continued sluggish growth. Things could be worse, but it's hard to reconcile the ebullience of the stock market with the weak pace of hiring.

To be sure, GDP growth has averaged about 3% in the past two quarters, and there is reason to believe it could could be at least 3% in the current quarter. But until we see a credible increase in the pace of hiring, it is premature to expect a sustained and/or impressive increase in overall growth. That most likely will require successful tax reform. But in the meantime, there are still several encouraging indicators which suggest that the economy is unlikely to enter a recession for the foreseeable future: business investment has picked up a bit, the ISM surveys show impressive results, and real yields are increasing (but only very gradually). Details can be found in the following charts.

The chart above shows the monthly change in private sector jobs. I focus on the private sector, since that is the economy's engine of growth. As the green line suggests, there hasn't been any sustained improvement in the pace of jobs creation for a long time.

As the chart above shows, public sector jobs haven't grown for a long time. This is actually good, since it means that the public sector is shrinking relative to the rest of the economy, and that acts as a tailwind to growth.

As the chart above shows, the growth rate of private sector jobs has been tapering off for the past three years. The current pace, about 1.5% per year, is the slowest we have seen since the recovery got underway. By itself, this is a disappointing indicator. At the very least, it reinforces the fact that the current recovery has been weak because business investment has been weak. Companies are generating healthy profits, but they are not investing much for the future. Without a pickup in investment we are very unlikely to see any pickup in jobs growth or in productivity.

As the chart above shows, private sector investment hasn't grown much at all for the past 10 years. This is one of the root causes of the fact that the current recovery has been the weakest ever.

The October ISM manufacturing survey declined a bit from September, but is still at very strong levels. This strongly suggests that GDP growth in the current quarter will be at least 3-4%. If so, that in turn would be a good indicator that labor productivity continues to improve.

The much larger service sector of the economy is also showing very positive readings in the October ISM survey. The Eurozone is doing well also. We are in a synchronized global upturn, and that is very good.

The manufacturing sector must be feeling fairly optimistic, since a solid majority of those surveyed report increased hiring plans. This bodes well for future jobs growth.

Real yields on 5-yr TIPS have tended to track the economy's real growth rate, as the chart above shows. Real yields have been in a modest uptrend for the past few years; I take this as a sign that the market is very reluctant to price in a strong recovery. According to the bond market, the outlook for the economy has improved only very modestly in the past year or so. No sign of exuberance here! Also, no sign of great expectations for tax reform. The market is still very cautious about the growth outlook.

So what about Trump's tax reform proposal? It looks good, but it could be better. It's very business-friendly (e.g., cutting the corporate tax rate significantly, allowing for immediate expensing, shifting to a territorial system that taxes profits only at their source, and eliminating or limiting many deductions). But it's tainted by keeping a very high rate on top income earners (and a new, even higher rate on those who make more than a million), and by not reducing the tax on capital gains and dividend income. However, these negative effects are somewhat offset by the phaseout of the death tax, the elimination of the alternative minimum tax, and the indexation of tax brackets by future inflation.

Trump's proposal effectively shifts a lot of the corporate tax burden to individuals, which in principle is a good thing, because in theory there should be no tax on businesses. Whatever tax businesses do pay is effectively passed on to consumers, employees, and shareholders—better and more efficient to tax them directly than indirectly. The top rate for individuals is there purely for political purposes; it will do nothing to stimulate investment or the economy because it fails to increase the incentives of the most successful to invest, take risk, and work harder. That's like hobbling those most capable of creating new jobs. It will also mean that those in the middle class who strive to reach upper class status will face a very steep marginal tax rate curve, thus creating new burdens for the middle class. And by creating very different top rates for individuals and corporations, it will result in myriad efforts to arbitrage the difference (e.g., by switching from S corp to C corp status).

It will, however, very likely result in more investment in the US, since it sharply increases the after-tax returns to corporate risk-taking in the US relative to other countries. Lots of capital that has fled high US business tax rates will likely return, with the net result being to increase the ratio of capital to labor in the US. That in turn would have the salutary effect of boosting wage income, because when you add capital to an economy you automatically make labor relatively scarce, and that has the effect of boosting wages. (If you want to invest more in an economy, you need to hire people to run the business.) If this tax proposal passes, we can expect to see more overall growth in the economy, more jobs creation, PLUS higher real incomes for the vast middle class. Unemployment is low, so a significant increase in the demand for labor is almost certain to require higher real wages. Rising real incomes would be a very welcome thing for everyone.

True tax reform requires the elimination of deductions and a lower and flatter tax rate structure. This proposal goes part way on the deduction front and a long way on the corporate tax front. Unfortunately, it makes the individual tax rate structure steeper and more progressive. It's a shame that Republicans couldn't propose something worth doing on all fronts without first caving to potential political opposition. But I won't let the perfect be the enemy of the good. This proposal beats the heck out of doing nothing!


Benjamin Cole said...

Great post.

What will the tax plan look like when finished? Who knows.

However, I fear the GOP establishment is dead, now. This tax plan is suicide. They promised middle-class tax cuts, but the headlines are all about corporate tax cuts. (In fact raising the standard deduction is a middle-class tax cut, but modest and not getting any press coverage). The word is the household with $59,000 income gets a $1,500 cut. $30 a week. A bag of groceries.

The GOP rank-and-file will keep voting Trumpsters in.

David Brooks has been saying Trump owns the GOP already.

The US tax code is 75,000 pages long and this does not change that. Any code of that length is anti-democratic. I cannot help but be suspicious of a 75,000-page tax code, and think the system is rigged, unless I know it is rigged as I benefit from some of the 75,000 pages, as in pages 34,618-40.

The Banana States of America.

The Cliff Claven of Finance said...

US businesses pay an average of 25% corporate taxes
US businesses do not pay any value-added taxes.
Every other major nation has those taxes

US businesses are not overtaxed.
That is complete nonsense unsupported by data:
Corporate profit margins are high
Corporate executive pay is high
Corporate labor costs are low

How could corporations be in ANY trouble when
stock valuations are among the highest in history

Where is any visible, not imaginary, problem that corporate tax cuts will solve?

If capital investment is 'too low', could there be a logical reason for that other than tax rates?:

- New online businesses require less capital than old-style brick and mortar businesses, and

- Demographics show an aging population, with fewer people in their peak earning and spending years,

Surely plenty of money is available for capital investments:

Interest rates on loans are unusually low,

Plenty of cash seems available for stock buybacks, and

Many tech companies with lots of "overseas" cash also have plenty of cash here

- Corporations can borrow money at low rates, and they are borrowing to buy back shares?

A nation that takes in $3 of revenue, for every $4 spent, with a deficit of $1, is under-taxed, not overtaxed!

Trump is telling us that a mere 5% reduction of govt. revenues each year
($3,000 billion minus $150 billion) is going to boost economic growth 50%,
from 2% to 3% ?
(before the election the claim was a 100% boost, from 2% to 4% ! )

That's Trump 'the master salesman' BS. not economic logic!

Please remember these actual facts, not predictions:

(1) The fastest economic growth in the US was in the 1950s, 1960s and 1970s,
when our top personal income tax rates were nearly twice as high as today, and

(2) Soon after President Reagan lowered taxes in the 1980’s,
the US real GDP growth rate began a disappointing long-term multi-decade downtrend,
and the quantity of US Govt. debt began a steep long-term uptrend.

The US Govt. has been overspending its income for decades,
without regard for the long-term consequences.

Reagan tripled the national debt.
Clinton was okay.
G. W. Bush increased the debt a lot too
Obama doubled the national debt.

Maybe, just maybe, we have an excessive debt problem?

Historically, debt over 100% of GDP is associated with an economic growth slowdaown.

Economic growth in the Bush and Obama years,
from 2001 through 2016, averaged 1.8%
-- that was bad.

Economic growth in the Obama years,
from 2009 through 2016, averaged only 1.5%
-- that was worse.

Our slow labor force growth has already subtracted one percent from potential GDP growth
(the old 3% growth rats was half labor force growth, and half productivity growth.)

Incentivizing job creators with lower business taxes sounds like a good idea,
but not when financed on the backs of future taxpayers via more Govt. borrowing.

US citizens are not taxed too much.
US corporations are not taxed too much.
US taxes are too low relative to Govt. spending!

Sid Pools said...

Scott, is it possible that the 'disappointing' job growth numbers are at least in part a function of the tight labor markets? I know where i am (Bay area) we have a hard time finding qualified people when we have openings. Perhaps as the labor markets tighten firms focus more on enhancing productivity with the existing labor pool vs simply enlarging the pool? Maybe that is why we are seeing productivity gains, rather than growth in jobs?

Scott Grannis said...

Sid: you make a good point. But to clarify, the slowdown in jobs growth that I note here began 3 years ago, when the unemployment rate was a good deal higher (5.8%)than it is today (4.1%). And the pickup in productivity of late is still very weak from an historical point of view. So it's hard to convincingly tie the two together. However, going forward, if the demand for labor picks up due to more investment, then I am reasonably sure that, in order to find more workers, companies are going to have to offer higher wages/salaries. At the same time, productivity is likely to increase further.

Scott Grannis said...

Cliff: I disagree with you across the board. As evidence that the corporate tax rate is too high, I think the huge amount of overseas profits that have been accumulated by US businesses is indisputable proof. Art Laffer and Milton Friedman taught me this years ago: taxes are too high when they influence people's behavior (e.g., tax avoidance).

Benjamin Cole said...

Sid Pools--

You have labor issues but worse you have housing issues all up and down the West Coast in GOP areas and in Democratic areas.

Property zoning is the evil that cannot be discussed

steve said...

Seems like this column attracts one whacko regardless of time frame and Cliff is the latest. What a bunch of blather!

That said, tax bill is already falling apart as GOP is capitulating on mortgage interest deduction limit and I guarantee they will do same on state tax. I have NEVER understood why RE should get subsidized. Makes absolutely no sense.

Anyways the left has a far more cohesive team than the right so this tax proposal is pretty much dead as we know it.

The Cliff Claven of Finance said...

To Steve
An intelligent comment would select something I wrote, even one sentence, and refute it.
A not very intelligent comment would call me a "whacko", and say "what a bunch of blather".

I guess you prefer the low road.

In spite of your insult,s I tend to agree with the OTHER things you wrote.
I hope saying that doesn't upset you -- after all, I am a "whacko"

Mr Grannis disagrees with me,
but he managed to be pleasant about it.

To Mr. Grannis:
From my bi-monthly finance / economics newsletter
that I'm mailing to subscribers later today after proofreading:

"The Congressional Research Service (CRS), Congress' nonpartisan think tank,
published a series of reports on the benefits of overseas profits repatriation.

They claimed the 2004 repatriation program was "an ineffective means of increasing economic growth."

"While empirical evidence is clear that this provision resulted in a significant increase in repatriated earnings, empirical evidence is unable to show a corresponding increase in domestic investment or employment."

In 2004, 9,700 US companies were eligible for a tax holiday to bring their overseas cash back to the US at a tax rate of 5.25%, well below the 35% rate for profits earned abroad.

843 firms repatriated $312 billion -- about one-third of the total cash held overseas, according to the CRS.

Most of the repatriated money went to repairing balance sheets and rewarding shareholders, according to the CRS.

According to one study, as much as 90% went to share repurchases, even though that, along with compensation increases, was prohibited by Congress.

Some firms repatriated money from overseas, and then laid off employees:
-- In 2005-06, Pfizer repatriated $37 billion ... and later cut 10,000 jobs.

-- Merck repatriated $15.9 billion ... and later cut 7,000 jobs, and

-- HP repatriating $14.5 billion, and later cut 14,500 jobs.

Note: Up to half of "overseas cash" is actually deposited in US banks and loaned to other US companies and US individuals.

It's true that a US corporation can't use their own "overseas cash" in the US, without first paying US corporate income taxes (a 35% rate, less income taxes already paid to other nations, typically 25% or less).

But when other US companies and individuals can borrow the money, to invest or spend in the US, the term "overseas cash" is misleading.

Many US tech companies that have a lot of "overseas cash" ... also have a lot of spare US cash.

It's unfortunate that politicians deliberately mislead on this subject, or are too lazy to learn some details."

Scott Grannis said...

Cliff: I agree that the cash that US corporations have accumulated overseas (by not repatriating it, because they would incur a significant tax liability) is nevertheless available to the US domestic market. Cash is fungible; money held in an overseas account can easily be invested in a US asset. And of course companies can leave foreign profits overseas and sell bonds in the US to effectively "relocate" that cash. Apple does it all the time, and I would too if I were a corporate Treasurer.

I agree that overseas cash doesn't necessarily negatively affect that US economy. My point however is that the fact that US corporations refuse to "repatriate" that cash is evidence that they want to avoid paying US taxes, which are the highest in the developing world. I could add to the list the fact that many corporations have been doing inversions, to relocated their HQ to other countries where taxes are lower.

Bottom line: US taxes on corporations are very high, and that has resulted in lots of effort by companies to avoid paying that tax. This is de facto evidence that taxes are too high. Why have a 35% tax on overseas profits if the result is to collect zero taxes? Lowering the rate to 15% or so would very likely result in an increased in revenues to the Treasury.

Benjamin Cole said...

Of course, why ever tax productive behavior?

Why ever tax income?

If a man has $5 million in income but lives modestly, he is placing very little claim on output (resources) while inputting a lot into future growth (assuming his income is invested).

Tax property and spending, not income!

As for here and now: The GOP should just triple, not double, the standard deduction and let it go at that. Change nothing else. This would put the D-party on their back feet, with nothing to do but tag along. People would ask, "Why did not the D=Party ever do this?" Indeed, why not? The GOP rank-and-file would remember who got them a tax cut and many Dems too.

As it is under the hyper-complicated tax code and GOP plan, a typical household with $59,000 income might see a tax cut of $1,100 to $1,500. Our tax code is so complicated there is disagreement even on this. Nothing noticeable for the middle-class, but the headlines are huge tax cuts for corporations. Yes, and the estate tax has to be cut too. Egads.

My guess is that this is the end of the GOP as we know it. Say good-bye to McConnell et al.

The Trump wing will push these guys out in the primaries.

Maybe this is for the better, or maybe not. It is unsettling.

steve said...

Of course that entire conversation and indeed the entire effort of tax reform is moot.

NO ONE IN DC HAS THE COURAGE TO CUT SPENDING! Especially not DT who is really more liberal than conservative.

This is the crux of the matter and what will always put a lid on growth. If we define a conservative as one who believes in limited government and allowing individuals more choice, there are none and maybe the American voters don't really want any.

steve said...

"US citizens are not taxed too much.
US corporations are not taxed too much.
US taxes are too low relative to Govt. spending!"


Admittedly, you are right about the last sentence but that misses the point.

The federal government spends too much damn $-on everything. Pols are wimps-but despite the rhetoric, this is what voters want. More government and less taxes. The math doesn't work.

Frozen in the North said...

One sentence stood out: The Trump Tax plan keeps tax rates for the very wealthy very high...sure BUT!

This 39.5% tax rate is easily avoided by the ultra-wealthy with just a little tax planning. In fact, the ultra-wealthy can easily reduce their taxable rate to less than 25%...Not even serious tax planning is required (which they do anyway), that's why there no kicking and screaming by those folks, the new system incorporated in the Trump tax reform allows the ultra-wealthy to easily shift their income so as to reduce their actual tax rate below the mear wealthy.

Just google it, its there in plain sight for anyone to see

Done by stealth

steve said...

The above is obviously incorrect. The top 1% of income earners pay nearly 40% of all tax. This is from the IRS. It's a myth that high wage earners somehow avoid paying a LOT of tax.

bob wright said...
This comment has been removed by the author.
bob wright said...


Is the data set for private sector investment [real gross private domestic investment] from a publicly available source or do you get your data from Bloomberg?

Bob Wright

Scott Grannis said...

bob: I just realized I forgot to put the data source on the chart—thanks for catching that. The data comes from the Bureau of Economic Analysis (BEA), the same source for all GDP-related data. (

The Cliff Claven of Finance said...

Mr. Grannis said:
"Lowering the rate to 15% or so would very likely result in an increased in revenues to the Treasury."

That's backwards economics.

I challenge you to show me one study proving tax cuts have ever "paid for themselves".

And don't mention Reagan -- his tax cuts were accompanied by a tripling of the national debt, from about $900 billion to about $1.7 trillion !

Could you be a major stockholder whose finances would greatly benefit from a corporate tax reduction from 35% to 15%?

Wouldn't potential personal financial gain bias you in favor of all corporate tax cuts?

Actually, the effective tax rate for US corporations is about 27%
-- well below the 35% marginal rate -- and there are no value-added taxes to pay.

Considering ALL taxes paid, US corporations are comparable to corporations in other developed nations.

The Cliff Claven of Finance said...
This comment has been removed by the author.
Scott Grannis said...

Cliff: Here are some surprising facts about Reagan, tax rates, and the national debt.

Federal revenues, FY 1980: $520 billion, FY 1981: $599 billion, FY 1982: $619 billion, FY 1983: $601 billion.

Between FY 1980 and FY 1983, the top marginal income tax rate plunged from 70% to 38.5%, yet revenues increased by over 15%.

Federal debt as a % of GDP (the only valid measure of the debt burden) rose from 26% pre-Reagan to 40% in Reagan's final year. That's an increase in the country's debt burden of 54%. During the Obama years, the nation's debt burden rose from 47% to 76% of GDP, an increase of 62%.

A reduction in corporate income taxes would benefit everyone, because it would lead to more investment, more productivity, more employment, more prosperity, and higher real wages.

The Cliff Claven of Finance said...

Mr. Grannis
I supported the Reagan tax rate cuts.
They can not be repeated.
We don't have 70% rates now.
The personal tax rates are not being cut almost in half now.
Even with that smart tax reform, the tax revenues increased very little in the Reagan years.

Meanwhile the ACTUAL national debt TRIPLED under Reagan,
during his eight years,
and the five-year average real GDP growth rate
has been in a sad decline since the Reagan years.

Stop confusing people with debt as a % of GDP.
The true debt burden is the interest that has to be paid,
including a reasonable estimate of future interest rates.

% of GDP is only for pointy-head economists
who claim debt over 90% or 100% of GDP
has been associated with a slowdown of economic growth
in the past.

A reduction of corporate rates would mainly benefit the owners / stockholders.

The pipedream of increased capital investment ignores what has been happening since 2009 -- corporations borrowing lots of money at low interest rates for stock buybacks -- corporate leverage has never been higher.

Corporate labor costa are extremely low now,
and so are interest rates
-- so where was the capital investment?

On-line businesses don't require large investments
like brick and mortar businesses
and the number of Americans, Europeans, Japanese and Chinese workers
in peak earnings and spending years are declining,
as the baby boomers retire.

The demographics don't support a capital investment boom,
no matter how low the corporate tax rates is.

bob wright said...


Is this the data source for gross private domestic investment you reference:

Thanks for all of your work and thoughtful commentary.

Bob Wright

Scott Grannis said...

bob: that looks like the right series, but note that in my chart I use the inflation-adjusted version of this series. Your link is the nominal series.